To date, stock options have been the dominant form of equity-based compen- sation (or “equity pay”) for small and mid-size publicly-traded companies in Canada. As a result, stock options are generally very well understood, and it has become relatively simple to design and administer these types of compensation plans.
More recently, there have been reasons to question whether stock options are the most appropriate form of equity pay for many of these companies. Two issues in particular stand out: (i) frustration with accounting standards and valuation methodologies, where there is often a significant and largely fixed cost regardless of whether the stock options ultimately provide benefit to the employees or not; and (ii) the general movement by large-cap Canadian companies (largely in response to shareholder demands) to reduce the emphasis on stock options and introduce other forms of equity pay.
The equity pay structures to which these larger companies have moved (e.g., cash-settled, full-value share units) are not necessarily the optimal structure for smaller organizations.
This discussion brief provides an overview of alternative equity compensation structures for small and mid-size Canadian public companies, as a first step in the process of determining what kinds of these structures may be adopted. This paper also highlights key decision-making factors of the outlined alternatives, including: business/strategic considerations, reporting requirements and taxation consequences.
This paper is intended to provide an overview of equity compensation structures and to facilitate a meaningful discussion between boards and management teams. The alternatives presented and discussed in this publication may not be practical or feasible for every company. The information contained herein is in reference to publicly-traded Canadian companies (i.e., companies reporting in accordance with International Financial Reporting Standards (IFRSs)). The accounting implications discussed are for the purposes of illustration, and to provide a high level overview of consequences — this discussion brief is not intended to be a strict guide for the application of IFRSs. Any company considering the implementation of an equity-based compensation plan should seek professional advice (legal, tax, accounting, compensation). There are unique taxation and accounting issues for private companies, and for U.S. companies. Employees subject to U.S. taxation on employment income, including directors’ fees, also are subject to additional tax considerations that are not addressed in this paper.