Current executive compensation practices are making Canadian CEOs rich, but at the expense of a strong corporate culture and the long-term interests of shareholders, according to a new report from the Institute for Governance of Private and Public Organizations (IGOPP).
“Mutual trust, loyalty, the sharing of objectives and pride in the organization, the sense of ‘being all in the same boat’, were slowly but surely eroded, replaced by a calculative greed at the top and cynical disaffection at the bottom,” the report said.
In 2016, a typical Canadian CEO earned about $8 million in total annual compensation — with bank CEOs raking in more than $10.5 million. That’s about 140 times more than the average Canadian worker, up from about 61 times in 1998, according to the Montreal-based think tank.
The skyrocketing pay has come from a “questionable” compensation system conceived by consultants that may satisfy critical observers but does little to align the goals of the company with the interests of long-term shareholders, said Yvan Allaire, executive chair of IGOPP.
“Investors and shareholders were initially enthusiastic about forms of compensation likely to transform senior executives into fanatics of ‘shareholder value-creation,’” the report reads. “However, soon enough, the link between this ‘extravagant’ compensation and the company’s economic performance seemed very tenuous.”
Benchmarking CEO pay to a self-selected group of peer companies was supposed to make compensation practices more fair and open, but in reality it has distorted the system and led to pay packages constantly moving higher, said Allaire.
“This self-imposed requirement is the weakest link in the current system of compensation setting and has led to a marked increase in compensation,” according to the report.
The report recommends companies stop relying so heavily on stock option programs that often “produce enormous rewards just as much by accident or mere chance than as a result of a distinctive contribution to shareholder wealth.”
Rather than loading up on stock options every year, executives should be granted options only when they are hired, promoted or under special circumstances, recommends the report. Those options should have a more limited lifespan and should not benefit from financial engineering such as share buyback programs, asset sales or other similar measures.
Executives should also not be able to cash in when a takeover offer sends company shares higher, the report recommends. Options should only be able to be exercised at the share price 90-days prior to the takeover offer.
The report also calls on Canada’s institutional investors to step up and demand compensation programs that more clearly align with the interests of shareholders.