Canada’s top executives are shrewd negotiators — except in matters of their own interest

Canada’s highest-paid executives tend to negotiate hard — except over what is most critical, writes Howard Levitt. Photo by Getty Images/iStockphoto

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Canada’s highest-paid executives tend to negotiate hard — except over what is most critical.

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They will spend weeks refining compensation: base salary, bonus targets, signing incentives, title. They will argue over optics, reporting lines, and prestige.

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And then, almost as an afterthought, they will sign equity documents they have barely read, let alone understand.

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That is where the real money is. And that is where it is most easily lost.

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For executives earning $1 million or more, salary is often the smallest component of compensation. The real upside lies in restricted share units, stock options, performance share units or carried interest.

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Yet those same executives routinely discover, much too late, that the largest portion of their compensation is governed by documents designed, quite deliberately, to defeat their expectations.

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Executives speak about equity as if they “own” it.

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In most cases, they do not.

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Unvested equity is not property in any meaningful sense. It is a conditional promise, governed by plan documents that almost always favour the employer. Those documents are drafted with one objective: to limit what happens on the way out.

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And there is always a way out.

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One of the most common and costly mistakes is failing to align the employment agreement with the equity plan.

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The employment contract may say nothing about equity continuation on termination. The equity plan, buried in a separate document, will say everything.

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Typically, it will provide that upon termination, even without cause, unvested equity is forfeited immediately. Not reduced. Not prorated. Eliminated.

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Executives assume that their equity will continue to vest during the reasonable notice period that courts award. Increasingly, courts are saying otherwise. If the plan language is clear, it governs.

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That is not a technicality. It is often the difference between leaving with millions or leaving with nothing beyond salary-based severance.

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There is a persistent belief that if an executive is terminated without cause, they will be “made whole.” That belief is wrong.

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“Without cause” simply means that the employer chose to end the relationship without alleging gross willful misconduct. It does not guarantee the continuation of incentive compensation, equity vesting or bonus entitlements.

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Those rights exist only if they are protected. In most cases, they are not.

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In Matthews v. Ocean Nutrition Canada Ltd., which I successfully argued before the Supreme Court of Canada on this issue, went in favour of the employee. Employers have tried to buttress their agreements since. We still often find ways to get around the agreement, but it takes increasing legal creativity.