Employers look to more long-term incentives to minimize effects of economic uncertainty: expert
According to Southlea Group, total shareholder return growth for Canadian companies jumped to 14 per cent in 2024, compared to just seven per cent in 2023, driving substantially higher incentive payouts for executives.
Yet as the economic horizon darkens with concerns of instability in 2025 and beyond — or worse, whispers of recession — many organizations are rethinking how they structure compensation packages to protect both shareholder value and organizational stability.
The shift toward longer-term incentive plans and more rigorous performance criteria is becoming an essential safeguard against potential volatility, according to Sean Maxwell, a partner at BMKP Law in Calgary who specializes in executive compensation law.
Conservative approach to pay in Canada
However, he notes that traditionally, at-risk pay has been a smaller component of executive compensation in Canada than in the U.S. or U.K. This historical conservatism now demands careful recalibration as Canadian companies compete globally for talent while navigating tightening economic conditions, says Maxwell.
It’s critically important for organizations to look beyond immediate market pressures when designing executive compensation packages, says Maxwell.
“When you're looking at a long-term incentive plan that’s designed to reward over a three- to five-year period, you need to look beyond what the next year might look like,” he says, adding that making year-to-year compensation adjustments creates misalignment between executives, shareholders, and employees.
ProFound Talent's October 2025 analysis of data from Southlea, Mercer, and CGP found that a shrinking proportion of total direct compensation for Canadian executives over the past couple of years is base salary, with the remainder composed of incentive pay, especially long-term incentives (LTIs).
Planning for full economic cycle
The most significant strategic error that companies can make during economic softening is designing performance criteria that require constant adjustment.
“I've certainly seen cycles where the incentive pay has not delivered the compensation that executives were expecting and they have sufficient leverage to extract more from the corporation and shareholders who have perhaps not seen the returns that they were hoping for,” says Maxwell.
“And, conversely, scenarios where the awards have turned out more valuable than the broader economic environment would suggest that they ought to have paid, so your may shareholders struggle with that and demand change.”
Maxwell cautions that when organizations continually tinker with criteria, employees become upset because they either lose compensation or watch subsequent award cycles diminish based on prior year perceptions of overpayment. He says that intentional design of compensation that anticipates economic fluctuations across the full cycle can insulate from the highs and lows of economic instability with align the expectations of all stakeholders, including employees and shareholders.
Long-term strategy for executive comp
One of the most practical tactical decisions involves structuring vesting schedules within LTI plans, says Maxwell. According to Southlea Group's data, actual total direct compensation for CEOs increased nine per cent from 2023 to 2024, while CFO compensation rose 16 percent — increases driven largely through strategic vesting decisions rather than base salary growth. For example, the difference between a three-year cliff arrangement — where the employee or executive must work for three years before receiving any equity or benefits, with a large portion of benefits investing at the end of the period — and three annual installments can significantly impact both cash flow and perceived value.
“If you have an award that’s structured to pay out in three annual installments and the first vesting date is 12 months out, you may still be in a period of slow growth and so the share price might be in a period where it isn't necessarily fully reflective of the value that has been created through the efforts of that executive over the previous 12 months,” says Maxwell.
Maxwell says that organizations can adjust compensation mix by loading vesting toward years two or three, signalling confidence in recovery while managing immediate cash pressures. “It may mean that you provide additional that would vest at the end of the first year to compensate for the fact that the payout value may be diminished of the share price is soft, but it may also mean that in order to maximize value from this award we think the lion's share of these units should be best in years two or three, or maybe all of them vest in year three when you've seen us through this period in the economic cycle.”
Mawell believes the strategy underlining multi-year cliff arrangements aligns executive patience with organizational recovery during volatile economic cycles.
Aligning incentives with long-term objectives
When boards and organizations design incentive plans during economic uncertainty, the goals extend beyond simple retention, according to Maxwell. He emphasizes that focus should remain on LTIs because the behaviour that the organization wants to incentivize is aimed not just at extracting value from the company in a soft market over the next few months, but over a longer period of time that is better aligned with where shareholders are in terms of their value creation expectations.
LTIs also serve retention, as they provide “the golden handcuffs” that Maxwell believes would keep executives on board over a longer period of time.
For organizations that are concerned about short-term cash flow, Maxwell points to equity as a strategic alternative in executive compensation plans.
“Equity that’s issued from treasury as opposed to cash has less pressure on cash flow, so we often see employers take a fresh look at treasury-settled awards so that while they're pushing shares out the door, they're saving cash while doing it,” he says. “It builds that ownership mentality within the executive if they're getting shares, and they have the same incentive as shareholders to increase the long-term value of the enterprise.”
Potential legal pitfalls of termination provisions
One area where many Canadian organizations remain dangerously exposed involves the legal language within incentive plans and award agreements, according to Maxwell, noting that organizations should ensure those provisions are doing what they want or expect them to do.
He describes a common scenario with termination provisions: “If you’re looking at the horizon and you think there may be the possibility of terminations or resignations, or a downsizing of the executive team who receive medium- to long-term incentives, you want to be sure that outstanding awards don’t continue to vest,” he says.
“Make sure that the termination provisions in the award agreements have binding language that allows you to treat those awards as being null and void upon termination of employment.”
Maxwell points out that organizations that don’t effectively assess their termination provisions could have a surprise when an executive is dismissed.
“Employers who let people go thinking that the incentive arrangements that were tended to reward them for performance over a longer term are no longer effective because the person's no longer contributing to value creation, but the way the plan was drafted or the award agreement was structured creates an argument that they’re entitled to those awards through at least their common law notice period.”
Telling a story for global competitiveness
However, Canadian organizations must contend with the reality of competing on a smaller stage, and executives may feel like they’re at a disadvantage because their at-risk pay isn’t generating the returns of some international organizations. To maintain competitiveness while managing risk, Maxwell believes that Canadian companies must tell a clear story.
“As Canadian companies become more globally competitive and increase the portion of remuneration that is paid through at-risk pay, they will need to continue to work hard on their disclosure — you're not just detailing numbers but also telling a story in their proxy circulars about why the packages are structured the way they are.”
Southlea Group projects continued increases in pay for Canadian executives, especially via LTIs, as Canadian companies compete for talent with U.S. firms. The pay mix is currently about 70 per cent of CEO compensation is LTIs, according to Southlea.
Maxwell believes that organizations must communicate a message to stakeholders with their executive compensation plans. To executives receiving awards, it’s clarity about the multi-year nature of compensation: “You may think that the amount of cash running out the door to these executives in this year, given the relative softness of the economy or challenges within the business, is excessive, but you also have to bear in mind that this is a three- to five-year incentive,” he says. “So we're not just compensating this executive for what they did this year, but we're compensating them for what has been delivered over the life of the award.”
Additionally, Maxwell says organizations must build their performance criteria with the long haul in mind. “If one is able to say to the [executive] that there will be years over the course of the cycle where huge value is delivered, and there will be other years when there may be some softness in the performance but we're going to stick to the plan, overall the value that’s created over the long haul will be mutually beneficial.”
