The run rate – the total number of options granted in a year divided by the total number of outstanding shares – was 0.9% for Canadian companies, almost half of the US rate of 1.7%. Dilution – the total number of outstanding unexercised options granted divided by the total number of outstanding common shares – was 4.5% for those companies in Canada, compared to 10.3% for American companies. Overhang – a measure of options to be granted in the future – was also higher for American companies (16%) than Canadian ones (8.4%).
Ninety-nine percent of Canadian companies in the survey offered such options; however the use of such options have stabilized in recent years.
Canadian companies differ significantly from their southern neighbors in other respects and are increasingly changing their ways regarding compensation when compared to a few years ago, according to the study. Compensation is being tied much more to performance than it use to be for Canadian companies, with compensation being tied quite commonly to return on equity (ROE), earnings per share (EPS), and return on assets (ROA).
Although the average S&P/TSX Composite Index company has a median total return to shareholders of 25.9% in 2003, the average salary of CEOs only rose 4% (10% when bonuses and long-term incentives are included), indicating that salary was often tied to something else. According to the survey, these other factors are most likely ROE, which was 9.6% on the year, EPS (6%), and ROA (3.6%).
“These results show that pay-for-performance is taking hold and having a real impact on executives in Canada, as independent board members are helping to usher in a new level of accountability and corporate governance through various initiatives,” said Ray Murrill, Executive Compensation Practice Leader, Watson Wyatt Canada, in a press release. “Because companies are increasingly tying executive compensation to financial performance goals, CEO pay is increasing at what can be considered a reasonable rate in relation to the economic value executives help to create.”
Tying compensation and bonuses to pay seems to be having an effect as well. Companies that did offer bonuses tied to performance outperformed companies that did not, according to the survey. The 176 companies in the poll which did offer bonuses (with the median bonus at $358,000) had a one-year median return to shareholders of 31%, ROE of 10%, and ROA of 3.7%. In contrast, the one-year median figures of companies that didn’t offer bonuses were 6% for return to shareholders, 1.4% for ROE and 1.1% for ROA.
The survey also notes that the disclosure of executive compensation is improving drastically in Canada. In 2003, 80% of companies provided insight on compensation, compared to only 52% in 2002.
The annual survey – “CEO Compensation Practices in the S&P/TSX Composite Index” – looks at 214 companies. A full copy is available for $45 at http://www.watsonwyatt.com/canada-english/research/respub3.asp .