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The issues of accountability and transparency are shaping up to be big issues both in the election battle to determine who will become the next President of the United States, as well as in the recently announced federal election here in Canada. But when it comes to shareholder democracy—and more specifically the issue of CEO compensation—companies on both sides of the border are still largely ignoring these issues.
There has been a growing chorus of shareholder and governance advocates lobbying for so-called “Say on Pay” proposals that would give shareholders a voice in determining the pay for top company managers. One such proposal that made it onto the Canadian Imperial Bank of Commerce annual general meeting agenda in February garnered 45% support from the bank’s investors. That’s not enough to convince CIBC to adopt the non-binding proposal that was proposed by Cambridge, Ont.-based Meritas Financial Inc. and the Vancouver-based Shareholder Association Research and Education (SHARE).
Similar proposals at such U.S. banks as Morgan Stanley and the Bank of New York also failed to garner a majority of support from shareholders. And that’s too bad since if CEOs were forced to convince their shareholders that they deserved their high salaries maybe more companies would actually take the time to describe how they decide what they pay their top managers.
Over the past few years some top tier companies have made great strides in breaking down the components of CEO compensation and explaining what the managers have actually accomplished to justify their high salaries. That’s a big change from just a few years ago when most companies simply said they paid their CEOs based on performance and gee whiz, we think our performance has been pretty good.
Unfortunately too many companies still resort to impenetrable jargon, boilerplate legalese and meaningless generalities when describing how they decide what they will pay their top managers. According to a study by New York-based compensation consultants James F. Reda and Associates, many small and medium sized publicly traded companies in the United States are ignoring new rules from the U.S. Securities and Exchange Commission that require the companies to explain the benchmarks they use to determine CEO pay. Similar disclosure rules are expected to be finalized in Canada next year.
Only 47% of the companies surveyed made the required disclosures in 2007, according to the study, when it came to relatively simple items like short-term incentives such as cash bonuses. That’s a big jump from 2006 when only 23% made that disclosure, but still falls well short of the information investors require to properly assess how their board is handling the all-important issue of CEO pay.
There’s no similar research in Canada, but you don’t have to look very hard to see how wide the gap is between companies that take this stuff seriously and those that don’t. Take just about any company in Canada with a market capitalization of less than $1 billion and see if you can make sense of the pay disclosure in its annual proxy statement.
And that’s a shame because when it comes to CEO pay, it’s not just the investors in the company who are paying—it’s taxpayers. According to a recent study by the Washington-based Institute for Policy Studies, U.S. taxpayers subsidized CEO compensation to the tune of US$20 billion annually. The subsidies come through favourable tax treatment for deferred compensation for executives personally, as well as corporate tax breaks for items like stock options.
If you want an example of how shareholders are not getting the straight goods when it comes to CEO pay just look at how companies account for stock options, the IPS argues. In 2005, the most recent year that data is available, U.S. corporations claimed tax deductions for stock options that totaled US$61 billion more than the expense shown on the company books.
The Canadian Coalition for Good Governance does not unilaterally support shareholder say-on-pay proposals but has done much to advance the cause of sensible CEO compensation practices and disclosure. Just this week, the CCGG released its updated executive compensation best practices disclosure guide, which cites examples of good disclosure practices from such companies as Nexxen, Bombardier, Sun Life Financial and Canadian Pacific Railway.
As the economy slows and some companies even start to falter it’s not surprising that investors get upset when they learn that the CEOs who failed to deliver solid performance still walked away with millions in cash, stock and pension benefits. But the best argument for giving shareholders a say on pay is not that it might reduce some of those fat paycheques but rather it would force companies to look hard at what kind of performance they are paying for. After all, if you tell a CEO you will pay him for raising the stock price within a year, don’t be surprised if he sacrifices long term strategic corporate goals for a short-term stock bump.
But until companies give their shareholders a voice on the corporate ballots when it comes to compensation they only have one other option if they want to express their displeasure when it comes to CEO pay: vote with their wallets and sell the stock.
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