executive compensation trevor hunter mos 4422 corporate governance king’s university college

Executive Compensation

Trevor HunterMOS 4422Corporate GovernanceKing’s University College


• One of the most contentious governance issues because it is hits at some of the most basic human emotions:

• Greed• Morality• Envy• Social justice


• The debate:– Market forces determine pay vs.

justifiable compensation– Need to pay for good talent vs.

nobody is worth that much– CEOs earn their pay like everyone

else vs. simply lining their pockets at the expense of workers/customers/shareholders


• My bias:• Get all you can get – if the Board

is stupid enough or derelict enough in their duty to allow you to get paid more than you deserve than good for you


• Fuel for the fire*:– Average 2013 pay for top 100 Canadian

CEOs: $9.2 million, 2012: $6.3 million, 2011: $7.2 million, 2010: $8.4 million

– 2013 average Canadian salary: $47,358 – CEOs earned on average 195 times what

their average employee earned – in 1995 the difference was only 85 times

– Where to find CEO and Director Pay

* https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2015/01/Glory_Days_CEO_Pay.pdf

http://www.rbc.com/investorrelations/pdf/2014englishproxy.pdf

http://www.rbc.com/investorrelations/pdf/2014englishproxy.pdf

Executive Compensation: Rankings for Canada's top earners*

*Source: https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2015/01/Glory_Days_CEO_Pay.pdf

Rank Name Company Base Bonus Shares Options Pension Other Total

1 Gerald Schwartz

Onex 1,339,661 25,178,068 61,399,347 87,917,026

2 NadirMohamed

Rogers 1,130,769 1,500,000 2,520,440 2,520,440 1,856,084 17,242,636 26,769,973

3 Michael M.Wilson

Agrium 1,507,200 1,975,012 2,977,075 2,785,916 1,020,076 13,553,461 23,818,740

4 Donald J.Walker

Magna International

334,903 9,734,850 6,489,900 2,810,195 187,752 19,557,600

5 StevenHudson par

Element Financial

660,000 4,728,394 5,250,258 8,226,376 18,865,028

6 JR Shaw ShawComm.

1,500,000 10,140,700 5,603,000 136,832 17,380,552

7 RobertDepatie par

Quebecor 1,200,000 3,906,447 8,820,000 894,700 14,821,147

8 Gord M.Nixon

RBC 1,500,000 2,932,000 6,600,000 1,650,000 1,312,000 44,877 14,038,877

9 DougSuttles

EncanaCorp

562,830 969,403 7,129,178 4,127,419 40,023 945,242 13,774,095

10 PaulColborne

SurgeEnergy

450,000 1,744,400 11,473,616 7,925 13,675,941

American CEO Compensation*

Company CEO Name Compensation ($)

Discovery Communications, Inc. David M. Zaslav $156,077,912

Gamco Investors, Inc. Et Al Mario J. Gabelli $88,518,411

Microsoft Corp Satya Nadella $84,308,755Oracle Corp Lawrence J. Ellison $67,261,251

Lions Gate Entertainment Corp Jon Feltheimer $63,601,493

Basic Energy Services Inc T.M. (Roe) Patterson $62,863,840

Qualcomm Inc Steven M. Mollenkopf $60,740,592

CBS Corp Leslie Moonves $57,175,645Sprint Corp Daniel R. Hesse $47,077,699Walt Disney Co Robert A. Iger $46,497,018

Source: http://www.aflcio.org/Corporate-Watch/Paywatch-2014/100-Highest-Paid-CEOs

Largest Companies in CanadaRanking Revenue Profit

2013 Company Amt. 2013(x1000) Change Amt. 2013

(x1000) Change

1 Suncor Energy $39,784,000 3.8% $3,911,000 42.7%

2 Royal Bank of Canada $38,766,000 1.7% $8,331,000 11.9%

3 Magna International $35,880,048 16.4% $1,607,830 12.2%

4 Alimentation Couche-Tard $35,650,032 55.9% $574,518 26.2%

5 The Toronto-Dominion Bank $33,800,000 3.2% $6,557,000 3.0%

6 George Weston $33,582,000 2.6% $674,000 41.9%

7 Enbridge $32,918,000 33.5% $629,000 -11.0%8 Imperial Oil $32,722,000 5.4% $2,828,000 -24.9%

9 Power Corp. of Canada $29,642,000 -11.4% $1,029,000 18.8%

10 The Bank of Nova Scotia $28,799,000 7.3% $6,422,000 2.9%Source: http://www.financialpost.com/news/fp500/2014/index.html


• Fuel for the fire:– John Paulson, hedge fund manager, earns $4.9 billion

in 2010, while funds he manages are down nearly 50%2

• Other examples3:

2http://www.forbes.com/profile/john-paulson/ 3 http://www.businessweek.com/investor/content/sep2009/pi20090923_783858.htm

Name 10-year Pay 10-year ROI performance

Ken Lewis, CEO, Bank of America $180 million -37%

Kenneth Chenault, CEO, Amex $164 million -50%

Louis Carey Camilleri, CEO, Altria Group

$135 million +7%

Ivan G. Seidenberg, CEO, Verizon $164 million -54%

Jeffrey B. Immelt, CEO, GE $126 million -59%


• Types of compensation, reason for types

• Setting compensation • Pay for performance


Purpose:• You have to pay your senior

executive – there is a cost to the their adding value

• Attract and retain the best• Reduce agency risk• Provide incentives for them to

perform to the best of their abilities


Risk:• You have to pay your senior

executive – there is a cost to the shareholders if they don’t add value

• How do you make sure they act in the shareholders’ best interest?

• The folly of hoping for “A” while rewarding for “B”.


• One of the most important jobs of the BOD is to set the compensation for the CEO and senior executives in a way that minimizes shareholder risk, encourages appropriate behaviours and does not allow the CEO to engage in activities that entrench themselves

Setting Executive Compensation3

Define a compensation policy that rewards not just the achievement of goals but meeting the philosophy of the goals:

•Balance between short and long term objectives (reduces risk of making cuts that increase short term share price but negatively affect long term performance)

•Indicate the amount of risk the Board is willing to take (must differentiate between general industry risk and risk-taking)

3Adapted from: Charan, R., 2005, Boards that Deliver: Advancing Corporate Governance from Compliance

to Competitive Advantage. Jossey-Bass.

Setting Executive Compensation

Examples of considerations:•Strategy – profits or market share?•Resource allocation – to which areas of the business should resources be allocated (sales – short term; R&D – long term)?•Borrowing – What is the appropriate level of debt?•People – are the right people being trained or hired or retained?


Set multiple objectives to achieve goals:• Many pay for performance programs

fail because the objectives are too narrow and too far removed from what the Board actually wants the CEO to do

• One objective (i.e. Increasing shareholder return or EPS) does not capture the range of behaviours needed from executive to ensure sustained performance


•Reflects mix of short and long term objectives – single objectives can be manipulated too easily•Examples:

–Short term•Improve operating cash flow by x% in one year•Meet specific margin and sales goals•Don’t let debt go beyond x level

–Long term•Differentiate brand from competitors•Increase number of low-cost suppliers


Set multiple objectives to achieve goals:• Board should not indicate specific

ways in which objectives should be met

• Important to have objective, agreed to measures of success to eliminate questions as to whether they have been achieved


Match objectives with cash and equity:•Compensation plans are most effective when the time horizons are matched with those of the objectives

–Cash best used for annual objectives and equity for long term

•Balance is dependent upon industry and environment


Setting the cash component:•Often a combination of base salary and performance bonus•There are tax implications regarding salary – in the USA as of 1993, salaries of over $1million are not tax deductable so you see many firms with salaries at $1million but total compensation much greater. Often additional cash is in the form of a “guaranteed bonus”


Setting the equity component:•Should have a long term orientation to avoid punishing or rewarding CEO for uncontrollable environmental factors•Equity instils a sense of ownership in CEO matching her/his interests with those of shareholders by making them shareholders – eliminates agency risk


Setting the equity component:•What sort of equity?

–Stock options–Performance share units–Restricted share units

•Many ways to manipulate share price that do not follow firm performance or long term shareholder wealth maximization•Risk of shareholder wealth dilution due to over issue•Pricing the value of options can change performance

executive compensation trevor hunter mos 4422 corporate governance king’s university college

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