COVER

Called to account

Investors must demand more bang for the buck from CEOs

STEPHEN JARISLOWSKY May 9 1994
COVER

Called to account

Investors must demand more bang for the buck from CEOs

STEPHEN JARISLOWSKY May 9 1994

Called to account

COVER

STEPHEN JARISLOWSKY

Investors must demand more bang for the buck from CEOs

Shareholders take risks, but it more and more appears that CEOs do not. Look at executive compensation and concentration on the CEO. Corporate documents now clearly show that base salaries do not decline in tough years when lower earnings hit shareholders. Many companies with huge losses still manage to pay hefty bonuses to the CEO.

Pension plans are increasingly lavish—and besides, there are nice stock options that allow CEOs to get leverage on well over $1 million or $2 million of market value.

Stephen Jarislowsky is chairman and chief executive officer of one of Canada ’s largest independent managers of pension fund assets, Jarislowsky, Fraser & Co. Ltd. of Montreal. The company had $11.6 billion under management in 1993. His critique of executive pay:

Moreover, where shares are purchased with company loans, these frequently require either no or puny interest. And if the shares are depressed, as is the case with the Toronto-based Edper Group, shareholders shoulder the burden as the executive loans are forgiven.

What risk does the CEO take? If the company is taken over, he normally has a “golden parachute” or a long-term contract, or both. If he is fired, he gets a handsome “golden handshake.” More often than not, his total pay packg age is out of line with that of the | next four officers in the hieraræ chy. So much for a team feeling! o How would you like to work like § a dog and have your boss paid u three times what you get? But what disturbs me most is that CEOs use shareholders’ money to take risks, while they run no material personal financial risk themselves.

When a CEO wants more money, he hires a consultant who claims that to attract a good CEO you must be “competitive.” Thus, a company that does not even earn the 10-year government bond rate of return on its money can end up paying its CEO as much as a firm that earns an 18-per-cent return and has a net aftertax return 10 times higher. When things go badly, incentives are increased on the theory that to do otherwise would hurt morale, and people have to work harder in poor times. CEO compensations are highly complex, mainly because of the consultants—who get high fees to report what the CEO wants to hear.

Most board members do little to discourage this trend. Full disclosure of salaries, furthermore, encourages CEOs to ask for a catchup where they feel that they are underpaid relative to their peers. Rarely does anyone admit to being overpaid. Very few board mem-

bers, in my experience, argue for the shareholder, especially not those who are CEOs elsewhere or are keen to remain on the board. The number of directors who are truly trying to maximize the shareholders’ part of the pie are few and far between and, as in my case, are frequently outvoted.

How do I feel CEOs should be compensated? I believe well, but only when the company earns a good return for the shareholders. Thus, I see no reason for an excessive base salary, no more than I like to see excessive dividends. Once a fair return, say the return of a 10-year government bond plus four per cent for risk, is earned by the entire company, a bonus

should be paid to the CEO. If he can reach a premium of eight per cent, the bonus should be doubled. I would like to see this bonus, net of tax, be applied to share purchases at market value. And I would like these shares to be nonsalable for at least three years.

A CEO should also get only an initial stock option on becoming CEO, an option he can only exercise five years later. After the initial option, the gain in shares purchased with bonuses becomes the executives’ main incentive. That way, if a CEO lives on the base salary, he or she will also set an example to others in the company. That base salary should rise with inflation and with demonstrated leadership based on long-term results.

What is needed is to have more directors

who either represent large shareholdings and/or are required to have large shareholdings themselves—not people with no or only minor holdings. I have made it a point to own large amounts of shares of almost every company on whose board I sit. Also, I believe that CEO compensation should be far closer to that of the other top executives in the company— not head and shoulders above the crowd.

It is time that shareholders and their representatives address the North American problem of excessive arrogation of their assets by CEOs and slavish boards of directors. It is time that CEOs truly share the risks of the shareholders rather than remain insulated from them. If our companies are to be run entrepreneurially, it is time that our boards and CEOs share that experience and set that example. □