NOTE: See ” The highest paid chief executives at Canada’s Top 100 companies” list for a table breakdown. And for additional data tables, see ” Best and worst in executive compensation.”
In 2009, with shareholders staring at shrunken portfolios, and unemployment on the rise, companies across North America put their “fat cat” CEOs on a diet. The median pay for chief executives at Canada’s Top 100 companies dropped to $3.99 million from the $4.39 million of 2008. A similar dynamic was at work in the United States, where the executive compensation median for companies on the S&P 500 index dropped to $7.5 million from $8.2 million the previous year. In both countries, plenty of top executives took pay cuts and turned down bonuses as their industries hit bottom and they began to pick up the pieces.
Despite these decreases, Ken Hugessen of Hugessen Consulting Inc., says the theme of 2009 was recovery—though not a strong one. “Stabilization might be a better word,” he says. “After the precipitous decline of the previous year, things began to improve. We’re seeing more of that for 2010—there’s a mood of gentle recovery that’s reflected in pay.”
Nevertheless, a number of changes suggest a fundamental shift in the way we view executive compensation. Partly, this involves not-so-subtle pressure from the U.S. government, but there have also been some recent adjustments in the way CEO pay packages are structured. Many of them began in the U.S. but will undoubtedly shape the future of compensation in Canada as well. This is what we’ve begun to chronicle in our ranking of 2009’s big earners at Canada’s Top 100 largest companies.
The first is the increasing detail in compensation disclosure and analysis, mandated by the Securities and Exchange Commission (SEC) for 2008. The purpose was to ensure that annual reports and proxy statements included better analysis, were written in “plain English” and met the SEC staff’s disclosure standards for performance targets, benchmarks and change-in-control agreements.
The changes have quickly become common practice, and in some ways they have been helpful. Companies began to provide approximate values for these options through proxies at the end of the 2008 fiscal year by using an array of complex formulas to estimate the eventual cost to the company. They also began providing the approximate pension values. This is far superior to the pre-2008 method of just providing the raw number of options granted.
But as boards swamp investors with more and more information, wading through a company’s statements becomes less and less appealing. David Lefebvre, a partner at Stikeman Elliott who practises corporate and securities law and specializes in executive compensation, sums up the change well: “When I first became a lawyer 20 years ago, the compensation section was just a couple of pages,” he says. “And now, for a big company it can be 30, 40 or 50 pages.” That’s a standard that’s taken hold in Canada too, and it’s hard for independent investors to keep up. “If you own shares in 150 companies, do you really have the time to read through all that disclosure?” Lefebvre asks.
Probably not. And to make things even harder, equity-based compensation is really a lag measure of performance. Companies offer some compensation up front by way of base salary and bonus, but pay their CEOs for much of their contributions in arrears.
The difficult task of charting exact compensation is one of the reasons that it’s essential to look at executive pay over a long time period. This is especially true in a recovery year like 2009, when executive pay is so affected by political considerations.
Perhaps the most notable trend to take hold was the introduction of the controversial “say on pay” vote. What started as a way for Troubled Asset Relief Program fund recipients to show more social responsibility became, on July 31, 2009, the Corporate and Financial Institution Compensation Fairness Act and allowed every shareholder in the U.S. the right to a vote on the fairness of the company’s executive pay structure. The vote has no legal power, but it’s a way for the board to gauge the sentiments of their investors. A vote against a pay package would be a significant public embarrassment.
Naturally, SOP made its way into Canada. Some cross-listed companies were just being consistent, and some others were aligning themselves with their American peers. “It’s not a binding vote,” reminds Lefebvre, “but companies are always concerned about their check marks. They don’t want to be seen as corporate governance laggards, and most companies I work with like to think that they’re on the cutting edge.”
Not everyone was impressed. The Ontario Teachers’ Pension Plan said it would “generally not support shareholder proposals for say on pay advisory votes,” while the Institute for Governance of Private and Public Organizations said it didn’t like the populist idea that no one could complain about compensation once “shareholders formally approved the process.”
Lefebvre privately agrees. “If every company had a SOP vote, the risk is no one has time to read through this, so you’re really going to delegate that to RiskMetrics, who also aren’t going to have time. Then you get down to a ‘check the box’ system,” he says. He’s worried that a 20-point checklist developed to make things easier will cause companies to become more focused on good reports than on how they should be compensating their executives for their industry, company and stage of development.
And with the recent changes to methods of compensation, shareholders need to be more vigilant than ever when it comes to monitoring CEO pay. One such change, and another big trend in 2009, was the move away from stock options. During the recession, many CEOs were being granted stock options as a form of non-cash compensation, which would vest after a number of years (often five), But since the recovery, boards have moved away from awarding compensation by way of options, which can tempt executives to take unnecessary risks with the company’s capital, either to drive the share price up in ways that will be unhealthy, or even disastrous, to long term growth, or because they perceive they have a long time to repay debts before the options vest. Generally, that’s bad for both the company’s health and the investors, so instead of these options, companies hiked cash bonuses, and in some cases offered deferred or restricted share units. Plus, with stock options, there’s also the issue of a huge payout if the CEO is fired, or retires. That was recently highlighted by Bill Doyle at Potash.
When BHP offered $130 a share for the company, it meant Doyle would collect $445 million in stock alone. Many companies in the U.S. have eliminated these stock option offerings altogether, and in Canada some companies have followed suit. John Lau at Husky Energy took no options in 2008 or 2009, and neither did Bruce March at Imperial Oil.
Trends like this make it tempting to treat cross-border compensation in an apples-to-apples manner, This is especially true since some of our top earners do a lot of their business south of the border. But while our top earner, Barrick Gold’s Aaron Regent, made more than $24 million in 2009, it pales in comparison with H. Lawrence Culp Jr., the CEO of Danaher in the U.S., who earned $141.36 million. Had Regent been paid in the U.S., he would have ranked 32nd, one spot below GameStop CEO Daniel A. DeMatteo (but a surprising five spots above the CEO of McDonald’s.)
One thing they should all have in common is pay for performance. This means that CEOs are rewarded for the results they produce, and the system works if executives receive less pay when they fail to provide their shareholders value. In other words, it’s the idea that some years should be better than others. Robert Levasseur, an executive-compensation expert at McDowall Associates, says he believes in pay for performance, because it “prevents CEOs from being paid top dollar irrespective of the results they are responsible for.” Plus, he’s seen companies change their compensation through economic cycles, and believes that a system that doesn’t adjust pay based on performance is broken.
On this score, with all the adjustments made through the recovery, the Canadian system appears to be in good shape.
There are plenty of familiar faces in our Top 100. Gerry Schwartz ranked third on the list with no pension, no options, a salary of just $791,700 and a whopping bonus of $15,898,058. Prem Watsa of Fairfax Financial Holdings is also notable. Watsa earned $621,000 this year—up just 0.16% from last year, the least changed salary on the list—and far exceeded his peers by offering the highest profit per dollar of compensation at $1,379.71. And on the top of the heap Aaron Regent, pulled in a cool $24,217,041 in his first year as head of Barrick Gold—although it was the $9.9 million in options and $6.9 million in share awards that really propelled him forward, since his base salary was only $1.3 million. This solidifies Regent’s personal investment in Barrick, and the 86% of shareholders that voted yes in Barrick’s recent SOP vote seem to think he can deliver.
One place where the system still needs to be fixed, though, is the advancement of women as top earners. On this year’s list, only three of the executives of the Top 100 companies are female, and none of them cracked the Top 50. In fact, the top-ranking woman, Nancy Southern, president and CEO of both ATCO and Canadian Utilities (the latter pays her compensation), only reaches No. 80 on the list. Southern saw a 52% drop in compensation over 2008 and made $1,942,808 in 2009. Linda Hasenfratz took a 75% pay decrease in 2009, made $574,870, and came in position 98.
But when it comes to examining who earned what, nowhere is there more scrutiny and pressure to perform than at the big banks. No. 28 on the list, Bill Downe at the Bank of Montreal, is an example of the restraint shown in 2009. His compensation total in 2008 was $6.37 million. But BMO had a bad year in 2008. The bank’s net profit for the fiscal year sank by 7.2% and it missed four out of five of its targets, including earnings growth and return on equity. Despite a good turn around in 2009, Downe’s compensation rise was just 19%, up to $7.89 million.
Over at the Toronto Dominion Bank, it at first seems to be an altogether different story. CEO Ed Clark, the fourth-largest earner of 2009 and the top-ranking bank chief executive, displayed some big numbers. With a pay increase of more than 41%, Clark made about $15,188,371 in 2009, up from $10,761,219 the previous year.
While the raw data are eyebrow-raising, TD had an explanation for Clark’s high salary. “The ???increase’ you’re describing relates to a one-time option grant that replaces cash pension payments that Ed would have otherwise received when he retired,” a bank representative says. The grant was part of a renewed employment agreement with Clark that replaced earned cash with at-risk equity, and Clark also agreed to waive his right to severance pay under any circumstances. The bank says that without this grant, Clark’s compensation actually declined to $10.4 million from $11 million in 2008.
It’s crucial that Canadians question executive pay, in recession, recovery and during economic booms. But experts say it’s also important to remember that if the country wants to be globally competitive, it needs to pay its executives with the objective of retaining homegrown talent. Too often we rake our brightest business minds over the coals because of their salaries while our high-school-graduate hockey players are paid millions and admired even when they lose games. “I think it’s because we all think we could do that job, but we know we can’t hit home runs,” says Levasseur of the attitudes toward white-collar pay versus athletes. “I’ve had people tell me that it’s not the same. But it is the same. CEOs are very talented people. Their view of the future is important. They are the stars of Canadian business, but we don’t see them that way.”
Corporate directors feel the heat
Over the past two decades, sitting on a board of directors has become increasingly complicated. There are more committees to tend to, more reports to read, and more time is required to do all these things.
As a result, director compensation is on the rise—a trend that experts say has accelerated over the past five years. “I think all these new rules have placed more of a burden on the directors, so it’s much more of a job than it used to be,” says David Lefebvre, a partner at Stikeman Elliott Calgary who practises corporate law and specializes in executive compensation. “If you look back 10 or 20 years ago, there might have been four board meetings a year to go over the quarterly financial strategy. But now big company boards might meet 10 times a year because so much is going on.”
The first major pressure was an audit committee, which became an issue of paramount importance and scrutiny after the Sarbanes-Oxley Act was introduced in the U.S. in 2002 to try to prevent another corporate accounting scandal of Enron or WorldCom proportions. As has been illustrated this year with the introduction of “say on pay,” those policies which are mandated in the U.S. will inevitably filter through to Canada. This year, CIBC was the first financial institution to offer shareholders a voice in the way of a non-binding vote. The board proposed to raise senior executive base salaries to diminish the volatility of their compensation packages, and eliminate restricted share awards in favour of “book value units” that were designed to bind compensation to the value he or she brought to the company.
When 93% voted in favour of the proposal, CIBC chairman Charles Sirois called it a ‘dialogue’ between the shareholders and the board, but said he didn’t know if the vote would be the same next year. In many ways, the importance of the compensation committee has become the new obsession—and Lefebvre believes that being able to explain executive pay has become just as important to shareholders.
With all the pressure on Canadian companies to move toward “say on pay,” it will only become more challenging for the directors to manage this issue. “It’s a lot more complicated than just taking the average of the five competitors now, so pay must reflect more work,” says Lefebvre. “Sitting on three or four boards would be reasonable. I don’t think you’d see too many people sitting on 10 or more boards the way you would have in the distant past.”
And in terms of how they’re rewarded for the added hours, the board members almost always set their own pay. Usually they will seek advice from different compensation or employment advisers than the executive team so that there’s no potential conflict of interest. They will often seek the advice of peer groups, and since many members sit on multiple boards, there are comparable figures. But in any event, the board of directors technically answers to shareholders.
Whenever the directors’ compensation seems high, as it might on our list of top earners, it’s important to keep in mind the talent and knowledge the members have in their respective fields. “It might seem like they’re getting paid a lot of money,” says Lefebvre, “but in terms of what they could be earning in their field, it’s not a lot.”
