See The Globe's full report on executive compensation in 2012 with rankings, an interactive pay vs. performance graphic and photo galleries of Canada's top-paid CEOs.
Having been in the executive compensation and governance advisory space from the days of murky disclosure to today, we at Global Governance Advisors can remember a time when almost every figure listed within a firm’s public disclosure was debatable.
Among public disclosure filings, with management proxy circulars in particular, statements were convoluted, there were few tables and diagrams were nowhere to be found.
The dialogue on transparency and accountability has made an impact; we’re pleased to see that the collective good work of the regulators, issuers, shareholder activist groups, independent advisers and stakeholders at large have helped influence public disclosure by providing a heightened sense of clarity on executive pay packages.
This year’s public filings have been some of the best we’ve seen thus far, with many organizations pushing the “plain language” beyond text to a “show and tell” model.
What some people don’t realize is that executive compensation tends to be the single largest expense an organization might incur. Shareholders have a right to understand the allocation of expenses and it has now become common practice to include tables, charts and diagrams to help explain these complex pay packages.
Yes, pay continues to rise, modestly over the past year, and that doesn’t necessarily assuage the concerns Canadians have about corporate governance. However, it is important to recognize that the structure of pay for these executives has changed immensely over the course of the last decade. In today’s most recent designs, the majority of executive pay is linked to longer-term share price. While the value disclosed in the public filings within the summary compensation tables indicate the value of pay, it is critical to look at the structure of the incentive plans, to better understand how executives get paid.
If we simply look at the values of disclosed compensation, it appears that executives received increases in compensation; however, an element fundamental to changes in pay designs is the concept of performance vesting. This means that the probability of receiving incentive awards is significantly diminished. As a result, the values of long term incentive awards disclosed in our study may fall, due to the fact that the executive will only receive all of the granted share units of the long-term incentive portion of the executive pay package if they have attained specific performance benchmarks.
When we look at the companies that incorporate performance vesting in their long-term incentives, they illustrate the highest level of correlation to pay to performance, once we isolate the performance metric on the horizontal axis of our interactive tool.
Although public disclosure has improved immensely, so have some other less obvious facts. Slate voting, where shareholders vote on the entire slate of directors, has waned, and now individual directors have become exposed to an enhanced level of reputational risk since they are typically now exposed to individual voting. This element becomes particularly important to those companies who have voluntarily adopted the next major improvement in corporate governance: the non-binding, say on pay vote.
When we look at the first major example of a major Canadian public company, Barrick Gold, which received a vast majority “no” vote, the directors on the compensation committee experienced up to an 18-per- cent decrease in support for their re-election. The Barrick “no” vote warrants an entire article in itself, but I will leave you with this final thought. While Barrick may not need to change its pay practices because the vote is advisory, the directors responsible for the executive compensation decisions will remain on the radar of the institutional shareholders for future proxy seasons.
The number of “best practices” in corporate governance is becoming a colossal sum of many parts. Canada’s Top 100, a key feature in our study of executive compensation and pay for performance, has helped lead change in our industry.
As independent executive compensation professionals, we at Global Governance Advisors have helped public issuers incorporate the leading executive compensation designs in North America. The work is far from over, but the dialogue has come a long way in a relatively short period of time.
Paul Gryglewicz is Managing Partner with Global Governance Advisors