The Year the Penny Dropped

Underwater options, no bonuses, even salary cuts – the last 12 months have brought an about-face on executive compensation. Finally

Nov 1, 2009

by Marzena Czarnecka

There’s never been a worse time to be a CEO with a salary under review – or a better time to be a compensation consultant. With the financial crisis of 2008, just about everything changed in the world of executive compensation, as organizations big and small struggled to reward, retain and motivate their top people in an environment characterized by reduced cash flows, abysmal share performance and increased shareholder and public scrutiny of every penny spent.

The Say on Pay Movement

If you don’t like it, blame it on the banks. Or rather, shareholders of banks. In the face of shareholder activism around executive compensation, all Big Five Canadian banks – Canadian Imperial Bank of Commerce and the Royal Bank of Canada led the way – have given shareholders the right to “non-binding votes on executive compensation.” Other financial institutions followed, and the trend is expected to spread. Companies from other sectors that have given a nod to Say on Pay include BCE Inc. and Potash Corporation. The Canadian Coalition for Good Governance is developing a model advisory vote on compensation that could be used by other public companies to pass Say on Pay resolutions.

Will Say on Pay revolutionize executive compensation in Canada? Not if boards already are transparent and mindful of their shareholders’ interests. But it will have an effect. “The criticism from other countries that have had longer experience with Say on Pay is that it fosters cookie-cutter schemes, [a] herd mentality,” says Mercer’s Lisa Slipp.

North American companies haven’t gone for cookie-cutting, though. “The practice in North America in recent years has been to tailor compensation programs to support business objectives and business strategy,” explains Slipp. The result has been myriad programs with different metrics, some of which may be challenging to explain to shareholders. “The worry among some clients is that what you gain in simplicity and understandability on compensation programs, you then lose in effectiveness,” she says.

The old formula was easy. “It was getting to the point of ‘How many wheelbarrows of money would you like?’” says Gervais Goodman, partner with the human resources consulting firm Goodman, McDougall & Associates Ltd. in Millarville. Today? Everyone questions everything, and is called to the mat to justify everything. The “Say on Pay” movement that originated in the United Kingdom in 2003 has been embraced by Canadian financial institutions and is poised to spill over into other industries.

“We’re seeing our Canadian banks take a stand for it, and they’re setting the gold standard others tend to follow,” says Paul Gryglewicz, a consultant with Hay Group Limited. Worldwide changes to accounting and reporting standards are putting additional pressure on how compensation at the highest levels is calculated and presented. (Want to see a compensation committee member or consultant jump? Ask them how the International Financial Reporting Standards are affecting their job.)

Most of the pressure, of course, is on boards of directors and their compensation committee subsets. “The general involvement of compensation committee chairs in the process has gone up dramatically,” says Scott Munn, a partner with Hugessen Consulting Inc. in Calgary.

“A lot of companies have been through a shock to the system,” says Lisa Slipp, a worldwide partner with Mercer and head of the company’s executive remuneration segment in Canada. “Directors and companies are taking this opportunity to re-evaluate various aspects of their pay program to ensure it’s right for their future.”

Because as 2008 became 2009, it was evident most compensation programs weren’t right for the present. The triangle that forms most executive pay packages – base salary, short-term incentives (STIs, also known as annual performance bonuses) and long-term incentives (LTIs, a.k.a. stock options) – saw at least two of its three supports crash.

Boards and compensation committees had to be fiscally conservative and responsible, to be transparent and accountable, and to retain their top talent. Their solution?

Er… they’re still looking.

Salary: Untouchable No More
The easiest part of the triangle to cope with has been base salaries. “The trend for executive salaries in early 2009 has been zero increases,” says Slipp, and compensation consultants across the market agree. It’s a big change from the automatic 5% or 6% increases for standard performance and the “sky is the limit,” as Goodman puts it, for stellar performance, but relatively easy to sell and implement in the middle of the worst financial crisis in memory.

“Our base rates for executives have been flat for 2008 and 2009,” says Bob Henderson, vice-president, human resources, with Flint Energy Services Ltd. “No merit-based increases have been provided to our senior managers including our executive team since January of 2008.” In January 2009, Flint’s executive took a pay cut.

Base salary rollbacks have been relatively rare in the Alberta market and symbolic rather than life-saving. At Flint, which laid off more than 1,000 employees in the spring of 2009 (atop earlier construction worker layoffs in December), a key reason for the executive salary cuts (up to 10%) was to “send the message that we are all in this together,” says Henderson.

At Midlake Oil & Gas Limited, a small private company with about 50 investors and a management team of three, members of the executive took a voluntary pay cut early in the game, says CEO Rick Nixon.

The key motivator? “We had to look after the line people who are essential to our business,” says Nixon. “We haven’t lowered their salaries. But their stock options are in the tank, and we can’t do an awful lot of nice things for them right now. So we said, we’ll lower our salaries to help keep theirs level.”

Pages: 1 2