Thanks for joining us for today's discussion on executive compensation. I'm Dianne Nice, the Report on Business communities editor. We will begin the discussion at noon (ET). In the meantime, you can begin submitting your questions for Paul Gryglewicz of Global Governance Advisors and Globe business reporter Janet McFarland.
Hi everyone. Looking forward to getting started at noon. Please feel free to submit questions in advance. Talk to you soon.
Hello all. I'm looking forward to talking today with Paul about current trends in compensation -- a very hot button issue for shareholders and for a lot of Occupy protesters. Please feel free to submit your own thoughts and comments as we go along, even if they are specifically a question for either of us.
Welcome, Janet and Paul. We have some questions submitted by readers, so let's get started.
The first question is from Andrea, who asks:
When we hear of the lavish pay the Ceo’s get such as Air Canada and then we also hear of how long term staff have had their wages clawed back for years now……most people feel that is just wrong! It makes me not want to support that company which is another kick at the poor beleaguered staff. Now we have a government bent on supporting business practices such as this! I really feel sorry for the staff.
Most of us are sensible people and just want a fair shake at life.
What do other people think about this kind of scenario?
Lets’ hear some honest conversation around these issues.
Hi Andrea. I couldn't agree with you more that it is really hard to read about lavish executive pay in any situation, but even harder when companies aren't doing well but executives are being paid a lot. I really get the sense this issue of fairness is starting to hit a critical mass of concern. I guess the question is what can be done about it. I think the biggest pressure on a board in terms of pay probably comes from its shareholder base, moreso than general public discontent.
Hi Andrea, people should always do their research before investing in certain companies. Examining executive pay practices is an important lens to consider before investing.
I have a question for Paul if I can intrude and ask one. Do you get the sense boards or management care if pay for top executives far outstrip that of regular workers? Do you sense this is becoming a discussion topic in light of U.S. rule changes about disclosure of CEO pay compared to worker pay?
Good question Janet. Looking at this year's executive pay results, we saw a very modest increase in CEO compensation. As say on pay becomes more prevalent amongst Canadian companies, it is becoming a concern.
Interestingly, dating back to Plato there have been numerous accounts to control the wages between the top and bottom paid worker.
I was curious how to interpret this year's 6 per cent pay raise for CEOs, because while that's a healthy amount, it is far less than some recent years. I'll be interested to see next year's numbers to know if moderation is becoming more of a trend or this was just a blip. You get to see pay discussions long before proxy circulars come out -- do you have any thoughts on what we'll see for 2012?
It will ultimately depend on the business results Janet. I think companies that compete on a global market and which fund their incentive plans from global results have a heigtened risk of lower incentive pay this year, due to the euro crisis.
I'm not a big fan, but Paul will probably have a more reasonable opinion. It seems to me that options are such a sweet deal -- you get a free right to buy shares up to 10 years in the future at today's price. And if the share price doesn't go up, you just don't exercise them. Number One -- talk about a cap on the downside for you. And Number Two -- talk about an incentive to quickly push up the share price and exercise.
Stock options certainly play an important part in rewarding long-term business results. Microsoft is a blue chip company whose share price is more difficult to move year over year, compared to a smaller cap company that is tight on cash.
for example, in a mining company still in the exploration phase it simply doesn't have the financial resources to use other equity vehicles in its long-term incentive plan
Hi Wayne, good question. I don't think it is flawed. The governance practices most companies in Canada are adopting are rather rigorous. More attention today is being spent in the board room examining pay for performance. Performance is being considered under multiple business objectives and further examined on both an absolute (relative to budget) and relative (to peer group)
We do sometimes find ourselves in situations where a compensation overhaul is required. In our current model with more transparency and the adoption of individual director voting, getting compensation right is at the top of the list of importance for a board.
Hi Bill. That's a big question! Ideally a CEO is charting the long-term strategic direction of a company in every major respect. I think it's easy for those of us on the outside to assume it's a cushy job that involves lunches and golf, but I have grown to realize over many years as a business reporter that it's really hard and complicated to successfully run a large company over the long-term. Not sure that answers your question...
Hi SJ, the annual bonus portion of incentive pay, is typically rewarding on results that were achieved over the year....
When we look at the long-term incentive portion of pay, with the use of either Restricted Share Units, Performance Share Units, Stock Options or cash equivalent like a phantom unit, they are measuring and rewarding on long term value creation.
Good point, though. Is it always clear what shaped a single year's performance that leads to a bonus payout? Perhaps decisions made five years ago by another CEO are the main factor... Hard to isolate one year, yet annual bonuses are still a big part of compensation.
Next up, a comment about fairness and then a question...
Good point Janet. A company always has some level of momentum from prior years. When setting annual performance hurdles this momentum should be taken into consideration when setting the performance hurdles.
This is a long-standing complaint -- pay disclosure ratchets up pay. It's undoubtedly true. My question is whether it's a better alternative to have it all secret/private and let lord-knows-what occur behind the scenes without any scrutiny.... I think it's probably impossible to go back to the old way.
Hi Jeff, I like this question. One of the main reasons for transparency is to help provide investor confidence. An unintended consequence is to your point allowing competitors to examine one another.
The definition of "right" stems back to a companies or organizations compensation philosophy. The philosophy is typically set with input from senior management and the board (municipality in your case).
One quick thought is that "right" can't possibly be what pleases everyone, because we all have different ideas of what is a fundamentally fair pay level for a CEO. So I guess that's why boards also revert to general peer/industry comparisons...
And further on that thought...
Devon, I always joke that I'd be happy to run a major corporation into the ground for just $1 million a year, and I would be a bargain. I just don't know what a CEO should be paid. $5.2 million is the median for Canada's top 100 companies, including the value of stock options and pension accruals. Is that too high? Is $3 million right? Does anyone else out there have an opinion on how to decide that?
Devon, this once again links back to an organizations compensation philosophy and how the organization wants to cascade its pay decisions down throughout. As we see say on pay pick up momentum, the results in Canada remain very positive in support of today's executive pay packages.
(Quick note to Craig. Our IT folks tell me they have just reloaded a fixed version of the performance tool. I haven't had a chance to test it, but it should work now or within a few minutes.)