Short-Term Incentive Practices in the TSX Mid-Cap

How do short-term incentives (STI) fit into an executive compensation plan? How are STI payouts calculated? How does performance come into the equation? Are there limits to how much STI an executive can receive?

In this article, we examine the STI plans of the top 5 paid executives of 100 TSX mid-cap organizations to see what the most common calculation approaches are, how performance components are weighted , and what limits are set on STI payouts. Note that the following statistics are as a % of organizations that have disclosed their incentive plan practices.

Short-term incentives are bonuses typically awarded in the form of cash, based on the company, the business unit, and/or individual performance during the fiscal year. The calculation of STI awards can vary by calculation approach, performance component weightings, and payout ranges.

Calculation Approaches

While specific metrics vary from organization to organization, the calculation of an STI award generally follows one of three approaches: additive, multiplier, or modifier.

Approximately 80% of the TSX mid-market use an additive approach in their STI plans, 12% use a multiplicative approach, and the remainder use an entirely discretionary approach or modifier approach.

Performance Component Weightings

While the use of specific metrics such as EBITDA or total shareholder return often vary from organization to organization, performance metrics generally fall into one of three components: corporate, business unit, and individual.

It is also common to have different weightings for different performance components from executive to executive, especially for organizations with distinct subsidiaries or business units. Approximately 54% of organizations weigh corporate, business unit and individual performance differently for each named executive when determining STI payout.

Where weightings are different, corporate performance is typically weighed the heaviest (average weighting of 62%) in order to tie the majority of STI directly to company success, as opposed to business unit (16%) or individual performance (22%).

Weightings can also vary depending on if the executive is the CEO or head of a business unit – the average TSX mid-cap CEO has a higher proportion of their STI tied to corporate performance than a non-CEO (83% compared to 57%), and business unit heads typically have the majority of their STI tied to the business units they lead (50% compared to 8% for a non-business unit head).

Payout Ranges

STI plans can also vary in terms of payout ranges (minimum to maximum payout). A typical payout range may be broken into maximum, target and threshold payout levels.

The maximum payout and target payout correspond to maximum and target performance levels, respectively. The threshold payout represents the minimum non-zero payout available, corresponding to the minimum-acceptable level of performance. If the minimum-acceptable level of performance is not met, the executive receives no STI payout.

Approximately 80% of disclosed maximum payouts in the TSX mid-market are between 150% and 200% of target, while 87% of disclosed minimum / threshold payouts are at or below 50% of target.