Increased calls for companies to justify executive salaries leads to raises for top performers while low performers stay the same
Canadian organizations are responding to increasing pressure from shareholders and regulatory bodies to align executive compensation to corporate performance and shareholder returns, a recent survey found.
The annual Watson Wyatt CEO Compensation Practices in the S&P/TSX Composite Index study examines a number of emerging trends in executive compensation and disclosure requirements.
“Our study clearly demonstrates that the pay-for-performance philosophy is taking hold and companies are making strides in aligning CEO compensation to corporate performance,” said Ray Murrill, executive compensation practice leader in Watson Wyatt’s human capital group.
The Watson Wyatt study reveals that companies whose CEOs earned above-median increases in their total cash compensation (TCC = base salary + bonus) delivered a robust median total return to shareholders (TRS) of 19.4 per cent. This compares to a median TRS of 8.6 per cent for their counterparts who earned below-median TCC increases.
Despite a lack of significant fluctuations in the median compensation levels at companies examined, high-performing CEOs received significantly higher compensation rewards compared to previous years.
Of the 219 companies included in the study sample, high-performing CEOs received 31 per cent more TCC in 2004 than the previous year. This equates to almost four times as much total actual compensation as low-performing CEOs. All compensation measures for low-performing CEOs either decreased or were flat.
Changes in CEO pay in 2004 - broken down by high performers (75th percentile), median performers (50th percentile) and low performers (25th percentile) - are summarized below:
“While a great deal of progress has been made towards increasing accountability for compensation and performance, we believe corporate boards and directors will become even more diligent in their calls for pay-for-performance measures,” said Graham Dodd, national practice leader, human capital group, Watson Wyatt.
“The key to making executive pay work is to set high but achievable performance goals and then reward those executives who attain them through significant long-term incentives and bonuses. The ‘malaise’ around pay-for-performance is linked to executives who fail to increase shareholder value, and who are still rewarded with rich compensation packages.”
High Stock Ownership May Lead to Enhanced Performance
The study found that companies whose executives have real share ownership tend to outperform those that do not. The 103 companies that awarded above-median stock ownership had a one-year median TRS of 21.6 per cent and a three-year median TRS of 18.8 per cent. The comparative TRS values of the 103 companies whose CEOs had below-median stock ownership were 8.8 per cent and 10.7 per cent respectively.
Further Disclosure Requirements Expected as Regulations Evolve
Significant lobbying efforts for increased disclosure have led to the introduction of new governance guidelines and disclosure requirements from the Canadian Securities Administrators (CSA) regarding executive compensation levels, as well as new guidelines to disclose the link between executive pay arrangements and company performance from the Canadian Coalition for Good Governance.
“Increased governance and disclosure requirements in response to the changing business environment and mounting pressure from shareholders are shaping the new face of executive compensation,” said Dodd. “While it is evident from our study that compensation is being aligned with organizational performance, it is crucial for companies to review the effectiveness and transparency of their compensation packages to ensure these arrangements deliver true pay-for-performance.”
Watson Wyatt Worldwide is a global human capital and financial management consulting firm specializing in employee benefits, human capital strategies, technology solutions, and insurance and financial com services and has 6,000 associates in 30 countries. For more information, visit www.watsonwyatt.com/canada.
The annual Watson Wyatt CEO Compensation Practices in the S&P/TSX Composite Index study examines a number of emerging trends in executive compensation and disclosure requirements.
“Our study clearly demonstrates that the pay-for-performance philosophy is taking hold and companies are making strides in aligning CEO compensation to corporate performance,” said Ray Murrill, executive compensation practice leader in Watson Wyatt’s human capital group.
The Watson Wyatt study reveals that companies whose CEOs earned above-median increases in their total cash compensation (TCC = base salary + bonus) delivered a robust median total return to shareholders (TRS) of 19.4 per cent. This compares to a median TRS of 8.6 per cent for their counterparts who earned below-median TCC increases.
Despite a lack of significant fluctuations in the median compensation levels at companies examined, high-performing CEOs received significantly higher compensation rewards compared to previous years.
Of the 219 companies included in the study sample, high-performing CEOs received 31 per cent more TCC in 2004 than the previous year. This equates to almost four times as much total actual compensation as low-performing CEOs. All compensation measures for low-performing CEOs either decreased or were flat.
Changes in CEO pay in 2004 - broken down by high performers (75th percentile), median performers (50th percentile) and low performers (25th percentile) - are summarized below:
| Percentage Change in CEO Pay 2004 vs. 2003 | |||
| How CEOs Were Paid in 2004 | 25th Percentile | 50th Percentile | 75th Percentile |
| Median Base Salary $656,000 | 0% | 6% | 13% |
| Median Annual Incentives $494,000 | -9% | 8% | 45% |
| Median Total Cash Compensation $1,142,000 | 0% | 11% | 31% |
| Median Long-term Incentive Present Values $663,000 | -56% | -5% | 62% |
| Total Direct Compensation $1,999,000 | -15% | 8% | 45% |
“While a great deal of progress has been made towards increasing accountability for compensation and performance, we believe corporate boards and directors will become even more diligent in their calls for pay-for-performance measures,” said Graham Dodd, national practice leader, human capital group, Watson Wyatt.
“The key to making executive pay work is to set high but achievable performance goals and then reward those executives who attain them through significant long-term incentives and bonuses. The ‘malaise’ around pay-for-performance is linked to executives who fail to increase shareholder value, and who are still rewarded with rich compensation packages.”
High Stock Ownership May Lead to Enhanced Performance
The study found that companies whose executives have real share ownership tend to outperform those that do not. The 103 companies that awarded above-median stock ownership had a one-year median TRS of 21.6 per cent and a three-year median TRS of 18.8 per cent. The comparative TRS values of the 103 companies whose CEOs had below-median stock ownership were 8.8 per cent and 10.7 per cent respectively.
Further Disclosure Requirements Expected as Regulations Evolve
Significant lobbying efforts for increased disclosure have led to the introduction of new governance guidelines and disclosure requirements from the Canadian Securities Administrators (CSA) regarding executive compensation levels, as well as new guidelines to disclose the link between executive pay arrangements and company performance from the Canadian Coalition for Good Governance.
“Increased governance and disclosure requirements in response to the changing business environment and mounting pressure from shareholders are shaping the new face of executive compensation,” said Dodd. “While it is evident from our study that compensation is being aligned with organizational performance, it is crucial for companies to review the effectiveness and transparency of their compensation packages to ensure these arrangements deliver true pay-for-performance.”
Watson Wyatt Worldwide is a global human capital and financial management consulting firm specializing in employee benefits, human capital strategies, technology solutions, and insurance and financial com services and has 6,000 associates in 30 countries. For more information, visit www.watsonwyatt.com/canada.
