Monitoring the historical trends in executive compensation can provide insight into future developments in executive compensation. Paying close attention to the trends in compensation that are being monitored helps companies, directors, officers and legal and compensation advisors understand what is important to the public, shareholders and shareholder advisory groups; which, in turn, helps them avoid adverse reactions to their compensation practices.
The following outlines some of the recent trends in CEO pay in Canada and the U.S.
CEO Compensation in Canada
T he Globe and Mail recently released its report on Canada’s Highest Paid Executives for 2010. 1 The survey ranks the compensation paid in scal 2010 to the CEOs of the 100 largest public companies measured by market capitalization in the S&P/TSX composite index as of December 31, 2010. Based on this report, the following trends in 2010 were noted in respect of CEOs on the job for all of 2009 and 2010:
- $6 million = average CEO total pay, up 13% from 2009
- $938,995 = average CEO base salary, up 4% from 2009
- $1.6 million = average CEO bonus, up 21% from 2009
- $7.6 million = median value of all unexercised in-the-money stock options held by CEO at year end, up 97%
- $13 million = median value of equity – shares and vested units – owned by CEO, up 40%
- $9 million = median estimated cost to fund CEO’s traditional defined benefit pension plan, up 39%
The report notes that the 2010 double- digit gains for CEOs, commonly seen the decade before the economic crisis, came on the heels of only two years of weaknesses in 2008 and 2009, when CEO compensation fell by 5% and rose by less than 1%, respectively.
In a seemingly rare, frank comment on executive compensation, Claude Lamoureux, who sits on the boards of ve public companies, commented that the process of truly linking pay and performance remains “a work in progress” for many companies and added, “A lot of times I think the relationship between performance and pay is hard to see.”
Agrium Inc. is attempting to develop a stronger link between pay and performance. Agrium Inc.’s Chairman acknowledged that rising commodity prices and improving economic factors can boost executive compensation, regardless of an individual’s performance. As such, Agrium Inc.’s performance share units pay out if the firm meets growth targets compared to a selected group of other North American chemical and fertilizer companies over a three-year cycle. Adding performance hurdles to stock options and share units is consistent with the approach to compensation promoted by the Canadian Coalition for Good Governance, a group representing Canada’s largest institutional investors.
CEO Compensation in the U.S.
Equilar Inc., an executive compensation research rm, has released its latest report on CEO pay trends in the S&P 500, an index of 500 large cap common stocks actively traded in the U.S. After pay declines in 2008 and 2009, Equilar Inc.’s report notes the following:
- $9 million was the median total compensation of CEOs in 2010, a 28.2% increase from 2009
- $2.15 million was the median CEO bonus
- 85.1% of CEOs received an annual bonus in 2010, up from 73.6% in 2009
- Stock options were the most common type of equity award, but performance shares and restricted stock were on the rise
- Stock-based awards and bonus payouts became a larger part of the pay mix, at 38.2% and 27.2%, respectively, of total 2010 pay2
Equilar Inc. also released its more detailed survey results of U.S. CEO annual incentive payouts in the S&P 500. Pursuant to Equilar Inc.’s report:
- Annual incentive payouts increased by 45% from 2009 to 2010
- The percentage of CEOs that received at least a target payout increased from 54% in 2009 to 79% in 2010
- Over 42% of CEOs received a payout of 1.5 times target when net income or earnings per share was included as a metric in the incentive plan 3
CEO Pay vs TSR
Equilar Inc. also tracked CEO pay versus total shareholder return (TSR) in the S&P 1500, which is a composite of three indices: the S&P 500, S&P Mid- Cap 400 and S&P SmallCap 600. Equilar Inc. noted that TSR is one of the most important facts proxy-advisory rms consider in making their voting recommendations. The report’s ndings include:
- 23.9% of rms increased their CEO’s pay, despite below-median TSR, in the past year
- 30.0% of rms increased their CEO’s pay, despite below-median TSR, in the past three years
- Almost all companies studied increased their CEO’s base salary from 2006 to 2009, even if the CEO’s total compensation went down. 4
RIM’s Automatic Securities Disposition Plan
I n the Spring 2011 Newsletter, Michael Bowen of CIBC Wood Gundy commented on automatic securities disposition plans (ASDPs). As a follow-up note on this topic, on April 1, 2011, Research In Motion Limited (RIM) announced that its Chief Technology Ocer, Software had adopted a new ASDP to facilitate the sale of 120,000 shares over two years. Dispositions pursuant to this ASDP will be reported in accordance with applicable Canadian securities laws. RIM insiders are exempt from ling insider reports under U.S securities laws.
RIM noted that it has additional measures designed to conform with “best practices” relating to ASDPs. These include:
- ASDPs may only be adopted during a trading window
- A waiting period of three months will generally be required between the adoption of the ASDP and the rst disposition under the ASDP
- An ASDP should generally have a duration of 12-24 months
- An ASDP must contain meaningful restrictions on the ability of the insider to modify or terminate the ASDP
- The ASDP should generally provide for regular sales of smaller amounts (relative to an insider’s holdings) over a period of time rather than a large sale during a short period of time after the adoption of the ASDP
In addition, RIM’s Insider Trading Policy requires all ASDPs to be precleared by its Compensation, Nomination and Governance Committee of the Board of Directors. 5