A growing number of Canada’s largest public companies are using climate or social responsibility goals in their executive compensation plans – although those that do are giving those metrics minimal weight in pay packages.
Chief executives at 100 of the largest Canadian companies listed on the Toronto Stock Exchange received a median of just under $8.6-million in 2022. But while many shareholders are looking for a stronger link between those paycheques and environmental, social and governance (ESG) measures, it’s unlikely top executives will immediately take a big hit in their pay if their companies fall short.
The attention to ESG in pay plans marries two trends. Most companies have for years been moving away from human discretion in setting executive pay, instead introducing specific criteria tied to their performance. At the same time, corporations have realized that maximizing shareholder returns may, in the long run, require a greater emphasis on what’s called “stakeholder capitalism” – that is, the impact a company has on their workers, customers, and citizens of the places they do business.
A 2022 survey by law firm Fasken Martineau DuMoulin LLP found 67 per cent of companies in the S&P/TSX 60 Index of large corporations have introduced ESG objectives as part of their top executives’ incentive plans.
At many companies, however, the ESG goals are opaque: Companies disclose that ESG is part of the “qualitative” evaluation that makes up a minority of an executive’s annual bonus, and offer little more by way of specifics.
Some companies, particularly in energy and mining – including Suncor Inc. and Teck Resources Ltd. – are laying out the numbers behind specific goals, or even creating special stock awards that only pay out if climate and sustainability goals are met.
Still, basing one part of just one element of executive compensation on ESG factors means that, even at the companies leading the trend, only a small piece of an executive’s paycheque is based on ESG goals.
“We do think CEOs should be paid well and fairly for their work – and that CEO pay should be tied to their performance on relevant performance-based metrics, including the most material ESG risks,” said Anthony Schein, the director of shareholder advocacy at SHARE, a group that assists institutional investors in advocating for social justice matters. But, he adds, there’s currently “a troublesome disconnect between corporate ESG performance, in particular, and CEO and C-suite pay.”
And CEO pay remains sizable, despite a recent decrease. The $8.6-million median figure for the 100 largest Canadian companies – based on an annual Globe and Mail review of executive compensation, in partnership with consulting firm Global Governance Advisors – is a 1.74-per-cent drop from what those companies paid their CEOs in 2021.
Compensation specialists say there are a couple of reasons for the atypical decline in pay. Annual bonuses were particularly high in 2021 coming out of COVID-19, and settled down in 2022. And many companies’ stock performance underwhelmed in 2022.
“Total shareholder returns were relatively flat or down a little bit amongst this group of 100 and pay was relatively flat amongst the group – which doesn’t always turn out that way,” said Peter Landers, a senior partner at Global Governance Advisors. “Overall, we saw more of a measured, conservative approach to pay.”
The pay decline in 2022 came after two years of pay increases during the pandemic. Median CEO pay rose 1.38 per cent in 2020 and over 23 per cent in 2021 as markets soared.
The 2022 decline was based on an analysis of pay practices at all 100 companies in the survey, even if they switched CEOs in 2022. At the 83 companies where the same CEO was in the role for two consecutive years, there was a median pay increase of 1.56 per cent.
“I think if we look at the results in 2021, companies were coming out of COVID and perhaps had modest targets and not a lot of certainty – so bonus payouts were pretty high,” said Marty Beraldo, a senior principal in Mercer’s Canadian executive compensation practice.
“This year, I think it’s something closer to business as usual or potentially more predictable,” he said. “The annual bonuses were not as high as last year and that’s likely why we’ve seen a bit of flatter comp this year.”
Many companies set 2021 incentive-plan targets in late 2020, a time of great economic fear related to COVID-19, so the financial targets were modest. For many of those companies, things turned out much better than expected, and they blew through their bonus targets. The boards at a handful of companies used discretion to scale back the windfall payments, but most did not.
As a result, the number of CEOs who received cash bonuses of $1-million or more in the 100 companies in The Globe’s survey dropped from 82 in 2021 to 73 in 2022. The median bonus fell from $1.95-million to $1.64-million.
But the median stock-award package – which includes grants of share units and stock options – was $4.74-million in 2023, nearly unchanged from $4.77-million in 2022.
Variable pay – companies like to call it “at-risk” compensation – makes up the bulk of CEO compensation packages. Base salaries made up just 12 per cent of total compensation last year for the 100 CEOs measured, while annual bonuses made up nearly 20 per cent of pay, and stock awards accounted for nearly 60 per cent.
It is in these incentive plans where climate and ESG metrics have had a growing presence. At first, many companies placed ESG goals in their short-term incentive plans, despite the long-term nature of many of the business challenges – climate change, sustainability – that are consider part of ESG.
A 2019 Compensation Governance Partners survey of disclosures by of 196 companies in the S&P/TSX Composite Index found 61 per cent of the companies measured sustainability metrics in their incentives. The survey found just 3 per cent of companies placed their metrics in their long-term incentive plan, while the rest were included in the annual bonus metrics or other short-term plans.
The 2022 Fasken survey found the proportion of ESG used in long-term pay plans, versus short-term plans, had risen to 32 per cent, however.
“As much as we agree that ESG is longer term, when companies start to incorporate ESG measures, they start with annual bonus,” says Victor Li, a governance consultant at Victor ESG Inc. “They didn’t start with long-term because they didn’t know how it will turn out. It is part of the struggle over quantifying a lot of this, particularly for the companies that are not in resource extraction.”
Indeed, the Canadian leaders in introducing quantifiable climate and ESG measures in their long-term pay plans are energy and mining companies.
In 2022, Suncor created “Climate Performance Share Units,” a type of stock award designed to “link the compensation of our executives to Suncor’s climate-related goal of net-zero emissions by 2050.” The 2022 award, Suncor said, “will vest based on progress from 2022 through 2024 towards our 2030 commitment to reduce annual greenhouse gas emissions by 10 megatonnes.”
Suncor valued the award of 12,242 CPSUs to then-CEO Mark Little at about $450,000 in the company’s disclosures that year. The company valued all his share and option awards that year at just over $9-million, meaning the climate PSUs represented about 5 per cent of his awards – and less than 4 per cent of his total $11.8-million in compensation. (The company did not reply to a request for comment.)
In 2022, Teck Resources introduced a Sustainability Progress Index as part of the metrics for its performance-share plans. The index is split equally among several measures: climate change; biodiversity and reclamation; management of its tailings facilities; equity, diversity and inclusion; and ESG ratings and rankings.
The Sustainability Index makes up 20 per cent of the weightings for the various metrics in the plan, with other measures such as shareholder return and production costs versus budget accounting for the rest.
In 2022, then-CEO Don Lindsay received a share award Teck valued at $3.76-million, meaning just over $750,000 of it was based on the sustainability index. Mr. Lindsay made $12.95-million last year, so sustainability-based pay made up just under 6 per cent of his package. Each of the five long-term sustainability measures, including climate change, make up about 1.2 per cent of total pay.
In an e-mail, Teck spokesperson Dale Steeves noted the company’s annual bonus program has included health and safety and sustainability factors “for years.” He said Teck’s health and safety performance can increase or decrease the corporate-performance rating portion of the annual incentive by 10 per cent. Sustainability performance makes up a portion of the business unit ranking, which was worth 6 per cent of the CEO’s annual incentive award in 2022, Mr. Steeves added.
Ken Hugessen, a Toronto compensation consultant, said of CEO compensation: “The majority of plans are a little bit ‘walk before you run,’ both in terms of proportion of incentive at risk based on those measures, but also on measurement ... It is a gradual process, coming up with objectively measurable milestones and measures to replace judgments about whether you’re moving ahead or backward. But it is happening, and the weight is going up.”
Still, Mr. Huggessen said, “at least as far as I can see, it will be a long time before the weighting of ESG will come anywhere close to the weighting of good old-fashioned things like earnings and return on equity. Quite possibly never – and quite possibly, appropriately, never.”
Ryan Resch, a partner at compensation consulting firm Southlea Group, said there may be a limit from a governance perspective as to how many companies need to be putting environment or climate into their incentive plan.
“For a company that does not have its own meaningful climate footprint, if a tiny reduction in climate impact creates any sizable financial reward to the executives, it could be out of proportion,” he explained. “Whereas a Suncor, it’s not as easy to get there and it’s going to have a much more material impact on the business.”
However, Mr. Schein of SHARE said as soon as next year “there will be more connection between ESG performance and pay.”
“Investors that we talked to in Canada, and also globally, are putting more of an emphasis there,” he said. “A lot of investors are looking for accountability for lack of action on climate transition.”
Who were Canada’s best-paid CEOs in 2022?
Top-paid CEOs, total compensation, in millions of dollars
Seetarama Kotagiri, Magna International Inc., $36.41
Tony Staffieri, Rogers Communications Inc., $31.52
Tobias Lütke, Shopify Inc., $26.03
José Cil, Restaurant Brands International Inc., $22.2
Mark Barrenechea, OpenText Corp., $20.11
Darren Entwistle, TELUS Corp., $17.49
Mark Bristow, Barrick Gold Corp., $17.39
Brad Corson, Imperial Oil Ltd., $17.34
Al Monaco, Enbridge Inc., $17.23
Roy Gori, Manulife Financial Corp., $17.08
Biggest bonuses (millions of dollars)
Patrick Dovigi, GFL Environmental Inc., $8.77
Alain Bédard, TFI International Inc., $5.94
Mark Bristow, Barrick Gold Corp., $5.27
Jay Hennick, Colliers International Group Inc., $5.01
Highest total stock awards (millions of dollars)
Seetarama Kotagiri, Magna International Inc., $31.50
Tobias Lütke, Shopify Inc., $26.03
José Cil, Restaurant Brands International Inc., $17.67
Tony Staffieri, Rogers Communications Inc., $16.75
Mark Barrenechea, OpenText Corp., $15.29
Biggest CEO share ownership stakes (billions of dollars)
Galen Weston, George Weston Ltd., $13.21
Tobias Lütke, Shopify Inc., $3.74
Bruce Flatt, Brookfield Corp., $2.88
Pierre Karl Péladeau, Quebecor Inc., $2.14
Prem Watsa, Fairfax Financial Holdings Ltd., $1.88
Michael Rose, Tourmaline Oil Corp., $1.13
Biggest accrued pension obligation (millions of dollars)
Jeffrey Orr, Power Corporation of Canada, $33.58
Nancy Southern, Canadian Utilities Ltd., $27.87
Darren Entwistle, TELUS Corp., $26.10
Al Monaco, Enbridge Inc., $25.50
Paul Mahon, Great-West Lifeco Inc., $23.32
Most valuable unexercised stock options (millions of dollars)
Keith Creel, Canadian Pacific Kansas City Ltd., $135.56
Don Lindsay, Teck Resources Ltd., $117.14
Alain Bédard, TFI International Inc., $71.56
Brian Hannasch, Alimentation Couche-Tard Inc., $66.41
Tim McKay, Canadian Natural Resources Ltd., $57.24
Alexander Pourbaix, Cenovus Energy Inc., $51.70
Source: Global Governance Advisors research based on company filings