Understanding Executive Pay Components:

Executive pay is commonly expressed as the annual target value of compensation provided to an employee. This includes a base salary, a target short-term incentive, and a target long-term incentive. The latter two components are variable or at-risk pay, in that they are contingent upon company and individual performance.

Unveiling the Variable Components:

Over time, as performance becomes known, questions on these variable components of compensation arise. How much of the target value does the employee actually receive? Is the pay ultimately aligned with performance? To answer these questions, we turn to a realized and realizable pay analysis.

Definition of Realized and Realizable Pay:

Realized pay is the value of compensation vested and paid out to the employee. This can include base salary, cash bonuses, and long-term incentives such as the payout value of RSUs, PSUs, and the gains from exercises of stock options. Realizable pay, on the other hand, is the estimated value of compensation still in-flight and subject to future performance. This includes unvested LTIPs such as RSUs, PSUs, and outstanding unexercised stock options. These values can be estimated based on the current company share price.

Aligning Pay with Performance:

Comparing the target value of compensation with the realized and realizable value in each given year can provide valuable insights. Is the employee achieving the target value of their compensation? How does this compare to the original target? Furthermore, aligning the employee's realized and realizable pay experience with shareholder experience over time helps evaluate whether executive pay aligns with overall company performance.

Navigating Variations:

While inherent leverage and the degree of risk/reward in the pay program can create deviations between the experiences of employees and shareholders, directionally, the two should ideally be aligned over the long term. This analysis can also be extended to a company's peers, offering a comprehensive view of relative pay and performance experiences.

Conclusion:

Many boards and compensation committees review realized and realizable pay analyses for top officers to gauge the effectiveness of the pay program. These insights are crucial for making informed decisions about future compensation plans. Although there is currently no mandatory disclosure requirement for realized and realizable pay analysis in Canada, some publicly traded companies voluntarily provide this information to shape their narrative around the alignment of executive pay with company performance.