Category Archives: compensation

Pay for Performance Observations 2011

By: Antonio Spizzirri

In 2009, the Clarkson Centre for Board Effectiveness (CCBE) began observing pay and performance for firms on the S&P/TSX Composite Index (TSX Index).1 CCBE has continuously tracked pay and performance data since 2004 for over 300 Canadian large public firms. For the purposes of this report, we observe 200 firms who were listed on the TSX Index in 2011 and for which 7 continuous years of pay and performance data are available. The impact of the financial crisis can be seen in our TSR observations for two years (2008-2009) of our sample. The average annual TSR in 2008 is the lowest in our observation period at -31.64% which was followed by the highest average annual TSR of 36.51% in 2009, suggesting an immediate overall rebound. However, despite the negative impact of the financial crisis, overall CEO pay and performance over the 6-year 2005-2010 period were aligned.


Publication can be found here.


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Say on Pay: the SEC’s New Rule

The SEC announced today a rule requiring corporations publicly traded in the US to hold non-binding “Say on Pay” votes at least once every three years. As is already the case in the UK, where Say on Pay has been mandatory since 2004, this move provides investors with an opportunity to formally voice concerns over problematic executive pay packages. After 6 years, engagement between boards and shareholders in the UK has increased in frequency and sophistication and has ultimately improved disclosure around executive pay (see “Say on Pay, 6 Years on: Lessons From the UK Experience”). It remains unclear, however, if Say on Pay will have a long-term impact on pay/performance alignment. This is also true in Canada, where an increasing number of publicly traded corporations are voluntarily adopting Say on Pay.

CCBE will be monitoring the impact of US Say on Pay closely in coming years.

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Stock Options and Institutional Investors

Stephen Jarislowsky, CEO of investment firm Jarislowsky Fraser Ltd., was recently interviewed by the Globe and Mail’s Report on Business. (See “Why Jarislowsky thinks stock options are dangerous.”) One of his key points has to do with the role of institutional investors in effecting positive governance change in Canada.

The way stock options are reported is a good example of the difference between regulatory change and effects of pressure from institutional shareholders, one that we at the Clarkson Centre have seen in our own research.

In 2008, there was a legal requirement, as part of the compensation disclosure rules, that each company disclose the value of option gains realized by each Named Executive Officer during the most recent fiscal year. But starting in 2009, the CSA reworked the compensation disclosure and removed the requirement to disclose Option Gains. As a result, since Option Gains disclosure is no longer required, only 16.6% of companies listed on the S&P/TSX Composite Index this year disclosed the value of option gains (and that number includes companies that had no options outstanding or no options exercised during the year so they were given credit by default as the options gains were obviously $0). So, where option gains disclosure was previously available for 100% of companies, it has fallen off dramatically with the removal of the regulatory requirement.

Conversely, the process for Director Elections in Canadian companies has been improving year-over-year despite the lack of a change in regulatory requirement. The current minimum requirement is that shareholders be allowed to vote “For” or “Withheld” for their board of directors. There are two problems with this. First is the fact that, since shareholders are not able to vote “Against”, then a director’s election is carried with even a single vote “For” (which hardly counts as a ringing endorsement). Secondly, many companies still use a ‘slate’ voting structure, under which shareholders can only vote “For” all or none of the directors. There is no option to vote “For” individual directors unless the company voluntarily chooses to hold elections in that way.

Since 2004, however, due in large part to the support of institutional investors such as the Ontario Teachers’ Pension Plan and the Canadian Coalition for Good Governance, more and more S&P/TSX Composite Index-listed companies are implementing a majority voting policy that not only allows shareholders to vote for individual directors but also counts votes “Withheld” as a vote against the director. In cases where a director receives less than 50% of votes cast “For”, that director must submit their resignation for the board’s consideration. In 2010, more than 50% of Index-listed companies in Canada have such a majority voting policy in place, and this is in large part due to institutional investors pushing for positive governance change, encouraging companies to do more than the bare minimum required.

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Filed under best practices, compensation, corporate governance in the news, elections, stock options

Board Shareholder Confidence Index, 2010

The Clarkson Centre is pleased to announce the arrival of its 2010 Board Shareholder Confidence Index, which rates all corporations listed on the S&P/TSX Composite Index.

You can find this year’s Index, along with past years’ results, here: Board Shareholder Confidence Index.

The BSCI is based on the kinds of factors that active shareholders use in assessing Boards of Directors in terms of their adherence to corporate governance best practices.

A couple of things are worth noting. First, our yearly Index isn’t a ranking. We assign each company a letter grade (from C to AAA+), based on a clear set of criteria, but we don’t rank-order them.

Second, as we often do, we’ve altered our methodology somewhat this year. We now reward firms that disclose the value of option gains. While boards are currently subject to a regulatory requirement to disclose a ‘grant date fair-value’ for options awarded to executives during the most recent fiscal year, the requirement to disclose the value of option gains for the year was removed a couple of years ago. We included disclosure of option gains in our scoring system because we feel that disclosure of actual gains will give a clearer impression to shareholders of how compensation has been affected over time.

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Disclosure About Executive Pay

Yesterday’s Globe & Mail featured an interesting item on disclosure regarding executive pay. By Janet McFarland: Securities regulator urges more disclosure about executive pay

The story quotes the Clarkson Centre’s own Matt Fullbrook:

Matt Fullbrook, manager of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto, said the potentially biggest amendment could be a new requirement for companies to disclose how the board of directors considered risks associated with the company’s compensation policies – for example, if a pay practice could potentially encourage an executive to take excessive risks.

Mr. Fullbrook said too few companies put meaningful information in their proxy circulars about the considerations that go into their compensation design.

“It’s a piece that is a glaring omission,” he said.

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Are SMEs ready for compensation scrutiny?

In 2008, CCBE undertook an initial ‘environmental scan’ of SME governance in Canada. Using the criteria for our Board Shareholder Confidence Index (BSCI), we rated 100 SMEs and determined that their adoption of governance best practices was at the same level as the TSX Index in 2002. In other words, SMEs were 5 years behind, so to speak.

The data are summarized in the chart below:


Since then, we have developed a customized SME scoring scheme with criteria designed to touch on challenges facing SME boards and executives. In some cases, there is still overlap with our BSCI criteria for the large-cap TSX Index. The chart below shows our SME sample set in blue (n=113) scored based on our SME criteria, and the TSX Index in red (n=199) scored based on our BSCI. This comparison shows that adoption of best practices is now very close between the two groups.

There remains a gap in three key areas: director share ownership, board evaluations and CEO pay related to performance. This indicates that while improvements have been made by SME boards in structural areas (director independence, committee independence, CEO/Chair split, etc.), there is still much room for improvement in board decision-making and oversight. Large-cap corporations have experienced a significant increase in investor scrutiny, particularly related to executive and director compensation. It isn’t much of a stretch to assume SMEs will begin to feel pressure to catch up.

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