My following remarks are based on experience I have derived as
a Director of Air Canada for the past 17 years and as a
partner in a law firm representing many large Canadian public
corporations.
It goes without saying that Air Canada is a very high profile
corporation. As such, it is constantly in the public eye and
all its activities seem to be subject to on-going scrutiny,
not only by its institutional and retail shareholders, but
also by several levels of government, regulatory agencies,
employee groups, customers, a host of other stakeholders and
last, but not least the ever-present media.
In consequence, Air Canada has made a special effort
throughout the past decade to develop a sound, responsible and
effective corporate governance culture. The corporation has
by no means been perfect in this regard, but its performance
has been judged to be positive by most critical observers. As
far as I know, there have thus far been no unseemly scandals,
conflict of interest situations or obscenely improper
compensation arrangements for senior management and/or board
members.
As Air Canada is subject to the Sarbanes-Oxley Act, the Board
is presently doing the necessary through its Corporate
Governance and Nominating Committee to ensure the
Corporation’s governance procedures comply with the very
highest standards of the law and custom.
In respect to Air Canada’s Human Resources and Compensation
Committee, a Charter has been prepared to replace the
Committee’s former Terms of Reference. This Charter provides,
inter alia, for the HRCC to be comprised of a majority
of independent directors including the Chairman; for regular
meetings (at least four (4) per year) without the CEO present;
for mandatory in camera sessions at every meeting; for
the Committee to hire independent HRC advisors with expertise
in the airline sector plus full and unrestricted access to all
necessary corporate information including financial and
operational performance data. The committee is to
ensure the
Corporation has a sensible and articulated compensation
philosophy and that there is in place: a modern succession
planning and talent management mechanism; a process for
regular and effective performance monitoring; for a fair and
reasonable retirement and pension policy; and an enlightened
training and career development program.
Air
Canada’s executive and board compensation process is, we
believe, at or close to state-of-the-art and we presently are
operating in accordance with principles which flow from or are
inherent in the following modalities for Executive and
Directors’ compensation.
A)
Executive Compensationtc
"Executive
Compensation"
·
Executive compensation
is under scrutiny by the public, shareholders and regulators
as executives from well-publicized cases were making vast
millions of dollars for themselves through exercise of stock
options while their company’s fortunes were in decline –
leaving shareholders with worthless stock.
·
The gap between
executive reward and company performance has in consequence
become an ongoing issue and there is significant debate on the
future of equity-based compensation and expense treatment of
stock options.
Q: Are stock option plans still viable?
·
In our view, stock
option plans are still alive and well; however, Air Canada and
many other Canadian companies are now reviewing their option
plan designs and regulatory requirements respecting
shareholder approval.
·
Stock options still
remain the pre-eminent tool to attract, retain and motivate
talent
Q: What types of new measures are being put in place
respecting options to safeguard shareholder interests?
·
Such measures include:
·
Regulatory and
legislative action for companies to expense options in their
annual financial statements
·
Prohibiting executives
and directors of companies that have, in the past, re-priced
options from sitting on boards of directors or their
compensation committees
·
Requiring shareholder
approval of all stock option plans
Q: What are the new trends in stock option plan design?
·
Over the past year,
more organizations are implementing the following changes to
their stock option plans?
·
Tying stock option
grants / vesting to company performance
·
Making stock option
grants / vesting contingent on individual performance
·
Vesting periods over
several years
·
Limiting number of
shares that can be exercised in a given timeframe or at one
time
·
Requiring executives to
hold the majority of their shares until a certain time has
elapsed or until they leave the company
Q: What is the state of the art for equity-based
compensation?
·
Long-term incentive programs which are still tied to stock
derivatives, but are now carefully measured on total
shareholder return in addition to profitability
A)
Directors Compensationtc
"Directors
Compensation"
Q. Has Enron sounded the death knell for the practice of
granting stock options to outside or independent directors?
A.
Not at all. Based on recent studies, stock-based
compensation for independent board members continues to grow.
This could change soon. It’s too early to tell.
Q.
Is the stock-based compensation for independent directors in
the form of stock grants only?
tc "Is
the stock-based compensation for independent directors in the
form of stock grants only?
" \l 3
A.
No. the use of stock options now exceeds the
granting of stock.
Q.
What other forms of stock-based compensation exist?
A.
In addition to stock grants and stock options, w e
also see the use of restricted stock grants or phantom stock,
which are grants subject to certain conditions that limit
their sale or transfer until some point in the future.
Q.
Is the level of Board compensation staying the same
or increasing?
A.
The level is definitely increasing as evidenced by a
6-7% increase in 2000 and 9-10% in 2001, even as this year was
marked by economic turmoil. We predict further increases as
directors’ liability risks increase and the pool of available
independent directors decreases.
Q.
Is the increased level of
board compensation being paid in cash?
A.
No. Most increases are now in the form of stock-based
compensation. On average, companies now pay outside directors
75 percent in stock and 25 percent in cash; a significant change
from 2000 when it was 66 2/3 percent stock and 33 ½ percent
cash.
Q. Is there any evidence that stock-based compensation for
outside directors will need to be tied to the performance of the
company?
A. Although there may be some companies granting performance
based stock awards to directors, the evidence at this time seems
to be in the negative.
Q. Are outside directors required to build a portfolio of
stock?
A. A significant number of companies apply stock ownership
guidelines requiring Board members to build to a given level of
stock ownership (typically as a multiple of the annual retainer)
over a defined period of time.
Q. Is there any use of deferred compensation for board
members?
A. Yes. There is a growing use of deferred compensation where
these arrangements often replace cash payments with stock-unit
accounts that allows directors to accumulate capital on a
tax-deferred basis until termination or some other point in the
future.
Q. Are the use of pension and benefit arrangements still
popular in board compensation arrangement?
A. No and as a matter of fact the use of pensions and other
benefits have all but disappeared in the marketplace.
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