Opting Out
Stock options help glue top talent to a company, right? But as their value increases, aren’t they just as likely to aid a quick exit?
Luis Navas, the Toronto-based head of compensation in Canada for Hay Group, an international human resources firm heavily involved in designing executive compensation packages, says Alberta’s “strong working culture” discourages suddenly wealthy managers from cashing out. “People really live to work in Alberta. They just keep going at it. The average bank CEO has over $100 million of wealth accumulated during their tenure. Why don’t they just quit? Because they love it.” It’s no different with oil and gas types.
Options are issued at a strike price, approximately the market value of the company’s shares at the time of issuance. They entitle the grantee to purchase a specified number of shares at that price after a certain vesting period, usually three to five years. If the stock has risen above the strike price, the holder profits by the difference in value. If the stock is lower than the strike price, the options are worthless.
Elsewhere in the country, and in other sectors, attaching restrictive performance criteria to the issuance and vesting of stock options – known as restricted share units or performance share units (PSUs) – is becoming more common, says Navas. PSUs are given to an executive outright provided that, thanks to his or her efforts, a company trumps certain objectives, such as beating the earnings per share of a peer group of companies. With the multiplier factors built into them (i.e., the number of shares granted can go up depending on how much the company’s performance exceeds a particular measure), PSUs can generate astronomical income for their owners. And, even if they sink below the price of the shares when they were granted, they still have some value and can be sold on the market. But in Alberta, and especially among oil and gas juniors free from the executive compensation scrutiny of institutional investors, the simple, old-fashioned stock option holds sway. “In organizations where the valuation might be more volatile or there are expectations of fairly high growth in valuation, stock options can be more attractive to the employees than whole share plans,” says Navas.
If anything, Peyto founder Gray sees options as helping to inject new blood into what he sees as the oilpatch’s stagnant talent pool. He used his millions as an opportunity to step aside and let a hungrier colleague, Darren Gee, take over as president and CEO. Still, he recognizes the flaws in option-based compensation, “primarily because it ties [compensation] to the [stock] market, and the market itself isn’t that efficient.” In other words, just because an oil company’s stock price rises when oil prices go up doesn’t mean company executives have necessarily done a great job creating long-term value. It’s the old saying: a rising tide floats all boats. Even the leaky ones.
That’s why Peyto restricted the vesting of options to certain performance factors. Each year the company hired an independent engineering firm to look at its proven and producing reserves and measure the difference between the value of those reserves and new finds with the value of their assets the year before. Peyto also used the same commodity price year over year to valuate those reserves, so that wild spikes in oil or gas prices didn’t excessively inflate the final bonuses and options given to employees. “So we weren’t paying people for an uptick in commodity prices,” Gray explains.
But that Peyto secretary who became a millionaire, what happened to her? “Now she’s at home raising her children,” answers Gray. “Is that a bad thing? No, that’s not a bad thing. That’s the way it goes.” And sure, Gray concedes, occasionally, rarely, a CEO or other top-flight exec at a junior firm who suddenly finds him or herself with a Jed Clampett-like fortune after options vest might leave or “choose to work for their own capital down the road and not somebody else’s. But they’ve got capital now and I think that is a positive for everyone.”
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