June 29, 2017

The CEO pay crusade

Tim Kiladze | The Globe and Mail

For a few months there, 2016’s political earthquakes seemed to signal a power shift away from the 1%. What started with the Brexit vote escalated when Donald Trump won the White House. Now, as we barrel toward an apocalypse incited by ill-advised presidential tweets, all that anti-elite anger has somehow been forgotten—and with it, any hope of a crackdown on runaway CEO pay.

Need proof this is an outrage that must be reined in? In an era of ruthless corporate cost-cutting and job losses, CEO pay on both sides of the Canada-U.S. border is astronomical. According to the Canadian Centre for Policy Alternatives, the top 100 highest-paid CEOs in Canada made, on average, $9.5 million a year in 2015. That’s 193 times the average industrial worker’s wage and a 30% increase from 2008, the start of the global financial crisis.

Take H&R REIT: CEO Tom Hofstedter won the corporate governance lottery last year when his board blessed him and fellow executives with a batch of exceptionally lucrative stock options (on top of the $78-million worth of stock he already owned). Normally, options are granted at idealistic future prices, as a reward to executives for boosting the company’s equity value. But H&R’s board issued Hofstedter’s practically at-the-money, which meant he could use them to buy shares almost right after he got them. And the timing happened to fall in late February, 2016—the same month H&R’s stock fell to its lowest level in over five years.

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Until institutional shareholders get comfortable with calling out boards and CEOs (and let’s hope they do, soon), a few structural fixes could do wonders. For starters, make say-on-pay votes binding. As of early this year, according to the Montreal-based Institute for Governance of Private and Public Organizations, 80% of large Canadian companies have embraced say-on-pay. But such votes are meaningless if boards aren’t required to act on the results—and they often don’t. (A notable exception: Barrick Gold reformed its compensation after failing say-on-pay votes twice in three years.)

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