Stock-based compensation is a legitimate labour expense that can be used in railway revenue cap calculations, says the Canadian Transportation Agency.
In an April 28 decision announcing a 6.6 percent increase in the volume-related composite price index used to establish caps for the 2006-07 crop year, the agency said that type of compensation is similar to other wage-related items.
“As for the reasonableness of the stock-based compensation amounts or rewards, such a review extends beyond the scope of the agency’s mandate,” said the decision. “The agency’s uniform classification of accounts indicates that stock-based compensation is a legitimate labour expense and no restrictions are put upon the amount. It follows that for price indices’ development, the level of compensation is also not a relevant factor.”
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Stock-based compensation is the practice of paying employees in stock options as well as a regular wage.
The labour price index is one component of the composite. The CTA uses historical price information for inputs such as labour and capital provided by Canadian National Railway and Canadian Pacific Railway. CTA staff develops forecasts for future changes in those costs and a price index is developed for each input.
This year, the agency was asked to expand the labour price index to include stock-based compensation plans and fringe benefits such as pension plans and employment insurance.
The CTA consulted with producer organizations, shipper organizations, grain companies, the Canadian Wheat Board, governments and the railways before making its decisions.
According to the CTA ruling, non-railway participants in the consultations said stock-based compensation shouldn’t be included. Such benefits might not be based on merit or competition in the labour market and may be excessive, they said.
Canadian National Railway Co. chief executive officer E. Hunter Harrison, for example, has a base salary of about $1.5 million US this year. According to regulatory filings made in advance of the company’s annual meeting in April, he took home more than $13 million in base salary, bonuses and stock options in 2005. He also received more than $17 million from a long-term incentive plan payout. As well, he exercised options worth nearly $22.5 million.
“A second concern was that stock-based compensation may not be related to the movement of western grain under the revenue cap regime,” said the decision document. “The third concern was that it was inappropriate to inflate the labour price index for rewards related to efficiency gains as i) that ensures that the rewards will be paid for, in part, by grain shippers who receive no benefit from railway efficiency gains, and ii) some of the railway efficiency gains have been achieved by downloading costs to the shippers.”
Similar concerns were expressed about the fringe benefits.
However, the CTA said stock-based compensation can attract and keep quality managers.
The agency also said there is no evidence to suggest that the compensation wouldn’t be related to western grain movement. All the indices are based on system-wide costs, not just grain.
