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The Globe and Mail

Compensation: What companies don't have to tell you

Gerry Schwartz, founder and CEO of Onex Corp., made quite a bit of money last year, you may have heard: The Globe and Mail recently combed through the company's proxy circular to report Onex paid Mr. Schwartz nearly $130-million (U.S.) in 2013, including a stock-option grant valued at nearly $60-million.

Even more remarkable, however, is what Onex doesn't have to disclose directly to its shareholders: According to other securities filings, Mr. Schwartz made $258-million (Canadian) in 2013 by exercising the options he already held.

Taken together, the numbers prompt a couple of questions: Does Mr. Schwartz, who owns more than $1-billion worth of Onex stock, really need millions of stock options to motivate him to run the company? And would shareholders better be able to answer that question if Onex had to disclose just how much money Mr. Schwartz made on his past options last year?

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First, though, let us pause to qualify a number of things. Onex stock has performed exceedingly well, more than tripling in the five years ended this past December. Mr. Schwartz's options, most held for nearly a decade, would not have been worth so much had the shares not appreciated. And Onex's stock-option program requires the market price of the stock to be 25 per cent above an option's exercise price before the option can be used – an unusual, pro-shareholder threshold not found in most other companies' programs.

In an essay on investing website The Motley Fool, contributor Benjamin Sinclair said Onex shareholders "knew what they were signing up for when they bought the shares. So while Mr. Schwartz's compensation is excessive, investors have no right to complain – especially since they have done all right too."

We'll set that aside for a moment to focus, however, on whether Mr. Sinclair and other investors really knew how much Mr. Schwartz made last year.

Several years ago, Canadian securities regulators made changes to executive-compensation disclosure that added volumes to what shareholders received. At least one thing was taken away, though: Companies no longer had to disclose how much money their executives made in the prior year by exercising stock options.

The Canadian Coalition for Good Governance has been arguing that was a mistake. Including the data on how valuable the awards were ultimately become helps show whether the compensation program has been effective "in aligning management's interests with shareholders."

The Globe and Mail's annual Board Games report has found that companies are increasingly returning to providing that information. Just 26 per cent of companies in the S&P/TSX composite index disclosed option gains in 2010, the first year of the new rules, but the number rose to 48 per cent in 2013. Of course, Onex is not one of them. (An Onex executive said Wednesday the company would not comment on this.)

CCGG also says proxy circulars need to include "an explicit discussion of whether and how a board considers outstanding and realized equity awards when considering further such awards." Onex at least has provided this: It said its board believes "stock options are an integral part of executive compensation and are fundamental to the alignment of interests and the incentivization of future performance."

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Even on its face, that statement is debatable, as many companies have moved away from using stock options unless they're tied to measures that compare a company's performance to its peers.

For Onex, it's even more questionable. Mr. Schwartz owns 21.1 million of the company's TSX-traded shares. At the end of 2012, they were worth just under $900-million. Onex's 2013 performance drove their value to more than $1.2-billion.

Are 3.95 million new stock options – Mr. Schwartz's 2013 award – required to "incentivize" him even more? (They will have to do; Onex says he will receive no more in the next five years.)

What they very well may do is cost the company a pretty penny. In most compensation programs, executives exercise their options and generate the profit by selling shares on the open market. Onex, by contrast, allows executives to obtain the profit in cash directly from the company. This has the benefit, it should be noted, of not diluting existing stockholders. It had the downside, however, of costing Onex nearly $300-million in 2013, according to a footnote in the company's financial statements.

This, then, is a more complete picture of what Onex shareholders have signed up for, to use Mr. Sinclair's phrase, although they wouldn't have known it from reading the company's proxy.

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