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Paul Gryglewicz is a senior partner at Global Governance Advisors and is responsible for the management of the Canadian operations. He is an adjunct professor at York University, teaching executive compensation, governance and performance management with the Master of Financial Accountability (MFAc) program.
Since we first launched our interactive pay-for-performance tool for The Globe and Mail in 2010, we have observed substantive changes in the design of executive pay packages.
Primarily among the Top 100 CEOs covered in our study, we have seen a growing segment of executive pay apportioned to long-term-incentive pay packages (LTIP), which are typically awarded in the form of full-value share units and stock options. LTIPs have also become ever more complicated. No longer are these awards all “gimmes.” More and more companies are making performance vesting conditions a priority, evident now in 75 per cent of this year’s Top 100. Performance vesting requires the company to meet hurdles such as total shareholder return goals before the equity units will pay out.
While more complex, performance units are a far better means of aligning executive pay with realized returns achieved by shareholders. The numbers may still look large on paper, but with the inclusion of performance vesting conditions in the pay design, the probability of the LTIP grants paying out at this magnitude has markedly decreased, while strengthening alignment to stakeholders.
A closer look at former Valeant CEO Michael Pearson’s $179-million performance share unit (PSU) award illustrates the point. Those units are today valued at $0, due to Valeant’s recent performance. If this award had been granted some five or more years ago, the likelihood of this award being in PSUs is slim. Rather, it would have likely been in restricted share units, which simply track the company’s share price, meaning that the award today would have been worth tens of millions, as opposed to nothing.
Marrying the investment community with today’s governance standards of giving access to voting on important items such as the say-on-pay advisory vote, individual director voting and approving equity compensation programs, quality shareholder identification and intelligence gathering coupled with effective communications programs become critical exercises, especially given the various shareholder voting guidelines and proxy advisory guidelines that exist.
Reflecting on the most recent annual general meeting season (AGM), as an independent executive compensation adviser working for many boards to help get “compensation right,” I can share a few critical learnings that will surely continue to affect decisions into 2016 and 2017.
The first is that investors are clearly getting comfortable voting No in the say-on-pay advisory vote. While the AGM season continues to wind down, we witnessed an increased momentum in large organizations getting lower say-on-pay votes than in prior years.
The table below highlights a few high-profile organizations facing large No votes from its shareholders. Linking the total shareholder return over the past year and looking at the change in those organizations executive pay packages, it’s not a surprise that shareholders are speaking up. While CEO pay typically tracks total shareholder return at many companies, the chart shows that companies getting lower say-on-pay votes this year also have a greater disconnect between pay and performance. Teck Resources, for example, reported a 26.5-per-cent increase in the CEO’s total direct compensation while total shareholder return was down 65 per cent.
While Barrick Gold – the historic poster child for receiving a love/hate Yes/No vote year over year with shareholders – received a Yes this year, it perhaps came due to executive chairman John Thornton forgoing his bonus this year. Will this be a new precedent that executives need to forgo the receipt of certain incentive payments? Time will tell, but what this has indicated is that shareholders were successful in driving a behavioural change on how executive compensation is managed.
Say on pay challenges: Individual cases
|CEO total direction compensation||Total shareholder return|
|2015||2014||% change||2015||2014||Absolute change|
|Crescent Point Energy||$8,787,354||$8,970,353||-2.04%||-32.3%||-28.1%||-4.18%|
|Say on pay voting|
|Crescent Point Energy||Not carried||Carried||*|
Change in CEO equity value vs. change in TSR
|Percentile||Change in CEO equity value||TSR|
Another current trend is a greater focus by directors on their own reputation management. Working with a former U.S. senator this past year has given me an appreciation that directors will surely continue to view the annual vote for the boards they sit on more like an election campaign than a passive exercise. Directors who fail to receive the majority shareholder For vote, while they may be “zombie directors,” they will surely be affected negatively in the nomination process on future boards. Individual vote failure threatens the very firm the board member represents – the company becomes a visible target for activist shareholder activity.
On the longer-term discussions regarding the Canadian regulator considering adopting proxy access (the right for a large shareholder to nominate their own preferred director to shareholders) and the current pressures on Canadian boards to address diversity issues, the individual director vote becomes critical for those currently fortunate enough to reside on a paid board. This means current directors must be highly engaged so that shareholders don’t begin to try and replace them with another director.
Active stakeholder communications is another critical factor in improving governance. To the best of my knowledge, I am the first independent executive compensation consultant that has run an investor road show without management and the board present to discuss directly with the shareholder community potential amendments to a company’s executive compensation program. After completing the exercise, it was evident that the shareholder community illustrated a few critical views, one of which showed a general acceptance of an executive making windfall gains well above “market normal levels” provided that the company achieved superior results both in financial achievement and share price appreciation.
The shareholders’ growing influence on executive compensation and individual directors has reached a point of no return. While the trust still remains with the board on making the appropriate oversight decisions on these important issues, the shareholder voice today is louder than ever. Board decisions not well liked by shareholders will quickly result in unintended backlash. This is why the board behaviours today are starting to show a higher degree of active shareholder engagement, so these shareholder attack scenarios can hopefully be avoided.