In the coming months, most Canadian companies will report on how much their executives earned last year. The astronomical numbers will grab headlines, but for shareholders, the biggest problem isn’t the total dollars. There is a huge disconnect between what many executives earn and how the companies they run perform. Moreover, shareholders have grown weary of excessive golden handshakes, stealth compensation and other forms of “pay for failure.” The US continues to take top marks for truly excessive executive compensation and exit packages. For example, even after driving Countrywide Financial Corp. to the brink of bankruptcy with subprime home loans, CEO Angelo Mozilo stands to gain $115 million in severance pay.
But Canada too, certainly has its share of questionable pay packages for CEOs and other top management. Consider the nearly $75 million that Precision Drilling reported as the total value of its CEO compensation in 2005. In 2006, 26 Canadian companies reported that they had executives who made between $10 and $50 million. And executive pay continues to climb with no end in sight.
So how do shareholders go about the business of tryingto rein in excessive executive compensation and ensuring a positive dialogue on the question of value for money related to key performance issues?
Dubbed ‘Say on Pay’, a yearly advisory vote on executive compensation has a direct impact on poor corporate pay practices that commit companies to huge pensions and severance benefits and incentive paydays that are out of touch with reality.
A fact of corporate life in the U.K. since 2003, and Australia since 2005, the advisory vote allows shareholders to cast ballots at every annual meeting ‘for’ or ‘against’ the compensation paid to executives.
Very rarely – just eight times in thousands of votes over four years – do a majority vote against executive pay in the U.K. The real impact of the vote has been to motivate directors to avoid making decisions that shareholders don’t like and will vote against. Pay usually becomes linked to performance.
In 2008, shareholders are proposing a solution and their proposal will be put to its first test in Canada at the five big chartered banks.
This will be a corporate milestone in Canada. Some argue we must put the advisory vote on hold and wait for
regulators to decide how to improve compensation disclosure. This confuses the cart with the horse. The advisory vote has been shown to improve the quality of the information companies provide, and would be worth having for that reason alone.
Most Canadian companies are working hard to do a better job of explaining executive pay. But disclosure, even if it is clear, complete and concise, is a presentation, not a conversation. The real benefit of the advisory vote is as a way for shareholders to provide feedback to the board on executive pay. Executive compensation is a consequential cost to companies in Canada. In past decades, the amounts paid to top tier managers from company coffers did not have any measurable impact on the bottom line. Today, they do. As a result of a shareholder proposal in 2006, some Canadian companies now report how much executive compensation represents as a percentage of corporate income. The fact that pay levels for a company’s few topexecutives is set at are high enough to register against revenues, often nearing a full percentage point, is yet another very good reason to have a vote on it.
The advisory vote on executive compensation carves out a role for shareholders where none currently exists. It is not a veto on the directors’ pay decisions. It is the vehicle for the expression of an informed opinion. It balances shareholders’ rights to make their views on executive compensation known with corporate directors’ obligations to ultimately make the call. An advisory vote is our best bet to reign in excesses and link pay solidly to performance. It has the power to change the climate in our boardrooms where pay decisions are made.
Canada needs “Say on Pay.”
Laura O’Neill is director of law and policy, Shareholders Association of Research and Education (SHARE), Canada
This article originally appeared January 28, 2008 in the Vancouver Sun