Thought Capital

With the 2013 proxy season now behind us, it is worth pausing to consider the evolution in CEO compensation levels, mix and incentive design over the past few years. The trends observed—including moderate increases in pay opportunity, bonus payouts at or near target, continued focus on multiple measures for short-term incentives, shifts in weighting toward long-term incentives, and decreases in the weighting of stock options—all reflect a general attitude by today’s boards to proceed with care given the still modest pace of recovery, actively manage risk, and take the long view.

In the same way that performance among companies in the TSX 60 Index (“TSX 60”) is considered a bellwether of the overall Canadian economy, the compensation and governance practices of the TSX 60 provide an important frame of reference for Canadian companies generally. Since the end of the most recent Canadian proxy season, Hugessen Consulting has compiled data on the executive compensation practices at TSX 60 companies, with the aim of uncovering recent trends in pay levels and design.

As shareholders become more assertive, directors need to be proactively engaged and start listening. The knowledge gained will support informed decisions on pay and executive performance—and prevent a nasty AGM surprise

Aligning pay to performance in struggling mining and energy markets is hard, especially if executive pay packages are based on stock options. But there is another way.

For compensation committees and senior management involved in executive compensation decision-making, the first quarter of the year can be a stressful time. Most issuers are determining bonuses for the year just ended as well as long-term incentive grants (e.g. stock options, performance share units, etc.) and salary increases.

On January 11, 2013, the SEC approved amendments to the listing standards of the NYSE and Nasdaq, which are substantially similar to those proposed in September 2012. These amendments relate to the independence of compensation committees members, the authority of the compensation committee, and its responsibilities when retaining advisors. The listing standards implement the SEC’s final rules (Final Rules) on these matters pursuant to the Dodd Frank Act.

On January 28, 2013, the Office of the Superintendent of Financial Institutions Canada (OSFI) released its final Corporate Governance Guidelines (Guidelines). These Guidelines are substantially similar to the draft that was released for comment in August 2012, and provide an update to the original Guidelines published by OSFI in 2003. The Guidelines, which complement OSFI’s Supervisory Framework and Assessment Criteria, set out its latest governance expectations for federally-regulated financial institutions (FRFIs), with particular focus on the role of the Board, risk governance, and the role of the audit committee.

Executive compensation is a complex field. This publication aims to suggest questions for directors to ask as they review executive compensation, and also give them a basis for critically assessing the information they receive from management and external advisors. The document provides an in-depth analysis of the elements and issues involved in the design and review of a compensation program, and then provides suggested questions for directors to ask.

Shareholders and regulators are continuing to demand more of corporate boards, calling for their active and direct involvement in corporate governance. In response, boards and their committees have been re-examining their mandates, membership, internal processes and alignment with best practices. With compensation remaining a top concern for investors, regulatory bodies and the public, compensation committees in particular are being affected, with a strong call for direct involvement and accountability on executive compensation decisions. One of the greatest changes taking place is in the evolution of the role of compensation committee chair, triggering a need to rethink and document the changes, as has generally been done for the committee itself by way of its written mandate from the board.