Since the tail end of the 1980’s, consultants, military and business leaders, and self-proclaimed “gurus” have embraced the term “VUCA” (Volatile, Uncertain, Complex, and Ambiguous) to describe the world we live in. Even through the global pandemic, VUCA was often used to describe the personal, national, and international environment that governments and business leaders were forced to navigate through as, in some cases, life or death decisions had to be made.
However, given the passage of time since the term was first introduced, we learned to live in and adapt to a VUCA world. Uncertainty implied the need for patience. Patterns emerged in complex environments, and ambiguity still offered decision-makers a choice of options to pursue.
Many would argue that we now live in a world that is far worse than VUCA, which in 2018 led author and futurist Jamais Cascio coin the term BANI: “Brittle, Anxious, Nonlinear, and Incomprehensible”.
- Brittle: Issues raging from climate disasters, war in Europe and the Middle East, and the striking ripple effects felt around the world from US economic policies have exposed the fragility of the systems and structures we have relied on for decades.
- Anxious: Trust between employers and their employees is at an all-time low. On a daily basis, the news cycle is flooded with warnings about the dire consequences of the newest crisis.
- Nonlinear: The patterns that existed in a VUCA world are no longer evident. While patience was often rewarded, the speed with which new challenges arise has compelled decision makers to act more quickly in the face of incomplete information.
- Incomprehensible: We are inundated with data – so much so that it is often impossible to separate meaningful information from the noise that surrounds it.
It Is in the context of a BANI world that the boards of publicly traded companies must make decisions regarding executive compensation – decisions that are increasingly being scrutinized by shareholder rights groups and institutional shareholders.
Base Salary
Competition for senior executive talent in North America remains intense. Bedford’s Executive and Director Compensation and Governance Study for the Mining Industry, as an example, identified a marked increase in CEO and CFO turnover during the past three years. Factors such as in-year performance, the company’s cash position, the inflation rate, and the behaviour of competitors for talent has influenced board decisions on base salary changes. With the turmoil in global financial markets and the risk of a world-wide recession, Bedford anticipates a conservative approach to executive base salaries in the near- to mid-term, with higher salary increases reserved for executives who lead their organization through a transformational change, such as completion of a major milestone or growing the company’s footprint through a significant acquisition.
Short-Term Incentives (STI)
By definition, STI rewards executives for in-year performance. Since 2022, US-listed companies have been required to report on performance against defined objectives to support STI decisions. Many Canadian-listed companies have adopted this practice either voluntarily or in response to shareholder pressure. While ability to pay remains an overriding factor, corporate scorecards normally include measures related to:
- Financing: Achieved targets for raising capital, retiring elements of debt financing.
- Operations: Examples may include achieving unit production costs, performance against budget, reaching sales or revenue targets.
- Development: Completing a planned drilling program, expanding plant capacity, entering a new market.
- Share Price/Shareholder Relations: In year share price performance against the compensation peer group or a recognized index.
- Safety/ESG: Meeting long-term injury frequency goals, operating in an environmentally sustainable manner, zero reportable environmental spills.
With a direct link between executive performance and an STI scorecard, shareholders have line of sight to the STI decision made by corporate boards.
Long-Term Incentives (LTI)
Given that LTI is meant to align the long-term interests of executives and shareholders, decision making on appropriate grant size can appear to be much more daunting in a BANI world. As a result, Bedford works closely with Compensation Committees to position them to make the most informed decision possible.
One of the key tools we use in this regard is a three-year lookback at share performance relative to compensation peers. The primary measure for LTI awards should be some relative measure of shareholder return, and the three-year lookback is broadly accepted by shareholders as a strong performance indicator for executive performance.
Table 1 and Table 2 present data from tow clients in the same industry, of similar size, with performance over three comparable years. The two clients do not share common peers.
| Company | Share Price December 31, 202X | Share Price December 29, 202Y | Change in Share Price |
| Peer 1 | $6.26 | $4.13 | -34% |
| Peer 2 | $1.97 | $0.22 | -89% |
| Peer 3 | $1.43 | $1.23 | -14% |
| Peer 4 | $2.89 | $0.81 | -72% |
| Peer 5 | $0.92 | $0.71 | -23% |
| Peer 6 | $3.17 | $1.57 | -50% |
| Peer 7 | $1.10 | $0.85 | -23% |
| Peer 8 | AU$0.06 | AU$0.21 | +250% |
| Peer 9 | $1.70 | $1.34 | -21% |
| Peer 10 | AU$0.71 | AU$0.45 | -37% |
| Peer 11 | $0.38 | $0.12 | -68% |
| Peer 12 | £16.14 | £12.77 | -21% |
| Peer 13 | AU$0.38 | AU$0.61 | +61% |
| Peer 14 | $0.84 | $0.51 | -39% |
| Peer 15 | US$52.97 | US$37.91 | -28% |
| Client 1 | $1.24 | $1.40 | +13% |
| Company | September 30, 202X | September 30, 202Y | Change in Share Price |
| Peer A | 4.61 | 6.26 | +36% |
| Peer B | 11.21 | 15.83 | +41% |
| Peer C | 1.23 | 0.69 | -44% |
| Peer D | 5.19 | 5.34 | +3% |
| Peer E | 3.11 | 1.57 | -50% |
| Peer F | 0.55 | 0.53 | -4% |
| Peer G | 4.21 | 2.00 | -52% |
| Peer H | 15.03 | 2.89 | -81% |
| Peer I | 6.30 | 12.7 | +102% |
| Peer J | 3.97 | 1.58 | -60% |
| Peer K | 1.84 | 1.70 | -8% |
| Peer L | 12.56 | 11.49 | -9% |
| Peer M | 2.38 | 3.43 | +44% |
| Peer N | 2.09 | 2.59 | +24% |
| Peer O | 1.89 | 1.61 | -15% |
| Client 2 | 2.77 | 1.28 | -54% |
For the Compensation Committees of each of our clients, this analysis proved to be telling in terms of setting LTI awards that align with shareholder expectations. For Client 1, the executive team executed on decisions that proved to be very effective over the three-year period, resulting in top quartile performance and an overall increase in shareholder value. As a result, Bedford recommended LTI grants at target for the year ending 202Y.
The picture for Client 2 is not as compelling, as shareholder return was in the bottom quartile relative to peers over the three-year period resulting in a significant decline in shareholder value. While the Compensation Committee acknowledged that there were factors outside of management’s control which had a negative impact on share price over the three-year period, the Committee also recognized that a material reduction in grant values was appropriate for the year ending 202Y.
LTI grants can include other measures. However, ignoring long-term returns invites harsh criticism from shareholders and shareholder rights groups. In a BANI world, the above approach, in our view, is a key analysis to support the final board decisions on the quantum of LTI grants.
Bedford Group is a recognized authority in compensation services, providing organizations with the guidance needed in benchmarking, strategy, policy and governance. Bedford also conducts annual industry-wide executive and board compensation surveys to provide essential insights. These compensation reports, combined with our expertise, ensure that you remain competitive and aligned with industry standards, helping to attract and retain top talent.
Connect with our team to learn more about Bedford’s compensation practice.
Stephen Diotte
Partner and Compensation Practice Leader
416-963-9000
sdiotte@bedfordgroup.com