TORONTO, Jan. 21 /CNW/ - Many Canadian companies still need to improve
the way they report executive pay according to the Canadian Coalition for Good
Governance. In their latest score card on executive compensation, the
Coalition concluded that while marks are improving many companies still have a
lot of work to do to improve their disclosure of executive pay packages.
"Transparency is essential when it comes to communicating the
compensation of senior executives to investors. This scorecard is not about
levels of compensation, it's about disclosing the process of how compensation
is determined" said David Beatty, Managing Director of the Canadian Coalition
for Good Governance. "We have seen some improvement in disclosure, but we need
to see more. Setting senior executive compensation is the toughest ongoing job
a board has to do and investors want, and should know how they arrive at their
Undertaken by the Clarkson Centre for Business Ethics and Board
Effectiveness at the Rotman School of Management, the study looked at the
executive compensation disclosure of 208 companies, representing all the
corporations in the TSX Index. Using a scoring system based upon the
Coalition's "Guidelines for Principled Executive Compensation", the study
evaluated a company's disclosure practices using 26 separate parameters.
According to the report, 29 companies scored well, exhibiting reasonably
thorough and complete compensation disclosure practices, up from 23 companies
last year. On the other end of the scale, 169 companies still had substantial
work to do. The Coalition is confident that these numbers will improve as more
companies adopt better disclosure policies.
"Regulations or "Say on Pay" resolutions are not today's answer to
improving scores, constructive cooperation is. Our members are anxious to help
compensation committees do their job better, improving how they establish and
refine compensation packages" said Beatty.
The Coalition has determined four areas where companies can immediately
improve their performance:
Ensure that compensation consultants are hired by the board and that any
additional work they do for the corporation is approved by the board,
along with disclosing the pay received for the services.
Provide a "one figure" number summarizing the CEO pay -- this is required
by the new SEC regulations and will soon emerge in the CSA standards --
and by demonstrating that they take into account past stock grants when
considering the current year's package.
Abandon options that vest over time with no performance hurdles.
Clearly explain how compensation packages are linked to performance in
the short and long terms.
The CCGG has provided the full scoring to the executive compensation
companies working in Canada to share with their clients. The full scoring
results will not be publicly available until one year after the final release
of the CSA disclosure requirements in the second half of 2008.
To help with better disclosure and better practices the Coalition
published a "Best Practices" document in September. This publication
complements the "Best Practices on Director Disclosure" found at:
As part of this year's survey the Coalition measured the market shares of
various executive compensation consultants and found that two firms, Mercer
and Towers Perrin dominated last year's disclosures:
Towers Perrin $2,928,213
Watson Wyatt $291,433
Semler Brossy $258,000
Perrault Conseil $131,154
Hamilton Soles $40,000
Hamilton Hall $34,102
Number Disclosing 78
For more information on the Coalition, go to www.ccgg.ca.
The Canadian Coalition for Good Governance is made up of 49 of Canada's
leading institutional investors representing more than $1.4 trillion in assets
under management. The mission of the Coalition is to represent Canadian
institutional shareholders in the promotion of corporate governance practices
that best align the interests of boards and management with those of the
For Frequency Histogram of Scores, please see:
Percentage of Companies Disclosing by Topic
2007 2006 Change
Comp Committee Independence 73.23% 67.31% 5.92%
CEOs on Comp Committee 97.47% 93.27% 4.21%
Experienced Comp Committee Members 95.45% 89.90% 5.55%
Consultant Retained 63.64% 61.54% 2.10%
Extra Work Pre-Approved 10.61% 6.25% 4.36%
Consultant Name 60.10% 58.17% 1.93%
Total Fees to Consultant 36.87% 12.50% 24.37%
Fees for Other Work 24.75% 10.10% 14.65%
Three-Year CEO Cost 32.32% 16.83% 15.50%
Multi-Year Payouts 72.73% 47.12% 25.61%
Look-Back Table 3.54% 1.92% 1.61%
Pay for Performance re: Look-Back 0.51% 0.00% 0.51%
Disgorgement 2.53% 1.44% 1.08%
CEO Share Ownership equals
3x Salary 32.83% 29.33% 3.50%
Hurdles on Equity 15.15% 10.10% 5.06%
CEO Holding Period 12.63% 11.54% 1.09%
Change of Control Double Trigger 87.88% 54.81% 33.07%
Option Double Trigger 61.62% 38.94% 22.67%
Pay for Performance Linkage 67.17% 62.02% 5.15%
Peer Group Named 11.62% 9.62% 2.00%
Stress Testing Used 4.04% 1.92% 2.12%
Stick to Guns 36.87% 28.85% 8.02%
SERP Cap 60.61% 34.13% 26.47%
SERP Total Present Cost 60.61% 31.73% 28.88%
Change in Accrued Liability 83.33% 38.94% 44.39%
CEO Annual SERP Payout 84.34% 52.88% 31.46%
AVERAGE 45.86% 33.51% 12.36%
Details of the scoring mechanics can be found in APPENDIX THREE
Compensation Disclosure and Practices
Since 2001, the Clarkson Centre has undertaken an annual survey of
corporate governance in S&P/TSX Composite-listed companies. While disclosure
and practice have become much more detailed and standardized with respect to
key governance issues, executive compensation has lagged behind this trend. We
have identified several areas where improved disclosure would be extremely
beneficial to shareholders, and have designed our criteria accordingly. Many
of the disclosure expectations in the survey are far beyond current S&P/TSX
Composite disclosure standards, but we feel they are nonetheless essential in
order for Compensation Committees to fully inform shareholders. We have also
attempted to design our methodology to compensate for cases where specific
metrics are not relevant to a company's executive compensation structure. As
such, we encourage you to contact us if you feel that a category does not
apply to your company's situation, and that the survey has not captured this
1. Composition of Compensation Committee
Entire Compensation Committee is Independent of Management? (10 points if
Relationships with management may increase the potential risk that the
Director will act in the interests of executives before those of the
shareholder. There is a particular perceived risk to shareholders if such
a conflict of interest exists on the Compensation Committee. If any of
the following apply to a committee member, we have considered him/her to
be related to management for the purposes of this study:
- Employee of the company (currently or within three years)
- Executive of any sister or subsidiary company
- Director or Director's firm provides legal, auditing, or
consulting services to the company (within the last 3 years)
- Kinship to CEO or other named executives
- Any other significant relationship deemed material by CC(BE)(2)
that does not fall under the above categories
We recognize that many different and conflicting definitions of director
independence have arisen in recent years. Our definition has been
carefully considered, and although it does not explicitly capture many
relationships that may be considered material, we attempt to assess
director independence on a case by case basis.
Sitting CEOs on the Compensation Committee? (-5 points if more than
1/3 of Committee are sitting CEOs)
It is also important that the number of CEOs on the Compensation
Committee be considered. On the one hand sitting CEOs are likely to be
sophisticated in their understanding of executive compensation matters.
On the other hand, some shareholders perceive that a currently active CEO
has a self interest in any and all inflation of executive compensation.
This, like director independence, is intended to identify potential
conflicts of interest. The balance reflected in our project is that only
one in three Compensation Committee members should be currently serving
CEOs or CEOs who have retired in the last three years. This assessment
was made based only on information that was publicly and readily
accessible at the time of the scoring. Only CEOs of publicly traded
companies with a market cap of approximately $100 million or more were
At Least One Compensation Committee Member has Significant Experience
with Management Compensation (5 points)
Executive compensation is extremely complicated. The Compensation
Committee must have "compensation expertise" just as the Audit Committee
must have financial expertise. The standard in our analysis is that at
least one committee member must have 5 years experience either as a CEO
or member of the Compensation Committee of a publicly traded company with
a market cap of approximately $100 million or more.
Compensation Committee Chair has Retained Independent Consultants? (Y/N)
Senior executive compensation is so complex that we believe that every
Compensation Committee could benefit by engaging external advisors. If a
Compensation Committee is solely dependent upon management for the advice
it receives with respect to management's compensation, this can also
result in a perceived conflict of interest. Credit is given here if an
independent compensation consultant has been retained by the company
during the most recently completed fiscal year, and that fact is
Additional Work by Consultant Pre-Approved by Compensation Committee
Chair? (Y/N) (5 points)
Just as for auditors, any other work done for the company by the
consulting firm or its parents or affiliates ought to be reviewed and
pre-approved by the Compensation Committee. There are only three
principal Canadian Executive Compensation Consulting firms and all three
have a broad range of services that they provide to corporations. In many
client settings, the fees earned from these other services are a multiple
of ten times the fees earned from consulting on compensation to boards.
This raises the issue of independence.
If a compensation consultant has been retained, or will be retained in
the future, credit is given if the company discloses a policy that any
non-compensation work performed by the consultant must be pre-approved by
the Chair of the Compensation Committee.
Name of Consulting Firm Disclosed? (Y/N) (3 points)
If the company has retained a compensation consultant during the most
recently completed fiscal year, has the name of the consultant been
Total Fees to Compensation Consultants Given? (Y/N) (5 points)
Has the company disclosed the fees paid to the compensation consultant
for advice provided to the Compensation Committee?
Fees for Other Pre-Approved Work Disclosed? (Y/N) (5 points)
Has the company disclosed the total fees paid to the compensation
consultant for all additional work provided to the company?
3. Disclosure (not otherwise captured)
Three-year Table Showing Full Annual Cost of CEO? (Y/N) (10 points)
Our expectation for this question is that the Compensation Committee
discloses the value of the compensation it believed it was conferring on
the CEO in each of the past three years. This table should include the
cash value of all compensation awarded to CEO for the past three years,
including the estimated value of options and other equity-based
compensation, as well as pension costs. Valuation methods are not
questioned or examined here.
Disclosure of Multi-Year Incentive Plan Payouts? (Y/N) (4 points)
Many companies with multi-year incentive plans will disclose the value of
the compensation at the time of grant, but not the value of the actual
payout at the end of the performance or vesting period. Does the company
disclose the value of payouts for all multi-year plans, excluding
options, even if the payouts in the current year are nil? Credit is also
given if the company does not have any multi-year incentive plans other
Table Showing Total Income of CEO Since Appointment (Look-Back Table)?
(Y/N) (4 points)
Because compensation packages often have pay-for-performance elements,
and pay schemes are complex, it is difficult to a priori determine the
actual CEO pay. Thus, we give credit if a company annually looks back and
considers what was actually earned by the CEO, enabling the Compensation
Committee to calibrate their 'ex-ante' compensation package. This sum
should include the total of all cash compensation, the amounts earned by
the exercise of options, sale of stock, the in-the-money value of the
Credit is given if a look-back table with this information is provided in
the Information Circular.
Pay for Performance Disclosure Reviewing Conclusions from 'Look-Back'
Table? (Y/N) (4 points)
Once the total amount earned is known, the Compensation Committee can
consider the linkage that did occur over time between the pay earned and
the performance achieved. Does the company provide a statement that such
an analysis was undertaken by the Compensation Committee and their
external consultant? NOTE: A company will not be given credit under this
metric if a look-back table is not provided (see above).
Disgorgement of Performance-Based Pay in Event of Restatement? (Y/N)
Does the company have a mechanism in place to ensure that compensation
earned based on performance can be "clawed-back" if earnings are restated
in later periods?
CEO has Share Ownership Guidelines (2 points)
Requiring the CEO to own a significant number of shares is an effective
way to ensure the alignment of the CEO's interests with those of
shareholders. Does the CEO have a formal share ownership guideline
requiring ownership of shares with a value of at least three times the
'Hurdles' Required for All Equity Components? (Y/N) (2 points)
Are there performance-based vesting hurdles or multipliers attached to
all equity based-compensation, including options and restricted stock?
Only a portion of each grant need be performance-sensitive in order to
CEO Must Retain Significant Equity Position for Minimum 1 Year After
Leaving? (Y/N) (2 points)
Is the CEO required to hold a significant number of shares following
retirement, either as part of a general share ownership guideline or
otherwise? If the CEO is a controlling shareholder (30% or more) the
company will be given credit under this metric.
Change of Control Provision has Double Trigger? (Y/N) (3 points)
Most companies have an agreement with their CEO that provides for payouts
in the event of termination and/or a change of control. A double trigger
on these provisions ensures that these payouts occur only in the event
that the CEO's employment is terminated in addition to the occurrence of
a change of control. Credit is given as long as payouts are not triggered
solely by a change of control.
Option Vesting Acceleration has Double Trigger? (Y/N) (3 points)
Similar to the cash payouts discussed above, some option plans allow for
accelerated vesting of options upon the CEO's termination and/or a change
of control. Credit is given here as long as accelerated vesting is not
triggered by a change of control alone. If a company's option plan does
not provide for accelerated vesting under any circumstances, credit will
Pay is Related to Performance? (Y/N) (10 points)
This metric relates specifically to the cash bonus paid to the CEO, or,
in absence of a cash bonus, any other significant at-risk component of
CEO compensation. Credit is given if there is an explicit and specific
link between payout and performance. What we look for is indication that
one or more objectively measurable criteria are considered in the
determination of the CEO's bonus, and what those criteria are.
Performance is Measured with Respect to Peer Group? (Y/N) (5 points)
With this metric, we are looking for an indication that the performance
measurements used to determine the CEO's bonus take into consideration
the company's performance against its peers. Is there an explicit mention
that peer group performance is considered in granting the CEO's bonus? We
do not require any specifics regarding the makeup of the peer group.
Compensation Committee Stress-Tests Compensation Packages? (Y/N)
Here, we are looking for an indication that the Compensation Committee
has considered the effect that significant upturns and downturns in
company performance may have on the CEO's compensation. Is there a
statement indicating that the Compensation Committee performs stress
tests on the CEO's compensation package?
5. Long-Term Load
Are SERP Pension Benefits Capped at Some Absolute Level? (Y/N) (2 points)
For this metric, we looked for indications that SERP benefits to the CEO
are capped at a specific dollar value. Credit is only given if the cost
to the company is explicitly limited.
Present Value of Total SERP Costs Given? (Y/N) (1 point)
Credit is given here if the total current SERP liability for all past and
present executives is given.
Changes in Accrued SERP Liability Since Last Year Disclosed? (Y/N)
Does the company disclose the changes in CEO SERP liability within the
most recently completed fiscal year?
Estimated Annual Pension Payout Given? (Y/N) (1 point)
Does the company disclose the estimated value of the CEO's annual pension
payout upon retirement?
For further information:
For further information: David Beatty, Canadian Coalition for Good
Governance, (416) 868-3585; Hugh Cameron, Public Relations & Communications
Consultant, (416) 488-3215