PRINCIPLE 1
A significant component of executive compensation should be "at risk" and based on performance
CCGG believes that a large percentage of the total compensation of senior executives should be a reflection of business performance achieved and should be linked to the risks taken during the relevant time period. Performance should be measured on an absolute basis and relative to a fully-considered list of company peers. The pay for performance component should be truly variable and dependent on performance (i.e., be "at risk"), and not be deferred base salary. Performance awards should be based on intrinsically risk-adjusted financial and non-financial measures and should include share-based awards such as Performance Share Units (PSUs) or a mixture of PSUs and time-vesting Restricted Share Units (RSUs), with a greater emphasis on performance as the primary vesting mechanism.
Use of Stock Options
Shareholders generally are discouraging the use of time-vested-only (as opposed to performance-vested) stock options as a significant component of executive compensation, arguing that options may encourage inappropriate risk-taking and lead to unintended reward outcomes that are not well aligned with long-term performance. Another criticism levied at stock options is that they allow management to participate in share performance upside while not suffering any consequences on the downside. In addition, recent research h
as highlighted the fact that the value of stock options may be quite volatile and often reflective of market-specific rather than company-specific factors.
Where stock options are used, they should be de-emphasized in favour of other forms of equity-linked compensation and serious consideration should be given to introducing performance-vesting provisions. Performance-vesting provisions are a means of mitigating the risk of rewarding executives for share performance clearly driven by factors beyond management’s control (for example, a booming commodity market). Boards also should be mindful of minimizing the dilutive impact of a stock option program.
