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When shareholders of Canada’s big banks opened their proxy voting forms in early 2008, they found a striking new proposal on the ballot. Submitted by a small ethical mutual fund company, the resolution called on banks to give investors an annual vote on how executive pay was designed.

Bank boards initially opposed the motion as an intrusion into boards’ powers to set executive level pay. But within a year, a wave of companies bowed to pressure and agreed to introduce the votes, ushering in a decade of change in executive compensation design in Canada.

How much are Canada’s top CEOs paid? Here’s the full breakdown

Since the financial crisis, measures have been introduced to increase transparency, better align executive returns with those enjoyed by shareholders and curb the worst excesses in chief executive pay.

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A Globe and Mail review of the past 10 years of compensation trends reveals these efforts have shown signs of success. More executive pay features are tied to performance than in the past, and companies are providing clearer explanations to justify their pay decisions.

At the same time, CEO compensation has soared well beyond the increase in wages for employees. While boards tout the emphasis on performance-based pay, critics complain the performance features appear to pay out generously in most cases, suggesting performance hurdles are easily met. In many cases, compensation has also become more short-term in focus even as shareholders call for a longer-term horizons.

CEOs at Canada’s 100 largest companies earned average total compensation of $7.6-million last year, an increase of 49 per cent from $5.1-million in 2008. (The averages only include CEOs who were in their jobs for two years in each period, helping ensure pay was for typical full-year compensation.)



The increase is more than triple the rate of inflation during the period, and more than double the average 20-per-cent rate of wage increases for employees in Canada, but is roughly aligned with increases in total shareholder returns during the period.

Thomas Lemieux, an economics professor at the University of British Columbia, said CEOs have bargaining power to advocate for the most optimal pay programs, but the unequal wealth growth is breeding resentment across society. It is also inefficient, he says.

“A big share of our GDP that used to be going somewhere else is now going to the people at the very top,” he said.

Pay vs. performance: How do Canada’s CEOs stack up?

Canadian regulators changed executive pay disclosure rules in 2008, requiring companies to disclose the cost of all elements of pay, including shares and stock options. That means 2017 is the first year it is possible to do a 10-year look-back using comparable pay data.

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David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, said reporting changes were expected to curb pay growth by drawing shareholder attention to the full cost of compensation. Instead, he believes companies used the disclosure to benchmark against peers and justify constant increases.

“A lot of advocates thought it would shame CEOs into reducing their pay, but it turns out there isn’t a lot of shame in the C-Suite,” he said. “They’re perfectly happy to use the data to increase their pay.”

Growth in share-based grants, bonuses

One of the most significant changes in CEO pay over the past decade has been the increasing use of share-based grants as the preferred way to align executives’ interests with those of shareholders.

The average value of share units granted to CEOs grew by 146 per cent to $2.58-million in 2017 from $1.05-million in 2008, accounting for a big part of the increase in total pay over the decade. Share units typically track a company’s common share price, but pay out in cash at the end of a three-year period.

An analysis by Global Governance Advisors shows 77 per cent of the top 100 companies also granted “performance” share units last year, which require CEOs to achieve an additional financial performance target before they pay out. The idea is that when share prices are rising broadly, a company must outperform its peers.

At the same time, companies reduced the use of stock options because of concerns that they encouraged executives to manipulate share prices higher to quickly cash out. The average value of option grants fell by 7.6 per cent between 2008 and 2017, but CEO grants still averaged $1.3-million last year.

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There has also been significant growth in the cash bonuses most CEOs receive.

With greater shareholder pressure for performance-based pay, companies have curbed increases in base salaries, which climbed 30 per cent on average (and just 24 per cent at the median) for a typical CEO over the past 10 years.

Instead, many companies shifted more cash into CEO’s annual bonuses, which climbed 66 per cent on average over the decade – and 100 per cent at the median – even as performance conditions became more elaborate.

Compensation consultant Ken Hugessen, who advises boards on pay design, said shareholders are happier with rising bonuses than with rising base pay.

“We hear pretty consistently from shareholders that if you’re going to increase pay, it is better that it be variable pay,” he said.

‘The risk of getting rich is very high’

Pay may now have more variable elements, but there is concern that the programs are not nearly as “at risk” as they appear.

Companies often tell shareholders that 85 per cent or more of a CEO’s pay is at risk, because every major element is variable except for the base salary. But cash bonuses at many companies will pay out at some level even if only a fraction of the performance goal is met. Regular share unit grants, meanwhile, retain value unless the share price goes to zero.

Michel Magnan, an accounting professor at Concordia University who specializes in pay analysis, said compensation appears more performance-based with all the features that have been added, but the real measure of risk lies in how difficult the targets are to reach.

Given that management often has some input in setting the targets, and given the evidence of growing annual cash bonuses, he believes there is less risk in the pay system than would appear to be the case.

Instead, he said, “the risk of getting rich is very high, especially if [share] awards become annual events.”

Shifting performance goals

The shift into share units over the past decade also means that compensation rewards shorter-term performance, despite frequent discussion about the importance of focusing management on longer-term, sustainable growth.

Stock options are typically exercisable over 10 years, creating a long time lag between granting and cashing out, while share units typically pay out in cash at the end of three years.

Whether an unintended consequence, or simply an unavoidable trade-off, the shift into share units has reduced the definition of “long-term” compensation.

Yvan Allaire, chair of the Institute for Governance of Private and Public Organizations who wrote a recent paper on pay trends, believes share units provide a medium-term incentive at best, and a muddled short-term incentive at worst.

With most CEOs getting share unit grants each year, a portion is also vesting each year, so executives never have a single discrete three-year performance cycle. Instead, the performance goals are constantly shifting as a new target comes to fruition each year.

His proposed solution is to offer one grant of units every three years, allowing the performance goals to play out before a new incentive is added.

But compensation consultant Paul Gryglewicz, senior partner at Global Governance Advisors, said it is getting harder – not easier – for companies to deliver a large grant of share units in a single year and tell shareholders it is intended to cover several years.

“Mega grants” are more often opposed by shareholders, he said, who see them as excessive compensation in a single year.

Current tax rules make it unappealing to provide cash-settled share units that pay out over more than three years, Mr. Hugessen said, and grants of common shares are not tax deductible as a compensation expense. That means it is more costly − but not impossible − to build longer-term pay using share units or shares.

Creating a longer-term program would require different pay designs at a time when many boards feel little encouragement to innovate.

Ryan Resch, a board compensation adviser from Willis Towers Watson, said some companies have worked hard to develop their own alternative pay models, but it takes a lot more work to sell them to shareholders. Many, he said, just try to “check the boxes” to stay within proxy advisors’ guidelines.

“I think that tends to create a very narrow perspective on how the pay program should be designed.”

One of the most significant shifts in compensation in the past decade has been the standardization of pay design across companies as boards try to win the support of powerful proxy advisory firms such as Institutional Shareholder Services, which helps many institutional investors with their pay voting decisions.

While many shareholders urge companies to tailor compensation programs to their own unique strategies and time horizons, boards complain it is risky to deviate from the pay models favoured by the proxy advisers.

“The incredible convergence in compensation systems across companies is absolutely mind-boggling,” said Mr. Allaire.

“You read them, and it’s almost the same text from one to the other. … We’ve converged on a process which has received the blessing of proxy advisers and large investors, and boards feel safe when they apply that particular process.”

A golden example

In the end, perhaps the clearest benefit of the say-on-pay era is that it has reined in the outliers, or “mitigated the most egregious cases,” according to Mr. Magnan.

The gold mining sector illustrates the impact, with several major producers – Barrick Gold Corp., Yamana Gold Inc. and Eldorado Gold Corp. – all losing say-on-pay votes in past years when pay spiked and performance was weak. They introduced changes to their pay programs, and got positive votes.

Mr. Gryglewicz said even a few examples of failed votes led to broader reforms in the mining world. In 2017, median total compensation fell 1.4 per cent at mining companies, according to Global Governance Advisors, while median total shareholder returns rose 17 per cent.

“These directors have some institutional memory,” Mr. Gryglewicz said. “When you speak to a director who has been bitten by [proxy advisory firms] ISS and Glass Lewis once, they’re more reluctant to repeat those decisions again in the future because they understand the ramifications of the new reality.”

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