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No. 1: Edward Sampson, Niko Resources Ltd. - $16,474,616. (DEBORAH BAIC/DEBORAH BAIC/THE GLOBE AND MAIL)
No. 1: Edward Sampson, Niko Resources Ltd. - $16,474,616. (DEBORAH BAIC/DEBORAH BAIC/THE GLOBE AND MAIL)

EXECUTIVE COMPENSATION

Back in the green: CEO pay jumps 13 per cent Add to ...

Recession? What recession?

The economic downturn in 2008 and 2009 was a distant memory by 2010 for Canada's top chief executive officers, at least as far as their pay packages were concerned.

A Globe and Mail review of executive pay last year shows CEOs at Canada's 100 largest companies saw their compensation jump 13 per cent last year, led higher by a 20-per-cent increase in annual cash bonuses. Base salaries climbed 4 per cent.

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Niko Resources Ltd.'s Edward Sampson was the top paid CEO with total 2010 compensation of $16.5-million. More than $15-million of that total came from the value of new stock options granted last year.

Although not part of the CEO list, Magna International Inc. founder and former chairman Frank Stronach was the highest paid executive in Canada last year with total compensation of $60-million, due primarily to a $41-million payment from his annual profit-sharing deal.

The 2010 gains for CEOs came on the heels of two years of weakness in 2008 and 2009 - when compensation fell by 5 per cent and rose less than 1 per cent respectively - and marks a return to the double-digit annual CEO pay increases seen commonly in the decade prior to the economic crisis.

While the pay increases look familiar, compensation experts argue the climate for executive pay is changing, thanks to far more aggressive lobbying by large shareholders and the added pressure of new say-on-pay votes, giving investors the ability to vote on executive pay practices at many large companies.

Executive pay consultant Ken Hugessen, who advises large companies on CEO compensation, said many of his corporate clients did not change CEO pay structures or levels last year.

Instead, many gains for CEOs came from better economic performance by companies, which boosted variable elements of pay like cash bonuses.

"For most large issuers, the pay-setting environment is really different today than what it was even five years ago, let alone 10 or 15," he said.

"You have this combination of way more active shareholders, very active proxy advisory firms, and regulators who are pushing for more and more complete and revealing disclosure. You do all of that for long enough and that message is clearly being received by boards."

Some companies say the decades-old mantra of "pay for performance" can no longer be a hollow promise, and they are facing growing pressure to ensure CEOs don't simply cash in as markets climb while their companies underperform peers.

Agrium Inc. chairman Frank Proto says the fertilizer company is keenly aware that rising commodity prices and improving economic factors can push share prices highest - and boost executive pay - regardless of an individual's performance.

To ensure pay is linked to superior performance, Agrium gives CEO Michael Wilson and other executives so-called "performance share units." The units pay out in rising amounts if the company meets growth targets compared to a selected peer group of other North American chemical and fertilizer companies over a three-year performance cycle.

They can also be worthless. If the company performs in the bottom quarter of the peer group, and earns a negative return over three years, none of the share units vest for the executives.

"If you're in an industry where the market is moving the whole industry up, but if you only go up 10 per cent and the whole industry is up 30 or 40 per cent, then you're not performing as well as others in the industry," Mr. Proto said.

"I like performance share units because they give shareholders that added assurance that you are performing as well or better than your peers."

In 2010, the value of share unit grants for CEOs at Canada's 100 largest companies climbed 16 per cent, while stock options grew by 6.5 per cent, indicating a growing willingness to add share units to the mix.

However, options are still far more widely used than share units with the total value of CEOs' unvested share-based awards at year-end just 25 per cent of the value of CEOs' outstanding stock options.

The Canadian Coalition for Good Governance, which represents most of Canada's largest institutional investors, has been campaigning for performance features to be added to options or share units to ensure executives aren't rewarded for being the worst performers in a growing industry, said managing director Stephen Griggs.

Mr. Griggs and others from the CCGG meet regularly with boards of major companies to review compensation issues and make a pitch for higher hurdles to ensure true pay for performance.

"Simply because the price of oil goes up - which executives have no control over whatsoever - it would increase the value of the [oil company's]shares, and it could occur when management is not really doing a good job," Mr. Griggs says.

"They could be the worst oil company, and they're still going to make money in that scenario, or gold company or whatever. It may not be as much as someone who does a really good job, but they're still going to make money for underperforming."

But corporate director Claude Lamoureux, who sits on boards of five public companies including Swiss-based Xstrata PLC and Canada's Maple Leaf Foods Inc., says the process of truly linking pay and performance remains "a work in progress" for many companies.

"I think there's a lot of work to be done still," he said. "A lot of times I think the relationship between performance and pay is hard to see for most shareholders."

He said many boards have not been willing to add extra performance hurdles, often because directors feel the old methods have worked fine and they are not keen to innovate, or because they are deterred by the extra cost and complexity.

There is also a danger that total compensation can swell quickly as additional features are added to the pay package, he warns.

"In general what I've seen is that the pool gets enlarged rather than diminished," Mr. Lamoureux said.

__________________

BY THE NUMBERS

Compensation trends for 2010

$6-million: Average CEO total pay (including salary, bonus, share units, stock options, and other elements), up 13 per cent.

$938,995: Average CEO base salary, up 4 per cent.

$1.6-million: Average CEO bonus, up 21 per cent.

$541-million: Total value of all compensation awarded in 2010 to all CEOs in survey, up 13 per cent.

$7.6-million: Median value of all unexercised in-the-money stock options held by CEO at year end, up 97 per cent.

$13-million: Median value of equity - shares and vested share units - owned by CEO, up 40 per cent.

$16.4-billion: Total value of shares and vested share units owned by all CEOs in survey, up 28 per cent.

$9-million: Median estimated cost to fund CEO's traditional defined-benefit pension plan, up 39 per cent.

(Information is based on the CEOs of Canada's 100 largest public companies by market capitalization. Data includes only CEOs on the job for all of 2009 and 2010.)

Source: The Globe and Mail

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