Executive compensation often extends well beyond base salary. Stock options, restricted share units (RSUs), annual bonuses, long-term incentive plans (LTIPs) and other forms of compensation can represent a significant portion of an executive’s overall earnings.
While these arrangements can offer substantial financial benefits, they often come with complex contractual terms governing vesting, eligibility, payment and what happens when employment ends. Understanding these provisions is important when negotiating an executive employment agreement, considering a career change or reviewing changes to an existing compensation plan.
Employment contracts and incentive plans can also affect an executive’s entitlements following resignation or termination. Ontario courts have considered numerous disputes involving stock options, discretionary bonuses and long-term incentive payments, demonstrating the importance of carefully reviewing compensation agreements before making significant employment decisions.
Understanding Executive Compensation Agreements
Executive compensation agreements typically establish how senior employees are paid, including the conditions that must be satisfied to receive bonuses, equity awards and other financial incentives. Unlike arrangements based primarily on salary, executive compensation packages may include several components with different payment schedules, eligibility requirements and contractual restrictions.
Common forms of executive compensation include:
- Base salary: The executive’s regular employment income, generally paid regardless of company performance.
- Annual or performance bonuses: Additional compensation that may depend on individual performance, company results or other established criteria.
- Stock options: The right to purchase company shares at a specified exercise price, subject to the terms of the applicable stock option plan.
- Restricted share units (RSUs): Equity-based awards that generally become payable or settle when specified vesting conditions are satisfied.
- Long-term incentive plans (LTIPs): Compensation arrangements designed to reward performance or continued service over an extended period.
- Short-term incentive plans (STIPs): Compensation arrangements generally tied to shorter performance periods, such as an annual bonus cycle.
These forms of compensation may be governed by separate documents, including employment agreements, equity incentive plans, award agreements and amendments introduced during employment. Each document may contain provisions affecting an executive’s financial entitlements.
When reviewing or negotiating an executive compensation package, it is important to understand how these agreements interact and whether any provisions restrict compensation following resignation, termination or a change in employment status.
How Do Stock Options and RSUs Work?
Stock options and RSUs are common forms of equity-based executive compensation. Although both may provide an opportunity to benefit from a company’s value, they operate differently and are subject to the terms of their respective plans.
Stock options generally provide the right to purchase shares at a predetermined exercise price. Their value may depend on the difference between that price and the market value of the shares when the options are exercised. RSUs, by contrast, typically represent an entitlement to shares or their cash equivalent once the applicable vesting and settlement conditions have been satisfied.
Both arrangements frequently include vesting schedules requiring an executive to remain employed or meet other conditions before receiving the benefit. Compensation plans may also specify what happens to vested and unvested awards when employment ends.
For example, an executive who resigns before an award vests may lose the entitlement to that award under the applicable agreement. A stock option plan may also provide a limited period following departure during which vested options must be exercised. Missing that deadline could result in the loss of valuable compensation.
However, the treatment of equity compensation following a dismissal may differ from the treatment following a voluntary resignation. The wording of the agreement and the circumstances surrounding the end of employment are important.
IMAX: Stock Options and RSUs During the Reasonable Notice Period
In O. v. IMAX Corporation, 2019 ONSC 342, the Ontario Superior Court considered whether a senior executive was entitled to damages for stock options and RSUs that would have vested during the reasonable notice period following termination without cause.
The employee had worked for the company for 22 years and received a significant portion of compensation through stock options and an LTIP. Following termination, the employer relied on provisions in the award agreements stating that unvested awards would cease vesting when employment ended.
The Court determined that the employee was entitled to a 24-month reasonable notice period. It found that the contractual provisions did not clearly remove the employee’s common law entitlement to damages for stock options and RSUs that would have vested during that period.
The decision illustrates the importance of carefully examining equity compensation agreements. Provisions addressing the cancellation of unvested awards may affect an executive’s entitlements, but their enforceability depends on the applicable contractual language and legal circumstances.
Executives facing termination can learn more about the treatment of equity compensation in Monkhouse Law’s article on executive severance packages in Ontario.
What Happens to Executive Compensation When You Resign?
Resignation can have significant financial consequences for executives whose compensation includes stock options, RSUs, bonuses or other incentive arrangements.
Some compensation plans distinguish between voluntary resignation, termination without cause, termination for cause and other circumstances in which employment ends. These distinctions may affect whether outstanding awards continue to vest, whether previously vested options remain exercisable and whether an executive qualifies for an upcoming bonus payment.
Executives should also consider the effect of moving from an employee position to a consulting or independent contractor arrangement. A change in employment status may alter eligibility under a compensation plan, even where the individual continues providing services to the same organization.
Altus Group: Why the Terms of a Stock Option Agreement Matter
In C. v. Altus Group Limited, 2020 ONSC 2936, the Ontario Superior Court considered an employee’s entitlement to stock options following a change in employment arrangements and a subsequent departure from the company.
The employee had sold a business to Altus Group and entered into an agreement providing for 50,000 stock options after three years of service. The agreement required the employee to remain actively employed or continue providing services under a qualifying consulting arrangement at the relevant time.
A subsequent agreement also addressed the vesting of stock options if the employee was terminated without cause before completing the three-year period.
After approximately one year of employment, the employee transitioned to an independent contractor arrangement and later left the organization to pursue another opportunity. The employee alleged constructive dismissal and claimed entitlement to the stock options.
The Court rejected the claim, finding that the employee had voluntarily left for another opportunity and was not entitled to the stock options in the circumstances.
The decision demonstrates that compensation entitlements can depend on the precise terms of an agreement and the circumstances in which an executive leaves a company. Before resigning, changing employment status or accepting an amended compensation arrangement, executives should review the potential effect on outstanding equity awards.
Are Discretionary Bonuses Guaranteed?
Executive compensation agreements frequently include discretionary bonuses. These arrangements may give employers flexibility to determine whether a bonus will be paid and how much an employee will receive, based on factors such as company profitability, individual performance and other considerations.
However, describing a bonus as discretionary does not necessarily give an employer unlimited authority to withhold compensation. Ontario courts have recognized that contractual discretion over bonus payments must be exercised fairly and reasonably.
Whether an executive is entitled to a particular bonus depends on the terms of the employment agreement, the applicable compensation plan and the circumstances surrounding the employer’s decision.
JC Clark: Discretionary Bonuses Must Be Awarded Fairly and Reasonably
In B. v. JC Clark Ltd., 2022 ONCA 614, the Ontario Court of Appeal considered whether two portfolio managers were entitled to discretionary bonuses following their termination without cause.
The employees worked as portfolio managers for a hedge fund acquired by the defendant company. Their employment agreements provided for discretionary bonuses based on factors that included individual performance and company profitability.
Following their termination in July 2014, the employees pursued claims relating to performance fees and discretionary bonuses. The trial judge dismissed their claims, and the employees appealed.
The Court of Appeal upheld the dismissal of the employees’ separate claim to performance fees under their employment agreements. However, it found that the trial judge had erred in preventing them from advancing their claim for discretionary bonuses.
The Court explained that where an employment agreement provides for a discretionary bonus, the employer must exercise that discretion in a fair and reasonable manner. The fact that a bonus is discretionary does not mean the employer’s decision is entirely unconstrained.
In assessing the employees’ entitlements, the Court considered the strong performance of the fund they managed, the substantial bonuses awarded to similarly situated employees and the relevant compensation arrangements.
The Court of Appeal awarded each employee $115,000 in discretionary bonus damages for the relevant period.
What This Means for Discretionary Bonus Agreements
The JC Clark decision demonstrates that employers may be required to justify how they exercise discretion when awarding bonuses. An executive’s entitlement may depend on the wording of the agreement, established bonus practices, individual performance and the treatment of comparable employees.
Executives negotiating discretionary bonus arrangements should seek clarity about performance criteria, payment timing, eligibility requirements and the circumstances in which a bonus may be reduced or withheld.
Can Employers Restrict Equity Compensation?
Employment agreements and equity incentive plans may include provisions intended to limit an employee’s entitlement to stock options, RSUs or other compensation when employment ends.
For example, a plan may provide that unvested awards are forfeited when an employee stops actively working, even if the employee would otherwise be entitled to a period of notice or compensation in lieu of notice.
Whether such provisions are enforceable depends on their wording, the applicable employment standards legislation and the circumstances of the employment relationship. Employers may be able to establish valid contractual restrictions, but provisions that conflict with minimum statutory entitlements or fail to clearly address common law rights may be unenforceable.
For more information about the enforceability of termination provisions, see Monkhouse Law’s guide to termination clauses in Ontario employment contracts.
Veeva Software: Restrictions on Unvested Equity Compensation
In L. v. Veeva Software Systems Inc., 2025 ONSC 7010, the Ontario Superior Court considered termination provisions and the employee’s entitlement to RSUs and stock options following dismissal.
The employee’s equity arrangements included restrictions addressing when unvested awards would cease vesting after employment ended. The dispute raised questions about the interaction between those restrictions, the employee’s statutory entitlements and the common law reasonable notice period.
The Court found the relevant termination provisions unenforceable and determined that the employee was entitled to six months of reasonable notice. The employee was also awarded compensation for RSUs and stock options that would have vested during that period.
The decision illustrates why executives should not assume that every forfeiture provision in an equity compensation agreement will necessarily be enforceable. At the same time, the outcome of any dispute depends on the specific wording of the agreement and the applicable law.
Executives should review the termination and vesting provisions in their compensation plans, particularly where equity awards represent a significant portion of their overall earnings.
How Are Long-Term Incentive Plans Treated Upon Termination?
Long-term incentive plans are designed to provide compensation based on performance, continued service or the achievement of specified business milestones. Depending on the arrangement, an LTIP may provide for cash payments, equity awards or other financial benefits.
These plans may be particularly valuable to senior executives, but they can also create uncertainty when employment ends before an award becomes payable.
An important question is whether the executive would have received the incentive payment during the reasonable notice period and whether the applicable agreement effectively limits that entitlement.
Ocean Nutrition: Supreme Court of Canada Addresses LTIP Entitlements
In M. v. Ocean Nutrition Canada Ltd., 2020 SCC 26, the Supreme Court of Canada considered whether an employee was entitled to a long-term incentive payment that became payable during the reasonable notice period.
The employee was a long-serving senior chemist who participated in an LTIP that provided for a substantial payment if the company was sold. Following changes to the employee’s responsibilities and working conditions, the employee left the company and was subsequently found to have been constructively dismissed.
The company was sold during the employee’s 15-month reasonable notice period. Although the employer relied on contractual language intended to restrict LTIP payments to employees who remained actively employed, the Supreme Court concluded that the provisions did not clearly remove the employee’s entitlement to damages in the circumstances.
The Supreme Court restored the employee’s entitlement to an LTIP payment of approximately $1.09 million.
The decision confirms that wrongful dismissal damages may include bonuses and incentive payments an employee would have received during the reasonable notice period, unless the applicable contractual provisions effectively limit that entitlement.
However, not every LTIP payment is automatically recoverable following termination. The terms of the compensation plan, the timing of the payment and the circumstances of dismissal must be considered.
For a more detailed discussion of how incentive compensation can affect termination entitlements, see Monkhouse Law’s article on executive severance packages in Ontario.
What Should You Review Before Signing an Executive Compensation Agreement?
Executive compensation arrangements can have significant long-term financial consequences. Understanding the terms before accepting a new position, agreeing to a promotion or signing an amended compensation plan may help prevent disputes later.
Important considerations include:
- Vesting schedules: Determine when stock options, RSUs and other incentive awards become available and what conditions must be satisfied.
- Termination provisions: Review how compensation is treated following termination without cause, termination for cause, resignation or constructive dismissal.
- Exercise deadlines: Understand how long vested stock options remain exercisable after employment ends.
- Bonus eligibility: Examine how discretionary and performance-based bonuses are calculated, when they are paid and whether continued employment is required.
- Changes to compensation plans: Consider whether the employer can amend or discontinue an incentive arrangement and how those changes must be communicated.
- Changes in employment status: Review the potential consequences of transitioning to a consulting arrangement, accepting a different position or resigning.
- Interaction between agreements: Consider how the employment contract, equity award agreements and incentive plan documents work together, particularly if they contain different provisions.
Executives may have opportunities to negotiate compensation terms before accepting an employment offer or agreeing to changes during employment. For more information, see Monkhouse Law’s article on six key areas to negotiate in an executive employment contract.
Understanding Your Executive Compensation Rights
Executive compensation can involve substantial financial arrangements that extend beyond regular salary. Stock options, RSUs, discretionary bonuses and long-term incentive plans may provide significant benefits, but their value often depends on contractual conditions that are not immediately apparent.
Ontario court decisions demonstrate that compensation agreements must be considered carefully, particularly when an executive is negotiating new terms, contemplating resignation or facing termination. Some contractual restrictions may be enforceable, while others may not effectively limit an employee’s legal entitlements.
Because executive compensation arrangements can be complex, obtaining legal advice before signing an agreement or making a significant employment decision can help identify potential risks and clarify available options.
Monkhouse Law’s employment lawyers can help executives and senior-level employees review employment agreements, assess compensation and incentive plans, negotiate employment terms and understand their rights under Ontario employment law.