The Importance of Well Structured Executive Compensation Packagesachkarlaw-admin
Executives in the public and private sector often receive a large chunk of their compensation through non-traditional methods such as stock options, bonuses, restricted share units, and long-term incentive plans (“LTIP”).
Structuring an executive compensation package is a complex task that requires consideration of many factors. Apart from securities law, pension, and tax implications, new case law and recent scrutiny by the public and regulators has led to additional changes in the composition of compensation packages.
Public Sector Executives
In Ontario, the main legislation that manages executive compensation in the broader public sector is the Broader Public Sector Executive Compensation Act, 2014 (“BPSECA”). This Act generally applies to public hospitals, school boards, universities, colleges, and certain other public bodies.
The purpose of the BPSECA includes ensuring a transparent and consistent approach to executive compensation. As such, most public companies are required to disclose the major elements of compensation provided to named executive officers and directors. This includes compensation such as cash and non-cash base salary and bonus, securities, shares or units subject to resale restrictions LTIP payouts, and all other compensation.
The BPSECA gives the Lieutenant Governor in Council the power to establish compensation frameworks governing designated employers and executives.
In 2018, regulation 406/18 was introduced. It set out new requirements that designated employers must meet when setting compensation for designated executives.
Part of the controversy surrounding regulation 406/18 is the fact that it caps salaries for a designated executive to his or her existing salary that was actually being earned as of the effective date. However, there are exceptions to aspects of regulation 406/18 for certain employers.
Such recent changes is but one reason why it is important for and public sector employers and employees to seek legal advice on executive compensation packages.
Private Sector Executives
Although private companies are not subject to the same disclosure requirements as public companies, there are special considerations that private companies should consider when developing executive compensation packages. For example, private companies must comply with securities laws with respect to the issuance of stock options and other securities. The details of these special considerations could fill a book (and in fact, has filled many books), so is beyond the scope of this article.
Further, recent case law dealing with the entitlements of executive employees upon termination suggests that change is on the horizon for how courts deal with executive compensation packages.
Uncertainty Surrounding Executive Compensation Packages and Termination
In 2020, the Supreme Court of Canada released its decision in Matthews v Ocean Nutrition Canada. In this case, the main issue related to an executive employee’s entitlements under a LTIP after he was constructively dismissed.
The lower courts awarded the executive employee, Mr. Matthews, fifteen months of pay in lieu of reasonable notice but disagreed on his entitlement to a payout under the LTIP. Of note is that this payout was over 1 million dollars, so the executive employee appealed to the Supreme Court of Canada.
The Supreme Court found that but for Mr. Matthew’s dismissal without reasonable notice, he would have been entitled to the LTIP payout as the company was sold during Mr. Matthew’s reasonable notice period. Further, it was determined the (detailed) terms of the employment contract did not limit Mr. Matthews’ common law right and he was compensated for the loss of the payout in the amount of $1,086,893.36.
The complexities of an executive compensation package paired with the legislative changes and developing case law make it difficult for organizations to navigate the legal landscape, and as such it is critical for employers and employees alike to seek legal advice before agreeing to an executive compensation package in this is a intricate area of the law.
If you are an employer and need assistance structuring executive compensation plans, or an employee and would like assistance with understanding an executive compensation plan, our team of experienced workplace lawyers at Achkar Law can help. Contact us by phone toll-free at 1 (800) 771-7882 or email us at [email protected] and we would be happy to assist.