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At Canadian Oil Sands Ltd., CEO Marcel Coutu has a portion of his annual bonus linked to total shareholder returns.Fred Lum/The Globe and Mail

A study is challenging long-standing complaints that CEO pay has risen steadily no matter how companies perform, concluding pay and performance have moved in tandem at the vast majority of Canada's largest companies over the past eight years.

A University of Toronto review shows CEO pay was aligned with company performance at 81 per cent of companies in the S&P/TSX 60 index between 2004 and 2011.

Author Matt Fullbrook, manager of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto, said he was surprised by the close correlation.

"It's less alarmist than I expected to see. … We're not seeing very many cases where pay is going up extremely aggressively," Mr. Fullbrook said.

"And we certainly aren't seeing any cases in the eight-year observation where it is completely out of whack, where pay goes up 1,000 per cent and [total shareholder return] is minus 90 per cent."

Mr. Fullbrook said the benchmark stock index's total shareholder return – which includes share price increases and dividend payouts – was up 90 per cent over the eight-year period, while total CEO pay was up a more conservative 14 per cent on average.

While 19 per cent of companies did not show a correlation between pay and performance over the eight-year period, almost all of those saw CEO pay drop while their share price rose, which means that lack of alignment was not the type most vexing to investors.

The marking system looked only at the connection between pay and performance, and did not assess whether the amount paid to CEOs was appropriate.

Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents most of Canada's largest institutional investors, said shareholders are generally growing more content with CEO pay practices following years of one-on-one lobbying by his group to reform compensation design.

CCGG staff hold 45 to 50 meetings with boards a year, he said, and compensation is always discussed. "I do believe boards are taking compensation of the CEO and the very senior officers more seriously," he said.

The coalition is still pressing boards on their use of stock options, however, recommending companies reduce their use and add performance features before they can be exercised.

The study results were not uniformly rosy.

Researchers found less correlation between pay and performance over six-year and four-year periods, suggesting market turmoil has made alignment with pay more difficult as shareholder returns worsened.

While the median score for eight-year alignment was eight out of a maximum of 10 marks, the median score for six-year alignment was three out of seven, or 43 per cent, and four-year alignment was two out of four, or 50 per cent. The one-year median score was two out of three.

Mr. Fullbrook said stock market volatility since 2008 affected many scores as total shareholder return fell while pay rose or plateaued, so even some companies with relatively conservative pay practices had poorer results in those periods.

Most companies do not explicitly award CEO pay based on share performance, with bonuses and share grants often more closely linked to internal targets such as profitability or production. Mr. Fullbrook said that means there is likely going to be less correlation between pay and performance in the short term and more in the longer term as share price eventually aligns with those internal factors.

Fifty-two of Canada's 60 largest companies were assessed in the Rotman study, with some excluded because they did not have eight years of performance data or did not provide details about which peer companies they use as comparators to set pay levels. The research was initially funded by the Ontario Teachers' Pension Plan and the Canada Pension Plan Investment Board.

The average total score was 13 out of 24, which combines marks for alignment over eight years, six years, four years and one year.

The company with the most misalignment over the eight-year period was Thomson Reuters Corp., which saw CEO pay rise sharply due to a one-time grant of $26-million worth of restricted share units awarded in 2008 to then-CEO Thomas Glocer as part of the Reuters merger.

The grant affected the pay-and-performance calculations, leading to a "significant misalignment" over the longer term, the researchers said, although the company got full marks for one-year alignment in 2011. The company said it had no comment on the report.

At Canadian Oil Sands Ltd., one of the overall leaders with a score of 20 out of 24, chief executive officer Marcel Coutu has a portion of his annual bonus linked to total shareholder returns, and qualifies for a payout on his performance share units based on TSR measures.

It's little surprise to director Ian Bourne that the company won marks for having close alignment in shorter and longer time periods.

"We've worked on this whole theory of how to correlate performance and compensation as hard as any board I've seen has worked anywhere," said Mr. Bourne, who chairs the company's compensation committee.

He said linking pay and performance is especially challenging at a commodity company where external factors such as oil prices can have a big impact on share price. CEO bonus payments are also linked to internal factors such as production volumes and management of operating costs.

At the other end of the spectrum, Husky Energy Inc. had the lowest score with a mark of four out of 24. The researchers said Husky's low score was due to a special $25-million option grant to former CEO John Lau in 2007, as well as low shareholder return and poor market performance since 2008.

Husky Energy spokesman Mel Duvall said the company continues "to execute against our business strategy and deliver value to our shareholders," and noted Husky's share price increased more than 30 per cent in 2012.

Researchers said Enerplus Corp. scored five out of 24 because pay increases for CEO Gorden Kerr outpaced total shareholder returns in each of the past eight years. In 2011, pay climbed 35 per cent when TSR was down 10 per cent.

Enerplus vice-president of human resources Brien Perry said his firm's pay plan is designed to align pay and performance, and TSR is a factor in annual bonus payouts and performance share unit payments. But he said there are other internal strategic factors such as oil and gas production and cost containment that also determine bonuses.

Mr. Perry said a $1.2-million grant of performance share units in 2011 boosted compensation, but noted the units have not vested and will not reach the anticipated payout level.

"It almost sounds like it's on purpose – that we're rewarding executives separately from what happens with TSR, and that's certainly not the case," he said. "We certainly pay attention to TSR, it's one of our [compensation] factors. …And Gord Kerr is a pretty sizable shareholder himself, so he certainly appreciates the situation and the scenario that shareholders have had to face the last few years."

First Quantum Minerals Ltd. questioned the survey's findings, saying pay for CEO Philip Pascall has risen from a low base, compares favourably to peers and has never been a subject of criticism by the company's shareholders.

Company spokesman Brian Cattell said First Quantum's market value has risen "exponentially" since 2004 and Mr. Pascall was ranked by Harvard Business Review magazine's latest edition as one of the world's top CEOs.

Mr. Cattell also said it should be noted that the chairman of the Clarkson Centre is David Beatty, who is also chairman of Inmet Mining Corp., which is the target of a hostile takeover bid by First Quantum.

Mr. Fullbrook said Mr. Beatty had no role in the research, which was initially commissioned in 2007 by two of Canada's largest institutional shareholders, the Ontario Teachers' Pension Plan and the CPPIB.