Equity-based incentives are the largest component of executive pay. They are also among the most poorly understood elements of executive compensation, which often results in a general misperception that many executives enjoy unwarranted or unfair levels of compensation. This is especially true when economic times are difficult, when shareholders and employees alike are suffering financial setbacks, and a story circulates about a corporate executive who “took home” a seemingly disproportionate compensation package.
It’s a popular story, one that is guaranteed to spark strong emotions, but it is also a story that is supported by required valuation models that were never designed to value employee equity incentives. These models, mandated by accounting standards (IFRS 2 Share-based Payment)
for accounting purposes, but also widely used by companies to disclose the ‘fair value’ of equity incentives granted to executives, can create significant disparities between the value that publicly-traded companies disclose with regard to their executives’ compensation and the value that executives actually realize from these incentives.
This report explains—for the benefit of the public, business press, large shareholders, and their proxy advisors—how long-term, equity-based incentives (stock options, Restricted Share Units [RSUs], Performance Share Units [PSUs], Deferred Share Units [DSUs]) are currently valued, why and how a different viewpoint can be used to more accurately capture and communicate their value, and, ultimately, whether this value is aligned with shareholder value creation.