Compensation Discussion and Analysis
Executive Summary
The following Compensation Discussion and Analysis discusses the structure, policies, principles and elements of our executive compensation program as well as the process related to and individuals involved in our executive compensation decisions. Information about the compensation awarded to our Named Executive Officers (as defined below) in 2006, 2007 and 2008 can be found in the Summary Compensation Table and related compensation tables beginning in "Executive Compensation".
The Compensation Committee has engaged Watson Wyatt as executive compensation consultants. Watson Wyatt reports to the Chair of the Committee and primarily provides input to the Committee on the philosophy and competitiveness of the design and award values for certain of our executive and director compensation programs.
As discussed in further detail below, our executive compensation consists of six main elements: base salary, short-term incentives, performance units, performance stock options, pension benefits and severance benefits. We design executive compensation policies to attract, motivate and retain qualified executives. To emphasize performance-based compensation, we benchmark total cash compensation levels to the median of a peer group of companies and provide the opportunity to earn total compensation above the median through medium-term and long-term incentive plans.
Based on a study conducted by Watson Wyatt in 2008, during the past three years, the realized pay of our Named Executive Officers was within the top quartile of our peer group, coinciding with the top quartile performance of our company relative to our peer group. A similar study of chief executive officer compensation at companies comprising the S&P/TSX 60 Index that was conducted in 2007 by the Hay Group, an independent executive compensation consulting group, found similar results for the compensation of our CEO. These results demonstrate the alignment between our Named Executive Officers' compensation and our performance and support the Compensation Committee's compensation philosophy.
We design our incentive plans with performance periods of varying durations. We provide executives with annual incentives through the Short-Term Incentive Plan, three-year incentives through the Medium-Term Incentive Plan and ten-year incentives through the Performance Option Plans. To align incentive compensation with shareholder interests, we link the amount of variable compensation to total shareholder return or metrics with a demonstrated relationship to total shareholder return.
Under our Short-Term Incentive Plan, we achieved an award percentage of 200% based on our actual 2008 cash flow return, which was more than 150% of our 2008 cash flow return target.
During the three-year performance period ended December 31, 2008, we achieved the maximum vesting percentage under our Medium-Term Incentive Plan based on our three-year total shareholder return of 153.31% and as compared to the three-year total shareholder return of the Dow Jones U.S. Basic Materials Index ("DJUSBMI") of -31.45%. As a result, 150% of the performance share units granted under our Medium-Term Incentive Plan vested based on our total shareholder return and our total shareholder return relative to the total shareholder return of the DJUSBMI.
100% of the outstanding options granted under our 2006 Performance Option Plan vested based on the difference between our cash flow return on investment and our weighted average cost of capital during the three-year performance period ended December 31, 2008.
We also provide pension benefits to supplement the income of our employees after their retirement, and in cases of termination without cause, we strive to provide appropriate severance benefits that reflect the potential difficulty in obtaining comparable employment in a short period of time and provide for a complete separation between the terminated employee and our company. In the past, we entered into change in control agreements with certain of our senior executives, which agreements remain outstanding. No new agreements have been entered into since 1994.
We strongly support Share ownership by our executives. Each of our executives is required to hold Shares with a value of between one and five-times the executive's base salary, depending on the executive's position. Our share ownership guidelines reflect the value of Shares held by executives and can be met through direct or beneficial ownership of Shares.
Compensation Structure and Policies
We design executive compensation policies, as described below, to attract, motivate and retain qualified executives. We believe that the most effective compensation program is one that is competitive within the marketplace, rewards the achievement of specific annual, long-term and strategic goals by the company and aligns the interests of executives with shareholders by rewarding performance above established goals with the ultimate objective of increasing shareholder value. To accomplish these objectives, most compensation is variable and fluctuates based on individual and corporate performance. To align variable compensation with shareholder interests, we link the amount of variable compensation to total shareholder return or metrics with a demonstrated relationship to total shareholder return.
Compensation Principles
- To emphasize performance-based compensation, for each position studied, we maintain total cash compensation levels (salary and annual short-term incentive targets) at the median (50th percentile) of the relevant group of comparable companies.
- We determine competitive and median levels of compensation with the assistance of independent compensation consultants that prepare, at least annually, analyses of external competitive compensation. Such analyses currently consist of (1) a group of publicly traded U.S. and Canadian companies with similar industry characteristics, revenues and market capitalization, which we refer to herein as the "Comparator Group", and (2) additional executive compensation surveys of U.S.-based companies with similar industry and revenue size, which we refer to herein as the "Additional Surveys". We refer to the Comparator Group and the Additional Surveys collectively as the "Comparative Compensation Information". See "— Compensation Consultants and Comparator Groups".
- We provide the opportunity to achieve compensation above the median through medium-term and long-term incentive plans (performance units and stock options) if our performance exceeds the median performance of comparable companies. We design these plans, including our performance-based option plans, with measures (total shareholder return and internal performance measures historically linked with total shareholder return) that require company performance above the median, relative to other basic materials companies, to deliver total compensation above the median. For 2008 and the six preceding years, we used the total shareholder return of the DJUSBMI as a benchmark for determining the relative performance of our company. In 2009, we will begin to replace the DJUSBMI with the DAXglobal Agribusiness Index as a benchmark for determining relative performance.
- We establish the overall value of retirement and welfare benefits at approximately the median of comparable companies.
Elements of Executive Compensation
Our executive compensation consists of six main elements: base salary, short-term incentives, performance units issued under the Medium-Term Incentive Plan, which measures a performance period of three years, performance stock options issued as long-term incentives, pension benefits and severance benefits.
We combine these elements, particularly base salary, and the short, medium and long-term incentives, to provide a total compensation package that attracts highly qualified individuals and provides strong incentive to align efforts and motivate executives to deliver company performance that creates sustaining shareholder value. The total value of the compensation package is weighted towards the variable incentive components. In particular, medium-term and long-term incentive targets comprise about 60% and short-term incentive targets comprise about 15% of total potential compensation value. The total value of our CEO's compensation package is weighted even more heavily towards medium- and long-term incentive compensation.
The following charts set forth the relative weight of 2008 compensation attributable to base salary, short-term incentive targets and medium- and long-term incentive targets for (1) our CEO and the CEOs of the Comparator Group, and (2) our Named Executive Officers and Named Executive Officers of the Comparator Group
Our CEO Compensation |
CEO Compensation of Comparator Group |
Our NEO Compensation |
NEO Compensation of Comparator Group |
We establish corporate performance goals for each variable incentive component. For short-term incentives, we set corporate and operating group financial and operating goals annually. The Medium-Term Incentive Plan incorporates absolute and relative total shareholder return targets over a three-year period, with potential payout occurring only at the end of the three-year period. The performance periods under the Medium-Term Incentive Plan do not overlap. As a result, awards, if earned, are paid out only once every three years. Our long-term incentive program grants performance stock options, which we refer to as performance options because the plan includes a performance target required for vesting of the options in addition to the inherent requirement of stock appreciation for the vested options to have value. Vesting is determined at the end of a three-year period based upon a target for cash flow return on investment compared to the weighted average cost of capital. The option term is generally ten years from the date of grant.
More detail on each element and its purpose within the total executive compensation program is described in the following table and further in this report.
| Current Compensation | Form | Eligibility | Performance Period |
Base salary
|
Cash | All salaried employees | Annual |
Short-term incentives
|
Cash | All executives and most salaried staff and union and non-union hourly employees | 1 year |
Medium-term incentives
|
Performance Share Units | All executives and senior management (approximately 66 individuals) | 3 years |
Long-term incentives
|
Performance Options | All executives, senior management and other selected managers (approximately 258 individuals) | 3 year vesting 10 year option term |
| Post-Retirement and Termination Compensation | Form | Eligibility | Measurement Period |
| Pension Benefits | |||
Canadian Pension Plan
|
Cash | All Canadian salaried staff and certain union and non-union hourly employees | Pensionable service period |
Canadian Supplemental Retirement Income Plan
|
Cash | Selected senior executives (23 individuals) | Pensionable service period to a maximum of 35 years |
U.S. Pension Plan
|
Cash | All U.S. salaried and non-union hourly employees | Pensionable service period to a maximum of 35 years |
U.S. Supplemental Plan
|
Cash | Eligible U.S. salaried and non-union hourly employees | Pensionable service period to a maximum of 35 years |
| Severance Benefits | |||
Change in control severance benefits
|
Cash, Insurance and Other Benefits | Selected senior executives (3 individuals) | Upon termination of employment |
General severance benefits
|
Cash | All salaried employees | Upon termination of employment |
In addition to the above elements of compensation, certain U.S. employees participate in our 401(k) plan, which we refer to herein as the "401(k) Plan", and certain Canadian employees participate in our savings plan, which we refer to herein as the "Savings Plan". Pursuant to the 401(k) Plan and the Savings Plan, we make company contributions for the benefit of participants. For information about the amount of company contributions made for the benefit of Named Executive Officers (as defined below) pursuant to such plans, see "Executive Compensation — Summary Compensation Table". We do not have non-qualified deferred compensation plans or arrangements pursuant to which our Named Executive Officers may elect to defer current compensation. Where appropriate, we design our compensation arrangements to provide relief from Section 162(m) of the Internal Revenue Code.
Salary
We believe that salary is a necessary component to retaining qualified employees. We have established a system of tiered salary levels for senior executives (vice president and above). We assign senior executive positions to an appropriate salary tier, considering the position's internal value, as well as external comparisons to relevant positions in the Comparative Compensation Information. The Committee generally establishes salary guidelines at levels that approximate the median (the 50th percentile) of the Comparative Compensation Information. Individual executive salaries for executives that report directly to the CEO are subject to approval by the CEO and the Committee. The CEO's salary is subject to approval by the Committee and the Board.
Incentive Plan Compensation
We design our incentive plans with performance periods of varying durations. We provide executives with annual incentives through the Short-Term Incentive Plan, three-year incentives through the Medium-Term Incentive Plan and ten-year incentives through the Performance Option Plans. Our incentive plans do not provide mechanisms by which executives can monetize unvested equity awards or, except as described below in "Medium-Term Incentive Plan", obtain value prior to the end of the relevant performance period. We believe that, in the aggregate, the range of performance periods in our incentive plans creates a strong alignment between the interests of our executive officers and shareholders.
The Committee analyzes our incentive plans based on actual and potential performance scenarios to ensure that the value of the incentive awards granted to our Named Executive Officers is appropriately linked to our performance. In 2008, at the request of the Committee, the Committee's executive compensation consultants, Watson Wyatt, conducted a study of the relationship of our Named Executive Officers' pay to the performance of our company. For purposes of the study, pay included base salary, the payout value or, if not yet paid, the 2007 year-end value of incentive awards granted during the measurement period and the aggregate annual change in the value of stock options during the measurement period. Company performance was measured based on growth in cash flow per Share, growth in earnings per Share and total shareholder return during the measurement period. The study concluded that during the three years ended December 31, 2007, the pay of our Named Executive Officers was within the top quartile of the Comparator Group, coinciding with the top quartile performance of our company relative to the Comparator Group. A similar study of chief executive officer compensation at companies comprising the S&P/TSX 60 Index conducted by the Hay Group in 2007 found similar results for the compensation of our CEO. These results demonstrate an alignment between our Named Executive Officers' compensation and our performance, reflecting the Committee's compensation philosophy of providing the opportunity to achieve compensation above the median through medium-term and long-term incentive plans if our performance exceeds the median performance of comparable companies.
The Comparator Group used by Watson Wyatt for the above study excluded CF Industries Holdings, Inc. and The Mosaic Company due to the unavailability of three years of historical compensation data for such companies.
Policy on Recoupment of Unearned Compensation
In November 2008, the Board approved a policy on Recoupment of Unearned Compensation. Under the policy, if the Board learns of misconduct by an executive that contributed to a restatement of our company's financial statements, the Board can take action it deems necessary to remedy the misconduct. In particular, the Board can require reimbursement of incentive compensation or effect the cancellation of unvested performance option awards if (1) the amount of the compensation was based on achievement of financial results that were subsequently restated, (2) the executive engaged in misconduct that contributed to the need for the restatement and (3) the executive's compensation would have been a lesser amount if the financial results had been properly reported.
Short-Term Incentive Plan
Our Short-Term Incentive Plan is intended to aid in developing strong corporate management by providing annual financial incentives to eligible employees to achieve corporate success. The plan provides for incentive awards based on an individual's performance and position and our financial and operational results. The plan provides incentives to individuals during a near-term performance period, which we set at one year, and focuses on successful fulfillment of short term corporate and operational goals.
The purpose of the Short-Term Incentive Plan is to tie compensation more directly to corporate and operational performance and to attract, retain, motivate and reward productive employees who support corporate and operational goals. After extending the plan to most salaried staff employees beginning on January 1, 2006, we further extended participation in the plan to Canadian and U.S. union and non-union hourly employees beginning on January 1, 2008.
We assign participants an incentive award target, expressed as a percentage of salary. Achievement of the target is determined by our cash flow return, as defined in the plan. We use cash flow as a supplemental financial measure, because management believes that it is useful as an indicator of our ability to service our debt, meet other payment obligations and make strategic investments. In addition, cash flow is strongly correlated with long-term TSR. In this way, the use of cash flow return as a performance measure under our Short-Term Incentive Plan further supports the alignment between our Named Executive Officers' compensation and our performance.
For certain participants employed at operating facilities, one-half of the award is based upon achievement of the corporate performance target and one-half is based upon achievement of annually determined operating facility targets, including safety, environmental performance and productivity.
We generally set cash flow return targets that are challenging to achieve. Despite a strong year in 2006 based on our gross margin and total shareholder return, our cash flow return was less than 100% of the target. In an even stronger year in 2007, based on gross margin and total shareholder return, our cash flow return exceeded target but was less than the amount required to deliver the maximum payout for the Short-Term Incentive Plan awards. Given the record results of 2008, the maximum payout level for the Plan was achieved. The following table sets forth our performance under the Short-Term Incentive Plan for each of the last three years.
| 2008 | 2007 | 2006 | |
| Cash Flow Return Target | 23.20% | 14.86% | 16.10% |
| Actual Cash Flow Return (1) | 45.85% | 21.85% | 14.37% |
| Adjusted Cash Flow Return Ratio (2) | 1.9766 | 1.4573 | 0.8924 |
| (1) | For a description of how cash flow return is calculated under the Short-Term Incentive Plan, see "— Summary Compensation Table — Non-Equity Incentive Plan Compensation". |
| (2) | Due to rounding, dividing actual cash flow return by the cash flow return target may not result in the exact adjusted cash flow return ratio. |
For senior executives, including the Named Executive Officers, unadjusted incentive awards can range from 0% to 200% of salary, depending upon an executive's position, actual cash flow return above the minimum threshold return and compared to the target return. Because the value of the awards under the Short-Term Incentive Plan are capped at specified percentages of participants' salaries, the Committee can more readily stress-test executive officer compensation and analyze the effect of significant upturns or downturns in company performance. The incentive awards are subject to adjustment (±20%) based on the executive's individual performance and other factors that the Committee deems appropriate, provided that total adjusted awards approximate total awards at mid-point. Under the terms of the plan, we generally make no payments if our cash flow return is less than 50% of the target set by the Board for that year. For information regarding each Named Executive Officer's 2006, 2007 and 2008 Short-Term Incentive Plan awards, see "Executive Compensation — Summary Compensation Table".
Medium-Term Incentive Plan
Our Medium-Term Incentive Plan was intended to reward senior executives and other key employees for superior performance over a three-year performance period and for their continued contributions to our success. The performance objectives under the plan were designed to further align the interests of executives and key employees with those of shareholders by linking the vesting of awards to the total return to shareholders, or TSR, over a three-year performance period that began January 1, 2006 and ended December 31, 2008. TSR measures the capital appreciation in our Shares, including dividends paid during the performance period, and thereby simulates the actual investment performance of our Shares.
Under the Medium-Term Incentive Plan, we awarded participants a number of units based on the participant's salary at the beginning of the performance period (multiplied by three), a target award percentage and the average Share price over the 30 trading days immediately preceding the performance period. The target award percentages range from 20% to 70%, depending upon the executive's position and potential for contribution to our success.
Units granted under the Medium-Term Incentive Plan vested over the three-year performance period ended December 31, 2008. One-half of the units vested based on increases in our TSR. The remaining one-half of the units vested based on the extent to which our TSR matched or exceeded the TSR of the common shares of a group of peer companies. The peer group of companies consisted of the companies that are included in the DJUSBMI. Plan participants generally were required to continue in a qualifying position throughout the performance period as a condition to vesting. However, if a participant's employment terminated earlier due to the participant's retirement, disability or death, or we terminated a participant's employment without just cause, the participant was entitled to a cash payment in settlement of a pro rata number of units, with vesting based on the achievement of performance objectives as of the date of termination. A participant who resigned or whose employment was terminated for just cause forfeited all rights to any units granted under the plan.
Depending on the achievement of the performance objectives, 0% to 150% of the units granted under the Medium-Term Incentive Plan would have vested. Achievement of the target performance objectives — a TSR of 30% and a TSR that outperformed the DJUSBMI by 5% — would have entitled a participant to 100% of the units awarded under the plan. Between 100% and 150% of the units would have vested if actual performance exceeded target performance. The maximum 150% of the units would have vested based on a TSR of 50% or more and a TSR that outperformed the DJUSBMI by 10% or more. No units would have vested if the minimum performance objectives — positive TSR and a TSR that matched the DJUSBMI — were not achieved.
The following tables set forth the percentage of units granted under the Medium-Term Incentive Plan that vested for the three-year performance period ended December 31, 2008, based on the performance of our Shares and the performance of our Shares relative to the DJUSBMI.
| Vesting of MTIP units based on our TSR |
|
| Opening Share Price | $25.99 |
| Closing Share Price | $64.936 |
| Dividends Paid/Share | $0.90 |
| Total Shareholder Return | 153.31% |
| Vesting Percentage | 150% |
| Vesting of MTIP units based on relative TSR |
|
| PotashCorp TSR | 153.31% |
| DJUSBMI TSR | -31.45% |
| PotashCorp TSR – DJUSBMI TSR | 184.76% |
| Vesting Percentage | 150% |
| Total Vesting Percentage 150% | |
We will settle vested units in cash based on the average price of our common stock over the last 30 trading days of the performance period. The price used to determine the cash payout could not exceed 300% of the market value of a Share as at the beginning of the performance cycle. Because the value of the units granted under the Medium-Term Incentive Plan were capped at 300% of the market value of a Share, the Committee could readily stress-test executive officer compensation and analyze the effect of significant upturns or downturns in company performance.
As set forth in the table above, 150% of the performance units vested based on our performance during the three-year performance period ended December 31, 2008. The total vesting percentage reflects the vesting of one-half of the units at 150% based on our TSR and the vesting of one-half of the units at 150% based on our TSR relative to the TSR of the DJUSBMI. The vested performance units will be settled and paid out in cash in an amount equal to $64.936 per unit, which is the average closing price of our common stock for the last 30 trading days of 2008. See "Executive Compensation — Summary Compensation Table — Stock Awards" for the complete vesting schedule applicable to the Medium-Term Incentive Plan.
We adopted a new Medium-Term Incentive Plan for the three-year performance period that began January 1, 2009 and ends December 31, 2011. The plan is substantially similar to the Medium-Term Incentive Plan for the performance period ending December 31, 2008 discussed above. Relative performance under the new Medium-Term Incentive Plan is based on the performance of the DAXglobal Agribusiness Index.
Long-Term Incentives (Stock Options)
We provide our executives with long-term incentives through our Performance Option Plans. Our Performance Option Plans award options to senior executives and other key employees for superior performance over a three-year performance period. Options vest based on metrics with a demonstrated relationship to total shareholder return. The options have a ten year term from the date of grant, providing incentives to executives to promote long-term shareholder interests.
We make one option grant per year following shareholder approval of the Performance Option Plan at the annual meeting of shareholders. We have determined not to make off-cycle option grants during the year. The number of options that the Board grants annually is that number of options that will result in the appropriate total compensation for each management level, as determined by reference to the Comparative Compensation Information. See "Compensation Principles". Options are not available for grant after the end of the calendar year in which the Performance Option Plan is approved by shareholders.
— Performance Option Plans
On May 8, 2008, our shareholders approved the 2008 Performance Option Plan under which we could offer, after February 20, 2008 and before January 1, 2009, options for the issuance of up to 1,000,000 Shares pursuant to the exercise of options to eligible officers and employees. As of February 20, 2009, options to acquire 485,500 Shares were issued and outstanding under the 2008 Performance Option Plan. As of February 20, 2009, options to acquire an additional 1,714,050 Shares were issued and outstanding under the 2007 Performance Option Plan. Options to acquire 2,659,800 Shares and 2,661,464 Shares have vested and are outstanding under the 2006 Performance Option Plan and the 2005 Performance Option Plan, respectively.
For 2009, we are requesting shareholder approval of an amount of 1,000,000 options to be available for grant under the provisions of the 2009 Performance Option Plan. We expect that this amount is sufficient for one annual grant to be made after the Meeting and before January 1, 2010. The 2009 Performance Option Plan incorporates our newly-adopted Recoupment Policy and a double-trigger change of control provision. See "Policy on Recoupment of Unearned Compensation" above and "Adoption of 2009 Performance Option Plan".
Under our Performance Option Plans, the exercise price of an option shall not be less than the quoted market closing price of our Shares on the last trading day immediately preceding the date of grant. Option vesting is determined by achieving corporate performance goals that historically have correlated with our TSR and the relative performance of our TSR to the DJUSBMI TSR. We measure performance over a three-year period. A vesting schedule determines the percentage of options vested at the end of the three-year period and ties the level of total compensation to our performance. An option's maximum term is currently ten years from the date of grant.
In connection with the development of our first Performance Option Plan in 2005, the Committee worked with Hewitt Associates to use 10-year historical data to analyze the correlation between our cash flow return on investment ("CFROI") minus our weighted average cost of capital ("WACC") and our TSR performance relative to the DJUSBMI performance. Having established the link between our CFROI-WACC and TSR performance levels relative to the DJUSBMI performance, the Committee and Hewitt Associates developed a schedule based upon our CFROI-WACC levels to vest appropriate amounts of Shares at different performance levels. Consultants at Watson Wyatt also reviewed and confirmed this methodology.
In order to deliver a level of total compensation that is consistent with the level of corporate performance achieved, data on compensation provided by the Comparative Compensation Information is analyzed on an annual basis to determine the 25th, 50th, and 75th percentile compensation levels for our management positions. We link these compensation study results and the vesting schedule to determine option grant levels that will deliver the appropriate compensation for the performance delivered. We strive to set the target value of each Named Executive Officer's option grant at a level that, including such Named Executive Officer's other compensation, will deliver compensation in the upper quartile of the Comparative Compensation Information if company performance is also in the upper quartile relative to the Comparative Compensation Information.
The following table sets forth the percentage of stock options granted under the 2005 Performance Option Plan and the 2006 Performance Option Plan that vested for the three-year performance periods ended December 31, 2007 and December 31, 2008, respectively.
| CFROI-WACC to Achieve Maximum Vesting |
Actual CFROI-WACC (1) |
Actual Vesting Percentage |
|
| 2005 Performance Option Plan | 2.50 | 8.29 | 100% |
| 2006 Performance Option Plan | 2.50 | 16.50 | 100% |
| (1) | For a description of how CFROI-WACC is calculated and for the full Performance Option Plan vesting schedule, see "Grants of Plan-Based Awards — Option Awards". |
— Stock Option Plan — Officers and Employees
As at February 20, 2009, options for a total of 5,033,916 Shares were issued and outstanding under the Stock Option Plan — Officers and Employees (the "Stock Option Plan"). Options were granted with an exercise price equal to the quoted market closing price of our Shares on the last trading day immediately preceding the date of grant. The options became exercisable over two years and expire after ten years.
Currently, all options granted under the Stock Option Plan are exercisable. Pursuant to a resolution of the Board on November 16, 2006, no additional options may be granted under the Stock Option Plan. See "Performance Option Plans" above for a description of the incentive plans under which we currently grant stock options to officers and employees.
Post-Retirement and Termination Compensation
Pension Benefits
We provide pension benefits to supplement the income of our employees after their retirement. We provide post-retirement benefits to employees generally and typically do not consider an employee's past compensation in determining eligibility for post-retirement benefits. In Canada, eligible employees, including senior executives, participate in the Potash Corporation of Saskatchewan Inc. Pension Plan, which we refer to as the Canadian Pension Plan, and a supplemental retirement income plan, which we refer to as the Canadian Supplemental Plan. In the United States, eligible employees, including senior executives, participate in a pension plan, which we refer to as the U.S. Pension Plan, and a supplemental pension plan, which we refer to as the U.S. Supplemental Plan. The Canadian Pension Plan is a defined contribution plan that includes individual and company contributions. Each of the Canadian Supplemental Plan, the U.S. Pension Plan and the U.S. Supplemental Plan is a defined benefit plan with benefits calculated based on the participant's service and the plan's benefit formula. In addition, certain U.S. employees participate in the 401(k) Plan and certain Canadian employees participate in the Savings Plan. We make contributions to the 401(k) Plan and the Savings Plan for the benefit of participants in accordance with the terms of such plans. For information about the amount of company contributions made for the benefit of Named Executive Officers pursuant to such plans, see "Executive Compensation — Summary Compensation Table". We do not grant extra years of credited service under our pension plans except as discussed under "— Change in Control Agreements" below and otherwise as appropriate in exceptional circumstances.
We maintain the Canadian Pension Plan, which generally requires all participating employees to contribute 5.5% of their earnings (or such lesser amount as is deductible for Canadian income tax purposes) to the Canadian Pension Plan and our company to contribute an equal amount. When an individual retires, the full amount in the individual's account is used to produce the pension.
We maintain the Canadian Supplemental Plan, which provides a supplementary pension benefit for certain of our officers and managers. Under the basic terms of the Canadian Supplemental Plan, a pension benefit is provided in an amount equal to 2% of the average of the participant's three highest years' earnings multiplied by the participant's years of pensionable service (to a maximum of 35 years), minus any annual retirement benefit payable under the Canadian Pension Plan. For the purposes of the Canadian Supplemental Plan, earnings are defined as the participant's annual base pay plus 100% of all bonuses paid or payable for such year pursuant to the Short-Term Incentive Plan. The normal retirement age pursuant to the Canadian Supplemental Plan is 65, with a reduction in benefits for early retirement prior to age 62. No benefits pursuant to the Canadian Supplemental Plan are payable if termination occurs prior to age 55.
Benefits payable to employees who have reached the minimum age (55) for retirement pursuant to the Canadian Supplemental Plan may be secured by letters of credit provided by us or may be otherwise secured by us, if appropriate. Benefits are generally paid in the form of a single lump sum payment equal to the actuarial present value of the annual benefits or, in certain circumstances, an annuity for life.
For a designated group of senior officers, including Mr. Doyle and Mr. Brownlee, the benefit payable under the Canadian Supplemental Plan is an amount equal to (1) 5% of the average of the senior officer's three highest years' earnings multiplied by the senior officer's years of pensionable service (to a maximum of 10 years), plus (2) 2% of the average of the senior officer's three highest years of earnings multiplied by the senior officer's years of pensionable service in excess of 25 years to a maximum of 10 additional years, minus (3) any annual retirement benefit payable under the Canadian Pension Plan and certain other tax qualified plans.
Prior to January 1, 1999, PCS Phosphate Company, Inc. and PCS Nitrogen, Inc. maintained separate defined benefit pension plans (the "Phosphate Pension Plan" and the "Nitrogen Pension Plan") for their respective eligible U.S. employees, including Mr. Dietz and Mr. Delaney, in the case of PCS Nitrogen. Effective January 1, 1999, we consolidated our pension plans for U.S. employees and the Nitrogen Pension Plan was merged with and into the Phosphate Pension Plan to form the U.S. Pension Plan.
Under the U.S. Pension Plan, participants age 65 with 5 years of service (or age 62 or older with at least 20 years of service) receive a retirement benefit of 1.5% of the participant's final average compensation (as defined below) multiplied by the participant's years of service accrued after December 31, 1998 (maximum 35 years) in the form of a life annuity. Participants with service accrued prior to January 1, 1999 under previous plans, including Mr. Dietz and Mr. Delaney, will have a portion of their retirement benefit calculated under the formulas for such plans. Employees not meeting the minimum age or years of service requirement at termination will receive a reduced benefit.
Pursuant to the U.S. Pension Plan, final average compensation is defined as compensation for the highest paid 60 consecutive months of service out of the last 120 months of service. Compensation is defined as a participant's base pay plus the annually paid bonus under our Short-Term Incentive Plan. The retirement benefits from the U.S. Pension Plan for Mr. Dietz, Ms. Irwin and Mr. Delaney are subject to certain limitations on the amount of retirement benefits that may be provided under U.S. tax qualified pension plans. The U.S. Supplemental Plan is intended to provide a participant with the same aggregate benefits that such participant would have received had there been no legal limitations on the benefits provided by the U.S. Pension Plan. No benefits pursuant to the U.S. Supplemental Plan are payable if termination occurs prior to age 55.
In February 2009, we adopted amendments, effective with respect to services provided on or after July 1, 2009, to the Canadian Supplemental Plan, the U.S. Supplemental Plan, and agreements we had entered into with certain of our senior officers, including Mr. Doyle and Mr. Brownlee, concerning their Supplemental Plan benefits. For the purpose of calculating a participant's benefit under the Canadian Supplemental Plan, the U.S. Supplemental Plan and the individual agreements, the amendments limit the inclusion of awards paid pursuant to our Short-Term Incentive Plan to 100% of base salary for the relevant calendar year. In addition, the amendments modify the calculation of a participant's benefit under the Canadian Supplemental Plan and the individual agreements to be based on the participant's three highest consecutive years' earnings rather than the participant's three highest years' earnings.
As calculated in accordance with generally accepted accounting principles in Canada ("Canadian GAAP") for financial statement reporting purposes, the following table sets forth our total liability under the Canadian Supplemental Plan and the U.S. Supplemental Plan for all current and former executive officers and other covered employees as of December 31, 2008 and December 31, 2007.
| December 31, | ||
| 2008 | 2007 | |
| Total Supplemental Plan Liability | $25.6 million | $23.1 million |
Severance Benefits
In cases of termination without cause, we strive to provide appropriate severance benefits that take into account the potential difficulty in obtaining comparable employment in a short period of time and provide for a complete separation between the terminated employee and our company. Our current severance policy for termination without cause, which is generally applicable to salaried employees, including the Named Executive Officers, is to provide notice of impending termination, or payment of salary in lieu of notice, equivalent to two weeks for each complete year of service (subject to a minimum of 4 weeks and a maximum of 52 weeks). Such policy is superseded by specific termination provisions contained in any applicable written agreement and may be subject to adjustment.
Change in Control Agreements
Effective December 30, 1994, we and, where applicable, PCS Sales, entered into change in control agreements with certain senior executives, including Mr. Doyle and Mr. Brownlee. At that time, we deemed such agreements to be appropriate arrangements with senior executives. Subsequently, we have not entered into new change in control agreements. The initial term of each 1994 change in control agreement was through December 31, 1997. The term of each agreement has automatically renewed for successive one-year periods since December 31, 1997 and continues to be subject to automatic renewal for successive one-year terms until the employee reaches age 65 or unless either party gives notice of termination.
Benefits pursuant to the change in control agreements require both a change in control and an involuntary termination of the executive's employment (including constructive dismissal) within two years following a change in control. The severance benefit entitlements upon termination of employment following a change in control of our company are:
- a lump-sum payment of three times the executive's current base salary and average bonus for the last three years;
- a lump-sum payment of the pro-rata target bonus for the year in which the termination occurs;
- immediate vesting and cash out of all outstanding Medium-Term Incentive Plan awards;
- a credit of three additional years of service under the Canadian Supplemental Plan;
- a three-year continuation of medical, disability and group term life insurance, provided that these benefits terminate upon obtaining similar coverage from a new employer or upon commencement of retiree benefits; and
- financial or outplacement counseling to a maximum of Cdn$10,000.
Payments to be made pursuant to the foregoing and relating to the employee's bonus may be deferred by the executive for up to three years or for such other period as may be permitted by the Income Tax Act (Canada). Mr. Doyle is entitled to a "gross up" of payments to cover excise taxes under the golden parachute rules of the Internal Revenue Code, if payable in respect of such benefits.
The change in control agreements further provide that all outstanding non-exercisable options granted to the executive become exercisable upon the occurrence of a change in control. In the event no public market for the Shares exists, we (or PCS Sales, as the case may be) will compensate the executive for the value of his or her options based on a Share value approved by our shareholders upon a change in control, or, if no such value has been approved, the market value of the Shares when last publicly traded.
For additional information about the above change in control agreements, including the definitions of change in control and termination, see the Form of Agreement dated December 30, 1994, filed as Exhibit 10(p) to our annual report on Form 10-K for the year ended December 31, 1995.
Compensation Consultants and Comparator Groups
To gather information about competitive compensation practices, the Committee relies on the input and recommendations of independent compensation consultants and data provided by broad-based executive compensation surveys. Although this information is an important tool in the Committee's processes, the decisions made by the Committee are solely the responsibility of the Committee and reflect other factors and considerations. For a discussion of the factors that the Committee considers in making compensation decisions, see "Compensation Structure and Policies", "Compensation Principles" and "Elements of Executive Compensation" above.
In 2005, the Committee engaged Watson Wyatt as executive compensation consultants. Watson Wyatt reports to the Chair of the Committee and provides input to the Committee on the philosophy and competitiveness of the design and award values for certain of our executive and director compensation programs. In addition, Watson Wyatt assists in the evaluation of compensation arrangements associated with certain strategic opportunities.
In accordance with our adherence to the best practice of retaining independent executive compensation consulting, Watson Wyatt does not perform any other consulting services for us. Any work other than executive compensation consulting services performed for us by Watson Wyatt must be approved in advance by the Chair of the Committee. The following table sets forth the fees we paid to Watson Wyatt in 2007 and 2008:
| Year Ended December 31, | ||
| 2008 | 2007 (1) | |
| Compensation consulting services | $362,300 | $267,400 |
| Other services | — | — |
The Committee uses executive compensation analyses prepared on at least an annual basis by Watson Wyatt and other independent compensation consultants. Such analyses currently consist of (1) a group of 20 publicly traded U.S. and Canadian companies, or the Comparator Group, selected on the basis of a number of factors, including similar industry characteristics, revenues and market capitalization, and (2) additional executive compensation surveys of U.S.-based companies with similar industry and revenue size gathered by three compensation consulting services, or the Additional Surveys.
The 20 companies included in the Comparator Group in 2008 were:
|
Air Products and Chemicals, Inc. Agrium Inc. Arch Coal Inc. Ashland Inc. Barrick Gold Corporation Cameco Corporation CF Industries Holdings, Inc. |
Eastman Chemical Company Ecolab Inc. Martin Marietta Materials, Inc. Monsanto Company The Mosaic Company Newmont Mining Corporation Nova Chemicals Corporation |
Peabody Energy Corporation PPG Industries, Inc. Praxair, Inc. Rohm and Haas Company The Valspar Corporation Vulcan Materials Company |
In 2008, the three Additional Surveys were (1) the WWDS 2008/2009 Survey Report on Top Management Compensation, (2) the Mercer 2008 US Benchmark Database — Executive and (3) the Towers Perrin 2008 US CDB General Industry Executive Database.
Executive Share Ownership Guidelines
We strongly support Share ownership by our executives. In November 2004, we introduced minimum shareholding guidelines, to be met by November 2009 for the then-current executive officer group. Any individual promoted into a position subject to these guidelines will have a five-year period within which to meet the share ownership requirements. The shareholding requirements reflect the value of Shares held and can be met through direct or beneficial ownership of Shares, including Shares held through our qualified defined contribution savings plans. Options and performance units (under the Medium-Term Incentive Plan) are not included in the definition of Share ownership for purposes of the guidelines.
The Guidelines are:
| Title | Share Ownership Guideline |
| Chief Executive Officer | 5 times base salary |
| Chief Financial Officer, Chief Operating Officer, Senior Vice Presidents and Division Presidents | 3 times base salary |
| Designated Senior Vice Presidents and Vice Presidents | 1 times base salary |
As of February 20, 2009, all of the Named Executive Officers hold Shares with a value in excess of the ownership guidelines. The table below sets forth, for each Named Executive Officer, the number and value of Shares held, the value of Shares required to meet the ownership guidelines and the value of Shares held as a multiple of the Named Executive Officer's base salary.
| Named Executive Officer | Number of Shares Held | Value of Shares Held | Value Required to Meet Guidelines | Value Held as Multiple of Salary | ||
| William J. Doyle | 481,413 (1) | $ | 40,419,507 | $ | 5,460,000 | 37.0x |
| Wayne R. Brownlee | 58,499 | $ | 4,911,546 | $ | 1,483,200 | 9.9x |
| James F. Dietz | 57,589 | $ | 4,835,179 | $ | 1,458,600 | 9.9x |
| Barbara Jane Irwin | 53,446 | $ | 4,487,343 | $ | 1,185,600 | 11.4x |
| G. David Delaney | 39,831 | $ | 3,344,240 | $ | 1,228,500 | 8.2x |
Chief Executive Officer Compensation
The Committee reviews annually the CEO's salary, any awards under our Short- and Medium-Term Incentive Plans and any grant of options under our option plans and makes its recommendations to the Board. With the assistance of Watson Wyatt, the Committee analyzes the relationship between our performance and the CEO's annual earnings. The CEO's annual salary is determined primarily on the basis of his individual performance and our company's performance. While no mathematical weighting formula is used, the Committee considers all factors that it deems relevant, including our financial results, our TSR and performance relative to similar companies within our industry, survey compensation data obtained from our compensation consultants, the duties and responsibilities of the CEO, the CEO's individual performance relative to written objectives established at the beginning of each year, current compensation levels and the effect of significant upturns or downturns in our performance. Awards pursuant to the Short- and Medium-Term Incentive Plans and under the option plans are made in accordance with the plans as outlined above. If minimum targets set under the Short- and Medium-Term Incentive Plans and option plans are not met, the CEO does not receive compensation pursuant to those plans.
With the assistance of Watson Wyatt, the Committee also references the compensation of the CEOs in the Comparative Compensation Information. The comparison of our CEO compensation to the Comparative Compensation Information incorporates many factors including the relative sales and market capitalization of the companies, their profitability and shareholder return history, the duties of the CEO and any other extenuating or special circumstances. In general, we set CEO cash compensation at the median of the applicable range.
In January 2009, the Committee and the Board reviewed Mr. Doyle's performance relative to his 2008 performance goals for the purpose of determining his 2009 base pay level and 2008 short-term incentive bonus award. At that time, a 2009 salary of $1,092,000 and a short-term incentive bonus award of $2,075,000 for 2008 performance were recommended by the Committee and approved by the Board. The goals and related achievements upon which the decision was based were:
| 1. | Improve all measurable safety indices with the emphasis on reducing serious injuries so we can achieve our goal of providing the safest work environment for our employees. | |
| The 2008 overall safety results did not meet our expectations. Our nitrogen segment had an outstanding performance with zero lost time injuries and a 25% reduction in the recordable rate of injuries. Unfortunately, lost time injuries and the recordable rate of injuries increased 63% and 10%, respectively, in each of the potash and phosphate segments. A fatality occurred at Lanigan when a truck overturned underground. | ||
| 2. | Exceed the budget approved for 2008, including earnings per Share ("EPS") and cash flow per Share ("CFPS") targets by 25%. | |
| We exceeded each of our 2008 budgeted targets for EPS and CFPS by more than 25%. | ||
| 3. | Continue to drive the "Potash First" strategy by staying on top of all global opportunities while at the same time being open to strategic alternatives for phosphate and nitrogen should an attractive alternative present itself. | |
| We kept the Board informed and engaged about strategic opportunities and related considerations about the company, the industry and relevant external events, in order to obtain the best Board feedback possible to test management's assumptions and strategy. We continued to drive our "Potash First" strategy by increasing our investment in Israel Chemicals Ltd. to 11% and our investment in Sinofert Holdings Limited to 22%. We initiated and continued to actively pursue other global potash opportunities and strategic developments in phosphate and nitrogen. | ||
| 4. | Outperform our peer group of basic materials companies. | |
| In 2008, our common stock outperformed the DJUSBMI with an annual total shareholder return of approximately –48.9%, compared to approximately –52.0% for the DJUSBMI. Our common stock fell short of sector average, which was approximately –28.6%. | ||
| 5. | Grow the revenue base and bottom line for our company through strategic use of capital. | |
| The following 2008 events and projects are expected to expand our revenue base and contribute to future annual gross margin: | ||
| (a) | the sale of our phosphate feed plant in Brazil; | |
| (b) | a full year of natural gas sales in New Brunswick; | |
| (c) | the completion of the first round of our expansion and debottlenecking projects at Rocanville, Allan and Lanigan; | |
| (d) | our ongoing expansion and debottlenecking projects at Patience Lake, Cory, New Brunswick, Rocanville and Allan; and | |
| (e) | the construction of three additional Silicon Tetraflouride plants and continued work on a new sulfuric acid plant at Aurora. | |
| 6. | Show measurable success in leadership development and succession planning for our employees. | |
| With 72.7% of senior staff openings filled by internal candidates, we fell just short of our target of 75%. We had four high level retirements and one termination that were successfully filled by internal candidates. More than 200 staff attended management and leadership skills training courses. Our management team conducted its annual succession planning review and discussed the results with the Committee. | ||
| 7. | Lead management's effort to make sure it does its part in the pursuit of the best possible corporate governance for our company. | |
| Transparency and accountability are the foundation of excellent corporate governance. The CEO personally engaged numerous stakeholders, including shareholders, the analyst community, media and employees in personal meetings and conference calls throughout the year. In addition, the CEO supported the Board's response to concerns raised by RiskMetrics regarding supplemental retirement plans for executives by adopting features recommended by RiskMetrics, including a cap on includable income that would primarily affect the CEO. We also engaged shareholders who expressed interest in the company's environmental, human rights and executive compensation practices. | ||
| Our commitment to excellence in corporate governance was recognized by external monitors, including The Globe and Mail, which ranked our company 1st out of more than 200 Canadian companies in its 2008 corporate governance rankings. The Canadian Coalition for Good Governance presented our company with its Governance Gavel Award for excellence in director disclosure. The Canadian Institute of Chartered Accountants recognized the quality of our corporate reporting and disclosure practices with its Award of Excellence in the Mining category for our 2007 Annual Report, and presented us with overall Awards of Excellence for our website disclosure and for our Sustainability Report. | ||
| 8. | Improve product quality through strict adherence to size guide number (SGN) and uniformity index (UI) measurements so we can provide the highest quality products to our customers. | |
| Product quality performance improved significantly in 2008. The total number of customer complaints declined by more than 20%, principally in our phosphate segment. Complaints related to dust, lumps or sizing in solid products were down 15%, and we received no customer complaints regarding SGN or UI measurements. | ||
| 9. | Provide leadership for our company with the investment community, within our industry and in the communities in which our people work and reside. | |
| In 2008, we received high marks in investor surveys relating to "Confidence in Management" and "Communications with the Financial Community". On a scale of 1 to 10, we received a rating above 8.5 for each category in these surveys, including a rating of 9.5 for management's knowledge of the business and a rating of 9.3 for overall communications. Our ratings in these surveys were in the top quartile for all categories. The 2008 Christensen Survey ranked us as the top company in our sector for corporate and investor communications. In addition, surveys of community leaders were conducted in three communities in which we operate (Lima, Marseilles and Weeping Water) regarding our community involvement, business practices and economic impact. We averaged an overall rating of 4.0 (on a scale of 1 to 5), which is in the top quartile for these surveys. | ||
| The CEO served on the boards of key industry groups, including serving as Chairman of the Nutrients for Life Foundation, Vice-President, Sustainability of the International Fertilizer Association and a member of the boards of The Fertilizer Institute and the International Fertilizer Industry Association. The CEO delivered the keynote address at the SouthWest Fertilizer Conference and delivered "state of the industry" speeches to customer groups. The CEO also addressed the Chicago Mercantile Exchange on the dynamics of global agricultural and fertilizer commodities markets, published an op-ed piece in The Globe and Mail regarding the importance of the fertilizer industry to the world economy and conducted numerous media interviews. | ||
| 10. | Find new ways to make it easier for our customers to do business with us. | |
| Seven important customer initiatives were introduced or continued in 2008: | ||
| (a) | Upgraded and expanded our North American and international transportation and distribution system to: (i) improve asset utilization; (ii) improve loading, unloading and delivery times; (iii) increase storage capacity; (iv) offer additional transportation mode alternatives; and (v) bring our product closer to our customers; | |
| (b) | Collaborated with customers in developing strategies to optimize their supply chain and reduce rail cycle times and seasonality in their business; | |
| (c) | Partnered with customers in our operational Best Practices workshops to discuss and share information to ensure the highest levels of product quality, reliability and service; | |
| (d) | Assumed an active leadership role in industry trade associations, working closely with governmental and other agencies to address transportation policy matters and proposed ammonia railcar designs to ensure the safe and reliable shipment of products to our customers; | |
| (e) | Expanded the delivery of market analysis reports, targeting the issues and trends most important to our fertilizer, feed and industrial customers; | |
| (f) | Supplemented our Safe Feed/Safe Food certification by voluntarily implementing enhanced risk analyses and control tools for assessing and restricting contaminants, demonstrating our pledge to food safety and enhancing consumer confidence in the products we provide; and | |
| (g) | Used information technology to enhance and streamline our customers' ability to forecast and monitor the sourcing, procurement and delivery of our products to their end-use locations. | |
| 11. | Improve the environmental commitment and performance across our company's operations to positively impact the climate, our use of natural resources, and our environmental stewardship. | |
| Environmental performance continued to improve in 2008. The number of permit excursions and reportable releases in the U.S. declined 35% to 11 in total, while the number of spills in Canada and the U.S. was flat at 9 incidents total. In our potash segment, we increased our emphasis on environmental management at the site level and expanded our training of site personnel on environmental awareness and responsibilities. | ||
Mr. Doyle's award under our Short-Term Incentive Plan for 2008 as set forth in the "Summary Compensation Table" and salary for 2009 were determined in accordance with the foregoing and approved by the Committee and all other independent members of the Board.