Long-Term Incentive Practices in the TSX Mid-Cap

Long-term incentives (LTI) are payment for performance over a period of longer than one year, usually granted in the form of equity. Typically, publicly-traded organizations will use share-based awards or option-based awards to deliver LTI to encourage equity ownership among executives and provide greater potential upside than a straightforward cash plan.

In this article, we examine the LTI plans of the top 5 paid executives of 100 TSX mid-cap organizations and discuss the different types of LTI vehicles along with different elements of their design.

The most prevalent LTI vehicles among the TSX mid-cap for executive compensation are stock options (used by 63% of organizations), time-based (“restricted”) share units (65%), and performance-based share units (66%). A small number of organizations use long-term cash or do not provide LTI as a form of incentive pay.

Stock Options

A stock option is the right to buy the underlying stock at a specific price as stated by the option. Options provide a more leveraged payout if the underlying stock overperforms, allowing for higher potential upside than other LTI vehicles. Stock options have historically been tax-advantageous over other LTI vehicles, but new limitations on the preferential tax treatment of options may result in a gradual shift away from options among larger TSX issuers.

Restricted Share Unit

A restricted share unit is a share unit that has a time-based condition, with no performance requirements for the executives.

Performance Share Unit

A performance share unit is a share unit that has a performance condition attached, with the intention that certain targets be achieved by the end of the performance period. The final number of performance share units received will vary based on the achievement of the performance conditions.

Long-Term Cash

Long-term cash awards are awards with a performance condition attached, similar to performance share units, but are settled in cash.