Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

The days of massive pay packages that bear no relation to a company's success are fading, we are told. Any company that brings its executive compensation program to its shareholders in the spring without some sort of pay-for-performance plan risks rebuke for anachronistic, shareholder-unfriendly policies.

There are, however, approaches to compensation that are robust and provide rewards for exceptional performance - and then there are pay plans that could stand a tweak or two.

To get an idea of the latter, let's look at the pay at a couple of Alberta companies preparing for their shareholder gatherings later this month. At electric utility TransAlta , the company received a clear warning from its shareholders last year that its performance-share plan was not rigorous enough. But the company has returned in 2011 with the same weaknesses.

Story continues below advertisement

And natural gas explorer Encana has introduced new stock awards for its executives tied to its operational abilities. In doing so, however, it's removed the performance-based criteria from its option awards.

First, TransAlta. To its credit, while its shareholder-approved compensation plans allow it to issue stock options, the company hasn't given out any to its executives in years. TransAlta's board has a "long-held view," according to the company's proxy, that "time-vested stock option plans are not as effective a shareholder alignment mechanism as a performance-based equity plan."

Indeed. One of the primary criticisms of options is that a rising tide lifts all boats. When the broad market surges, stock options can provide millions of dollars to top executives even if the company failed to outperform its peers.

The TransAlta plan seeks to solve that by relying on grants of shares in the Performance Share Ownership Plan, or PSOP. The awards are directly correlated, the company says, to how TransAlta stock performs versus a peer group.

26th Percentile? Good Enough

The correlation may not be as beneficial to shareholders as you think, however. Executives get their target number of PSOP shares when TransAlta places at the 50th percentile of its peer group in total shareholder return (TSR) - smack dab in the middle. Hitting the 75th percentile - true outperformance - yields double the target.

And, most troublingly, PSOP awards still occur when TransAlta winds up between the 25th and 50th percentile in TSR. The company's shares must fall in the bottom quarter of its peers before the executives truly get punished with a zero return.

Story continues below advertisement

"I think you'll find - and we have certainly been advised," says TransAlta spokesman Bob Klager, that vesting when TSR is under the 50th percentile "is somewhat standard and a design very common in the marketplace."

Yet I'm not the only one taking shots at this plan. When TransAlta went before shareholders last year to make amendments to the plan, nearly 46 per cent of the votes were cast against the proposal. "These performance requirements allow bonuses to be awarded for mediocre and even poor performance," said the Shareholder Association for Research and Education, which included TransAlta in a roundup of significant governance-related votes last year.

At Encana, the problem is more subtle, but still troubling.

Heading into last year, Encana had a stock-compensation plan that deflected the common criticism of options. Just one-third of its annual option awards vested based simply on an executive's continued service, while two-thirds vested only if Encana met its targets for "recycle ratio." (This unusual-sounding metric is based on the company's ability to sell valuable energy products at an efficient cost of exploration and production.)

For most of the awards to have value, Encana had to make its operational goals and the share price had to rise to make the options useful. It's a tough, shareholder-friendly combination for an equity award.

It is also a philosophy Encana has now abandoned. The company introduced a new Performance Share Unit Plan in 2010. Under the plan, the awards of shares - not options - vest in chunks over three years based on the company making its recycle ratio targets.

Story continues below advertisement

At the same time, Encana has retained its stock option program, but now allows the entire grant to vest based on time, so executives can benefit from rising share prices, regardless of the company's operational performance. And with the new Performance Share Unit Plan, they can also benefit even if the share price declines. The company has taken one high hurdle and turned it into two lower hurdles.

Both TransAlta and Encana have a nonbinding "say on pay" vote at their shareholders meetings in this latter half of this month. Based on last year's unhappiness, there's an excellent chance TransAlta will get significant negative feedback. Encana's compensation issue is less obvious, so the company may get a higher level of approval. A look at the fine print, however, suggests the company's shareholders should send a similar message.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies