All Business

PADDING THE PAY PACKET

CEOs are doing more to earn their cheques, but many are still overpaid

STEVE MAICH April 11 2005
All Business

PADDING THE PAY PACKET

CEOs are doing more to earn their cheques, but many are still overpaid

STEVE MAICH April 11 2005

PADDING THE PAY PACKET

CEOs are doing more to earn their cheques, but many are still overpaid

All Business

STEVE MAICH

SHAREHOLDERS BE GLAD, your grumbling has been heard in the halls of corporate Canada. No longer are executives free to feast on fat paycheques and stacks of stock options while lowly investors are left to nibble on table scraps. According to a new study by consulting firm Watson Wyatt, most top executives today are being paid according to the quality of their work and the returns they produce for the shareholders. Woo-hoo.

Now, you might think this is no big deal. Wouldn’t it be obvious that CEOs who perform better should get paid better? After all, business is supposed to operate as a

meritocracy, or at least approximate one, right? Pay-for-performance is a fundamental part of capitalism—everybody from commissioned sales staff to pro golfers live and die by this principle—so it goes without saying it should apply as much to the executive class as it does to the rest of us.

But in Canada’s cozy corporate circles, where even small governance victories are cause for celebration, Watson Wyatt’s revelation qualifies as a major breakthrough. “The unyielding focus on executive compensation practices in Canada has prompted many boards to tighten the links between executive pay levels and corporate performance,” the report says. As a result, execs who produced stellar returns in 2003 got paid more than those who did not. All that whinging from activist fund managers has finally started to pay off. Score one for the unyielding forces of shareholder accountability.

But alas, not everybody is ready to jump on board the pay-forperformance bandwagon, and progress shouldn’t be confused with success. There are still more than a few companies with a loose grasp on the purse strings when it comes time to dole out goodies for the guys in the executive suite.

The pay-for-performance principle hasn’t taken hold at CoolBrands International, for example. The Canadian maker of such frozen desserts as Eskimo Pie took an abrupt nosedive last August when it lost a key contract. Shareholders sustained a 42 per cent loss in fiscal 2004, and the stock has yet to recover. But the company’s co-chief executive, David Stein, picked up a 50-per-cent hike in his base pay anyway, thanks to a contract signed

in 2003 which includes automatic raises every year until 2013. He also took home his customary annual bonus, plus $ 10.6million in stock-option proceeds. That’s a pretty good windfall for presiding over one of the worst years in the company’s history.

Now, if you’re hoping to give executives incentives to perform, negotiating 10 years of pay raises in advance doesn’t seem like the best way to do it, but Stein’s haul looks positively paltry next to the outsized payments handed out to some other struggling execs of late. Generally, it’s not the salaries that raise questions, it’s the bonuses. Remember the traditional meaning of the word bonus? To most of us, it suggests a reward for some sort of special achievement, but not in today’s corporate world. In Watson Wyatt’s survey,

82 per cent of companies paid a bonus to their CEO in 2003. If that many corporate leaders are exceeding expectations, maybe it’s time to raise the standards just a smidge.

I was griping about this recently over dinner with a friend who is a consultant with a prestigious New York firm. He smiled and patiently explained that “everybody knows” bonuses aren’t really bonuses. They’re a part of an executive’s salary, companies just call them bonuses for tax purposes, he said.

Of course, my friend is right. I have a habit of clinging to naive ideals. For instance, I tend to assume that a salary is a salary, perks are

COMPANIES in North America have long since adopted the belief that CEOs deserve a bonus as long as they show up to work and avoid burning down headquarters

perks and a bonus ought to be earned. That’s why he lives in a lovely Manhattan apartment and I. . . well... I don’t. He’s also right about the new consensus on compensation in the business world. Most companies in North America long ago adopted the position that executives are worthy of a yearly cash prize as long as they show up for work and avoid burning down headquarters.

Last year, Royal Bank of Canada suffered its first decline in annual profit in five years. It was plagued by problems in its U.S. mortgage business and required a $322-million restructuring. But RBC’s board gave chief executive Gordon Nixon a $1.8-million bonus anyway, because he “reassessed RBC’s strategic positioning,” “redesigned RBC’s operating model,” posted “solid performances” in some businesses and “satisfactory performances” in others. Solid? Satisfactory? This warrants a $ 1.8-million thankyou card? Sure, Nixon’s bonus for 2004 was down from the year before. But that isn’t penance, it’s just a smaller piece of cake.

These are not isolated cases of excess. Even Galen Weston, as well-respected a guy as you’ll find in Canada’s business community, took a $700,000 bonus last year although profit at his company, George Weston Ltd., plunged 46 per cent.

Thankfully, there are some execs who seem to consider the automatic bonus game a little unseemly. Michael Sabia, chief executive of BCE, declined his $1.5-million bonus for 2004. The company was plagued by billing problems and the stock went nowhere, so Sabia clearly did the right thing. But you have to wonder why the board saw fit to reward him in the first place. BCE lauded Sabia for leading successful labour negotiations and making progress moving to a new Internet-based technology. I’ll leave it to you to figure out how that qualifies as performance beyond the call of duty. Hfl

Read Steve Maich’s weblog, “All Business,” at www.macleans.ca/allbusiness