TORONTO—In the CCPA’s annual review of executive compensation in Canada released January 4, 2010 (A Soft Landing: Recession and Canada’s 100 highest paid CEOs), an oversight was inadvertently made in reporting the value of stock options issued by the National Bank in 2008 to its CEO.
Our report indicated in a footnote that the National Bank had not disclosed the Black-Scholes value of its stock options in its 2008 proxy circular. In fact, while the bank did not disclose the value in the summary compensation table in its circular, it did report in another table an estimated value of $2,000,000 for 229,360 options issued at a strike price of $34.87.[1] It also reported “other compensation” in 2008 that was not included in the summary table. To be consistent with the approach taken with the other corporations on our list, the value of stock options included in the National Bank CEO’s compensation has been revised, the value for other compensation has been included, and the report revised accordingly.
As a result of this revision, the National Bank’s CEO’s compensation drops from 17th to 60th place.
The discrepancy between the value disclosed by the National Bank in its filing and the value estimated by the author of the CCPA report highlights the difficulties associated with the valuation of compensation provided in the form of stock options. To illustrate the issue further, the following table compares the values disclosed by the major banks for options granted in 2008 with the estimated values based on current share prices as of today’s date (January 5, 2010).
Valuation of options issued to CEOs by six largest Canadian banks in 2008
|
|
Options granted (#) |
Strike price ($) |
Value disclosed ($) |
Implicit Assumed Price in Valuation ($) |
Implicit % price increase |
Market price at 5 January 2009 ($) |
Value at current prices ($) |
|
BN |
229,360 |
34.87 |
2,000,000 |
43.59 |
25% |
59.94 |
5,750,055 |
|
RBC |
247,344 |
52.97 |
2,750,000 |
64.09 |
21% |
56.17 |
791,501 |
|
BMO |
219,749 |
34.13 |
1,800,000 |
42.32 |
24% |
55.70 |
4,738,887 |
|
BNS |
444,084 |
33.89 |
3,010,000 |
40.67 |
20% |
48.43 |
6,456,981 |
|
CIBC |
200,009 |
49.75 |
742,500 |
53.46 |
7% |
68.04 |
3,658,165 |
|
TD |
420,172 |
42.50 |
3,750,035 |
51.42 |
21% |
65.23 |
9,550,510 |
This table illustrates clearly the potentially dramatic differences between the values estimated at the time of option grant and a running estimate of the amount that could be realized when those options are exercised.
In all cases except for the Royal Bank (RBC), the values of options granted in 2008, if exercisable today, would be dramatically in excess of the values disclosed in the banks’ proxy circulars.
This discrepancy does not reflect any wrongdoing on the part of the banks; it simply reflects the difficulties associated with valuation of this important part of executives’ compensation. For the six largest Canadian banks, the methods typically used to value options have resulted in values that appear as of this date to be quite conservative. The average value disclosed in 2008 was $2.34 million; the current estimated value averages $5.16 million.
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For more information contact Kerri-Anne Finn, CCPA Senior Communications Officer, at 613-563-1341 x306.
[1] Although options granted in 2006 and 2007 were valued using the commonly-used Black-Scholes methodology, options granted in 2008 were valued based on a “percentage of the share price”. A value of $2 million for 229,360 options with a strike price of $34.87 implies a stock price on exercise of $43.59 and a percentage increase from the strike price of 25%.