Gluttons at the gate

Michael Sabia, BCE; Robert Prichard, Torstar; Tom Parkinson, Hydro One; Robert Nardelli, Home Depot

It was a bitterly cold February morning in Toronto just over a year ago when Gary Hawton witnessed a miracle. As CEO of Meritas Mutual Funds, a socially responsible investing company in Kitchener, Ont., he had been watching executive pay levels surge from generous to ridiculous over the last 15 years, and he’d had enough. As of 2007, the collective compensation of Canada’s 100 best-paid CEOs had crashed through the billion-dollar mark, and average individual pay packages were topping $10 million apiece. As a professional investor, Hawton knew that most CEOs were simply not worth that kind of money.

He sent letters to all the big Canadian banks asking them to allow shareholders to vote on CEO pay packages. He spoke out at shareholder meetings and talked up the issue to the press. At first, he was completely ignored. But Hawton, a former investment banker raised with strong Christian values, is a bit of a crusader. So last year, he decided to try a different strategy. He would introduce a shareholder’s motion that, if passed, would pave the way for a vote on executive pay whether the banks liked it or not. He knew it was a long shot. He knew it would take at least two years, quite a lot of money and infinite reserves of patience. He also knew that his mission would quite likely make him the financial world’s Don Quixote.

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Lone investors generally don’t stand a chance when taking on entrenched corporate directors. But lately it has begun to seem that maybe, just maybe, the executive compensation windmill was ready for a fall. As the recession drags on and real suffering sets in among working Canadians, mind-boggling pay packages for CEOs have triggered a palpable rage in the public and considerable uneasiness among the lucky few in the top tier. The Canadian Centre for Policy Alternatives recently calculated that after a bit more than a day of work, the average top-100 CEO has already earned more than the average Canadian worker will earn in a full year.

It’s not just the absolute amounts that are head-spinning, it’s the rate of increase. Between 1998 and 2007, after accounting for inflation, the average weekly wages and salaries of regular Canadian workers actually declined by a few percentage points. But real pay for the best-paid CEOs in the country exploded by about 145 per cent. By 2007, CEOs were making an incredible 259 times the pay of the average worker. “At what point does it stop making sense?” asks Hawton. “Is it really possible that someone is truly worth that amount? Is the average CEO really contributing 259 times more to the company than the average worker?”

That question was very much on his mind as Hawton sat in a ballroom at the plush Fairmont Royal York hotel in Toronto for CIBC’s 2008 annual shareholders meeting. He had a motion on the ballot asking the bank to give shareholders a non-binding say on executive pay, and if he managed to get six per cent of the shareholders to go for it, he could come back with a second motion in 2009. But when he tabled his proposal, there wasn’t exactly a groundswell of support. No other investors called to say they were onside, and CIBC’s directors made it clear they were dead set against it. “I remember sitting there and having no idea what the level of support for it would be,” Hawton says. As he waited for the results, he turned to the person next to him and nervously asked, “So, do you think we’ll get six per cent?” And then he heard a number that floored him: 45 per cent of the shareholders had supported his motion.

A year later, he flew to Vancouver for the follow-up vote at CIBC’s 2009 annual general meeting. Again, he enjoyed stunning success. A full 53 per cent of voters supported the second motion, finally allowing shareholders to have what’s called a non-binding “say on pay.” As he says, to win a motion that the board opposes is unheard of. “I can’t think of a time when I’ve seen it happen in Canada,” he says. “Ever.”

CIBC was just the first to fall in line. Within a month, every one of Canada’s big five banks had announced that they would allow say-on-pay votes—lest they be forced into it by shareholders. Since then, corporations such as TMX Group Inc. and Potash Corp. have adopted similar motions. SunLife Financial has announced it will adopt the policy soon, as has Bell Canada parent BCE. Manulife, which at first took an “over my dead body” approach to the issue, suddenly changed its mind a couple of weeks ago and will allow a vote on executive pay next year.

It’s gotten to the point where even the CEOs themselves are admitting that they make too much. For years, boards have defended their sky-high salaries by arguing that they’re based on complex formulas tied to the performance of the company. But earlier this year, the bank bosses looked around at the faces of angry shareholders and threw all that out the window, rejecting the board’s carefully engineered figures and setting their own pay at much lower levels. Dominic D’Alessandro, Manulife’s CEO, did a similar about-face just weeks ago. When critics first asked him to consider returning some of the $15-million payout he was to get for his last five months of work this year before he retires, he said, “I’m not given to self-serving gestures.” Then, just weeks ago, he suddenly changed his tune, announcing that he’ll defer 80 per cent of that pay in a scheme that could see him lose it altogether unless Manulife’s stock, which has been cut in half since last year, rebounds considerably.