Canadian Boards Report - Nature of Equity Compensation

When one looks at the nature of the equity compensation, Canadian companies have simpler programs than their U.S. counterparts. They typically offer either full-value awards, or option-only awards, not a combination. This applies to all equity awards,whether they are given when a board member joins or for their annual grants. The percentage of companies with options or full value stock in the equity portion of their director compensation programs is fairly similar among Canadian and U.S. companies. (See Figure 8.1)

Specifically, 80% of the participating Canadian companies offering equity retainers said they offer only options awards, while only 85% of U.S. companies offer option awards exclusively. 20% of Canadian companies offer full value awards only. Noteworthy is the contrast to U.S. companies. A mere 5% offer full value awards only, while 10% offer a combination of full value awards and option awards.

Among Canadian companies that offer equity upon joining the board, 73% of participants cite the use of option awards exclusively, while 23% use full value awards exclusively and 4% use a combination of the two strategies. By contrast, only 79% of U.S. companies reported the exclusive use of option awards; 9% reported the use of full value awards only and 12% reported a combination of these compensation tools.

The notion of keeping things simple appeals to us, but perhaps financing structures require both full value and option awards to properly motivate board members.

8.1: Equity Retainer and Equity Upon Joining Splits Canada and U.S.

Equity Retainer and Equity Upon Joining Splits Canada and US

The data for equity compensation shows the median percent of shares outstanding upon joining as well as an annual retainer for board members and for the board chair. Only 50% of companies give out stock options. This data is for companies providing stock options. In terms of board members, a typical option grant would be 0.3% of the shares outstanding upon joining and 0.1% per year. In terms of the median for the 30 chair, a typical stock grant would be 0.5% upon joining and 0.1% per year. Figure 16 provides a more detailed breakdown of equity grants. The implied option price for private companies is the most current price available, often the price of the stock at the last round of financing. Many times, if there is an upcoming round of financing, then the option price could be a blended rate of the current and past rounds of financing. The number of total shares outstanding in a ‘cliff’ is typically consistent with the option price blended rate. It is interesting to note that the vesting schedule for option awards varies from 3 to 5 years, with a median of 4 years. These numbers are typical and very expected. These numbers are surprising and we consider them to be on the high end of what we have experienced before. They are reflective of very senior board members. A prior random sample of equity stock option grants showed 0.19%. It is important to note however that if our statistics included companies that paid no equity, the numbers in Figure 8.2 would be lower.

8.2: Equity Compensation (% of Shares Outstanding)

Equity Compensation (% of Shares Outstanding)

Note: this is the median for companies offering equity as part of compensation. Roughly 50 percent of our sample offers equity as part of the board members, compensation package.