Update: Small- & Mid-Cap TSX LTIP Practices

October 2017

Reminder of Key Terms:
LTIP: “long-term incentive plan”
RSUs: “restricted share units” are phantom shares that track the value of the underlying shares of the company on the public markets
PSUs: “performance share units” are similar to RSUs, but vesting and settlement of the grant are subject to achievement against performance conditions
Stock Options: a right given to purchase shares of a Company at a specified price in the future
TSR: “total shareholder return” is a measure of the total return of a stock to an investor, including the share price appreciation + dividends

In Fall 2016, we published a review of CEO LTIP practices (reviewing 2015 pay data) among small- and mid-cap issuers on the TSX, which indicated, among other things, that stock options were the most prevalent instrument, although PSUs were increasing in prevalence. Our analysis this fall, of 2016 pay data, indicates that PSUs have now surpassed options in becoming the most prevalent LTIP instrument within the data sample. This “update” briefing provides a summary of these developments.

PSUs Became the Most Prevalent Instrument in 2016Average LTIP Mix

  • The prevalence of PSUs in CEOs’ LTIP mix increased from an average of 33% in 2015 to 43% in 2016
  • This increase in PSUs was accompanied by a commensurate reduction in the prevalence of stock options (while the prevalence of RSUs has been flat)
  • This trend mirrors the shift towards using PSUs among larger Canadian issuers in recent years; our TSX60 proxy review found that in 2016, PSUs accounted for 50% of CEO LTIP mixes on average

 Increase in the use of Operational Performance MetricsPrevalence of PSU Metrics

  • In line with the TSX60, TSR and financial metrics remain the most prevalent performance metrics used in PSU programs
  • However, several issuers have moved towards incorporating industry-specific operational metrics; this may be in response to concerns from issuers and the shareholder community regarding the overreliance on relative TSR

Some Thoughts for Small- and Mid-Cap Issuers

This review of LTIP practices indicates that small- and mid-cap companies are beginning to follow many of the “best practices” being adopted by large Canadian companies. In addition to this market context, consider some other factors that could lead more companies to adopt performance-conditioned LTIP:

  • Focusing on larger companies, proxy advisors seek a minimum of 50% of equity awards to have performance conditions; these guidelines are beginning to apply to smaller companies as well
  • Institutional shareholders continue to criticize the increasing prevalence of outside-of-plan awards (e.g., one-time or “special” awards, make-whole awards, etc.); a recent study from CPPIB and OTPP noted that only a small portion of total outside-of-plan awards granted in 2016 had performance conditions
  • With the CRA recently clarifying its stance on the deductibility of treasury-settled full-value shares for corporate tax purposes and pending changes to the taxation of stock options, the attractiveness of RSUs and PSUs could continue to grow