Up-front on pay

Jan 20, 2009
<p>Canada&rsquo;s new pay disclosure rules take effect January 1. Compensation discussion and analysis follows US model.</p>

Oil giant Nexen calculates that one entire ‘person-year’ will end up being devoted to complying with Canada’s new executive compensation disclosure rules. At the heart of the Herculean process is a narrative of the company’s compensation philosophy: the compensation discussion and analysis (CD&A). Its drafting and dissemination bring together a wide range of resources, not least the IR department, in which the job of explaining how compensation programs support corporate objectives should ultimately land.

Say on pay

‘We’d like to see shareholders able to do something with this information other than just read it.’ – Laura O’Neill, director of law and policy, the Shareholder Association for Research and Education (SHARE)

While some investors may applaud the breadth of contextual information now required, others bemoan their feeble options. Accordingly, for the second consecutive year, SHARE is helping Meritas Mutual Funds with say-on-pay proposals at eight Canadian companies. Last year’s campaign requesting the adoption of a non-binding vote on executive pay achieved spectacular support of 40 percent or more. O’Neill says such feedback would force companies to provide clear and comprehensive disclosure. ‘If it’s confusing and nonsensical, companies face a negative vote from shareholders,’ she explains.

The Canadian Coalition for Good Governance (CCGG) is, for now, taking a different tack. ‘We feel the better strategy is to have direct one-on-one engagement with boards about our concerns,’ says Paul Schneider, CCGG’s director of research. ‘Only if those activities don’t result in the kinds of changes we are looking for would we want to begin thinking about supporting advisory say-on-pay votes.’

Plain, elegant, eloquent

‘Simply put, those who profit disproportionately to the value they create for stockholders and society, or the value they provide to clients, are breaking faith with all who would do business with them, and all who would risk their hard-earned savings in the future of an enterprise.’ – IBM circular

‘Your disclosure says who you are,’ notes Catherine Gordon, president of SimpleLogic, a Toronto-based firm specializing in plain-language writing. ‘Lawyers have traditionally felt putting things in layman’s terms compromises interpretation, but clarity is now mandated.’ She adds that while IROs can expect resistance from HR and legal departments, their involvement in the CD&A offers the chance to do what they do best.

Advise and disseminate

‘Ever since I was a boy I have wished to write a discourse on compensation.’ – Ralph Waldo Emerson, Essay on compensation

Companies must consider the investor reaction to the CD&A; executive pay is a subject of acute investor concern. ‘IR people must communicate what their board is trying to achieve with the compensation structure,’ says Stephen Griggs, executive director of the Canadian Coalition for Good Governance (CCGG).

‘They should try to understand what the compensation plans are trying to achieve and the shareholder reaction to them. If the CD&A raises more questions for shareholders than it answers, that would be an issue for shareholders, and for investor relations.’

Truth be told

‘Companies can better control their litigation risk if they present material information in plain English.’ – Christopher Cox, SEC chairman

At Calgary-based power company TransAlta, the CD&A is drafted by the head of HR, the corporate secretary and outside counsel. IR’s key input is helping to gather information on peer group companies. ‘IROs are very attuned to a variety of trading comparables and competitors,’ says Jennifer Pierce, vice president of communications and IR at TransAlta.

IR’s next job is to articulate the alignment of corporate objectives with executive pay. ‘Firms that can’t show a clear line between performance and executive compensation are more likely to see investor backlash,’ says Pierce.

Less is more

‘He is richest who is content with the least.’ – Socrates

The new rules dramatically increase the volume and complexity of information provided to the market. Some are concerned the avalanche of data will bury the truth. ‘We’re getting data when we need information,’ contends Joan Reekie, an accountant among the Canadian Securities Administrators’ comment crowd. ‘It’s not meant to be informative; it’s meant to swamp you. What we need is information – all this data boiled down to one line in the financials.’

Helpful hints

‘The Canadian Coalition for Good Governance (CCGG) believes the requirement for full disclosure of executive compensation will aid some boards to recognize the enormity of certain compensation packages and take action to reduce them before they become public.’ – 2007 CCGG submission to Canadian Securities Administrators (CSA)

Former CIRI president Ian Bacque says the new CD&A rules ‘indicate the growing importance placed on IR as investors want to ensure compensation packages are reasonable and tied to performance.’

‘The compensation schemes at Lehman Brothers, among others, encouraged executives to take risks they should not have,’ Paul Schneider, CCGG’s director of research, told an audience of governance aficionados in Vancouver. ‘Does your compensation regime promote risky behavior?’

Governance advisor RiskMetrics’ 2009 proxy voting policies also take aim at executive pay, recommending shareholders withhold votes from members of board compensation committees at firms engaging in ‘unacceptable’ pay practices. While continuing to support advisory votes on pay in Canada, RiskMetrics is revising its pay-for-performance policy to measure relative total shareholder return.

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