i. executive compensation – historical overview

Paying for Performance

•  Stock market crash

•  Recession and hard blow on stock purchase plans (Hees, Royal Trust, etc…)

•  Increased use of time-vesting stock options

•  Disclosure of compensation (October 1993) ► Increase in compensation

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I. Executive Compensation – Historical Overview

•  Salary + annual bonus + defined benefit pension + share purchase

•  Use of options and deferred compensation

•  Abolition of EBPs •  Introduction of salary deferral

arrangement rules and retirement compensation arrangements

•  Extended use of SERPs / Top Hats

1970

1980

1986

1990s

1987

1993


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I. Executive Compensation – Historical Overview

•  Y2K Bug ► Retention bonuses •  High tech bubble •  Huge option grants with no risk and

excessive dilution

•  High tech bubble burst •  Use of stock options challenged •  Stock option expensing •  Introduction of:

•  RSUs •  DSUs •  Stock ownership guidelines •  Performance-based vesting more

widely used (and not solely time-based vesting)

•  More in-depth disclosure •  Corporate governance becomes

a business (Glass Lewis, CCGG, etc…)

•  Disclosure of compensation-related risks

•  Corporate governance/proxy advisory services guide the voting of institutional investors

•  North American and European stock market future outlook is modest at best

•  Defined benefit plans are abandoned and SERPs are attacked by the CRA

► What do we do?

1997 2000

2001

2006 onwards

2012


II. PWC Study

3

1,106 executives in 43 countries

81 % 19 %

  66 % earn < $350 k

  10 % > $725 k

 PWC general Findings

 Executive compensation is not really working

 Compensation has increased considerably while the economic performance in the Western world has not kept up the pace

 Long-term incentives do not always deliver the expected results


II. PWC Study

4

 Specific Findings

  Executives want:

  To minimize their risks;

  An easier-to-understand compensation package rather than one with higher potential but tied to less tangible objectives;

  Controllable performance measures (profit) instead of external measures they cannot influence (TSR);

  To be paid right away (discounted by 50% if deferred for 3 years);

  More internal equity than external equity.


II. PWC Study

5

 Specific Findings (cont’d)

  Executives believe that :

  Money is not everything ... they are ready to accept less money in exchange for the “dream” job;

  Long-term incentives (LTI) are not an efficient motivational tool;

  nevertheless, they value their participation in these schemes.

 Design Suggestions

  Incentive compensation should be seen as an incentive to perform better or as a cost management tool.


II. PWC Study

6

 Design Suggestions (cont’d)

 Deferral of compensation and LTIs should be used only when clearly understood

 Mandatory holding of shares could easily replace complex LTIs

  The perceived value of LTIs varies according to the participant’s culture and demographics and compensates for the additional costs associated with plans that are adapted to the participants’ characteristics

  Equity and recognition: a plan that is easy to understand will better achieve the need for recognition and result in less “discounting” of the perceived value of the plan

Keep it simple and s…


II. PWC Study

7

 Design Suggestions (cont’d)

  Less volatility will result in reduced compensation costs for the organization

 … if the overall compensation package is volatile, the organization will pay more, regardless of whether performance is good or bad


III. Harvard Law School (HLS) Study

8

 HLS findings

 Comparator groups:

  Are based on the assumption that executive talent is transferable, which is not true according to HLS …beyond manipulation ...

 When a CEO quits his/her job, he/she will usually go to a smaller organization with a lower compensation package

 Compensation packages for CEOs often tend to push the whole compensation structure upwards , which will eventually result in higher costs for the organization


III. Harvard Law School (HLS) Study

9

 Suggestion

  A compensation policy should be based on principles reflecting the nature of the organization, its competitive environment and its internal dynamics

Who we are

versus what others are doing


IV. Questions for the Panel

10

 According to you,

  do short-term and long-term incentive plans motivate executives and participants? Should these be more focus on

  short-term incentives?

  or long-term incentives?

  are LTIs useful for business transfers?

  could too much equity-based long-term incentives lead to undesirable behaviour?

  for executives?

  for Board members?

  …or even promote the sale of the company to cash in the value of stock-based incentives?


IV. Questions for the Panel

11

 According to you,

 what will be the future of LTIs in a context of poor outlook for Western stock markets?

  Will there be more :

 short-term incentives?

 more or fewer retirement arrangements?

  long-term cash bonuses and/or performance units based on operational results?


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i. executive compensation – historical overview

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