TSX60 Key Executive Compensation Observations

A Deeper Dive into Long-Term Incentive Plans (LTIPs)

Continuing Laulima’s series on TSX60 executive compensation, this article delves deeper into Long-Term Incentive Plans (LTI plans or LTIPs). Laulima’s key findings¹ reveal:

• Approximately 60% of CEOs’ and 50% of NEOs’ total direct compensation (TDC) among TSX60 companies is comprised of LTI, with median targets of 550% of base salary for CEOs and approximately 250% for other NEOs.
• Median LTIP targets are 2.8x to 3.8x median STI targets.
• PSUs are the most common LTI vehicle, with approximately 75% of companies combining them with stock options, RSUs or all three vehicles.
• Most PSU plans cliff vest after 3 years based on performance on two metrics. The most prevalent combination is relative TSR and absolute financial performance.
• Stock options continue to decline in prevalence, with at least 5 TSX60 companies eliminating or reducing the weighting on stock options in 2023 or beginning in 2024.
• RSUs continue to make up 20–25% of total LTI. Virtually all RSUs vest at the end of a 3-year period, with either cliff vesting (two-thirds of companies) or ratable vesting (one-third of companies).

The remainder of this article highlights Laulima’s key insights into TSX60 LTI plans.

Targets

• As noted in Laulima’s article on year-over-year compensation changes, CEOs and NEOs continue to see approximately 60% and 50% of their TDC in LTI, respectively.
• Median LTIP targets are 550% of base salary for CEOs, 265% of base salary for CFOs, and approximately 250% of base salary for other NEOs.
• Median LTIP targets are now 2.8x to 3.8x median STI targets, meaning most incentives are tied to long-term performance.
• The Financials sector places a notably greater emphasis on LTIP than other sectors. Median LTIP targets as a percentage of base salary are near the 75th percentile.

LTI Mix

• PSUs are the most commonly used LTI vehicle, followed by RSUs and stock options.
• The majority of TSX60 companies use a combination of two LTI vehicles.
• The most widely used combinations² are:
  • PSUs and stock options (33% prevalence)
  • PSUs, RSUs, and stock options (24% prevalence)
  • PSUs and RSUs (19% prevalence)
• Companies continue to monitor their LTI mix to ensure it meets compensation objectives while considering evolving shareholder expectations for more performance-based compensation and the recent changes to option taxation in Canada.

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We anticipate that the emphasis on PSUs will continue to increase going forward, albeit at a more gradual pace since PSUs are already virtually ubiquitous and the highest-weighted vehicle among TSX60 issuers.

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PSUs

• Most PSU plans vest based on the achievement of two performance metrics although approximately one-third of companies continue to use a single performance metric. This differs from STI plans where the median number of metrics is five. Fewer metrics streamline the goal-setting process and tie LTIP payouts to the most critical performance indicators.
• PSUs are most often tied to:
  • an external metric (relative TSR); and
  • an internal metric (typically absolute financial performance).
• It is no longer common for PSUs to focus exclusively on relative TSR.
• Consistent with STI, most companies set payouts at:
  • 50% for threshold performance;
  • 100% for target performance; and
  • 200% for maximum performance.
• The vast majority of PSU plans measure long-term sustainable performance over a three-year period as opposed to measuring performance against annual objectives.

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Common Performance Metrics

• Relative TSR is used by almost three-quarters of companies. Where used, companies tend to compare TSR performance to a custom performance peer group³ using percentile rank.
  • Threshold performance is usually set at or near the 25th percentile.
  • Almost all companies set target performance at the median.
  • 60% of companies set maximum vesting at the 75th percentile while the remaining 40% set maximum between the 80th and 90th percentiles.
  • The remaining companies measure relative TSR performance using an index or a combination of index and peers.
• Financial performance is used by 80% of companies. Where used, metrics are most often assessed on an absolute basis — that is, companies measure success based on whether performance falls within a predetermined performance range.
• Some PSU plans (14%) incorporate a performance modifier that can vary payouts by up to +/-20% of the initial performance multiplier.
  • The most common metrics used as a modifier are relative TSR and ESG.

There have not been any significant changes to PSU design in 2023/2024. The above represent the more notable observations.

Stock Options

• Most stock options have a 7- or 10-year term and completely vest after 3 to 5 years.
• Performance-based vesting is rare.
• FirstService uses a combination of:
  • time-based stock options that vest over 4 years; and
  • performance-based options that vest upon achieving specific financial hurdles.

Restricted Share Units (RSUs)

• Similar to PSUs, RSUs most typically vest at the end of a three-year period, but are subject to time restrictions only (instead of time and performance).
• RSUs cliff vest at the end of 3 years for approximately two-thirds of companies, whereas the balance apply ratable vesting.

While companies should continually monitor evolutions and best practices in LTIP design, it is important not to get caught in a one-size-fits-all approach. Companies should carefully assess their LTIP to ensure a strong linkage to their own strategic imperatives that drive long-term shareholder value creation. Rigorous stress-testing and regular pay-for-performance analyses can help ensure the LTIP is working as intended and that payouts are commensurate with long-term company performance.

For more information, contact us at info@laulimaconsulting.com.

¹ Based on Laulima’s review of recent TSX60 proxy disclosures.
² Percentages based on prevalence among TSX60 issuers reviewed.
³ Custom peer groups typically consist of companies selected for performance comparison purposes rather than compensation benchmarking.

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