Gluttons at the gate

This is vexing enough when a company is performing well, but in recent years there have been several examples in which top executives have walked away with massive payouts despite mediocre to poor results. When Michael Sabia stepped down as CEO of BCE, his plan to sell the company to private investors had fallen apart and the stock was pretty much right where it was when he took the job six years earlier. Yet he still walked away with a $21-million package. Robert Prichard is leaving Torstar next week with almost $10 million, even though the company’s stock has been cut by two-thirds under his watch. Hydro One CEO Tom Parkinson received more than $4.8 million on his way out the door, even though he left under a dark cloud following a scathing report on the company’s billing practices by Ontario’s auditor general. Just last week, the executives who sit on Ottawa’s Public Sector Pension Investment Board, which has lost billions of dollars of federal government workers’ pension money, declared that they would not rule out awarding themselves huge bonuses for their sad accomplishment.

Given that CEOs and directors make the rules, it shouldn’t come as a shock that they’ve stacked the deck in their favour. But while this used to be a problem just for shareholders, it’s increasingly becoming a problem for everyone. Many are now saying that the reckless pursuit of short-term corporate profits over the past few years—much of it fuelled by outlandish executive bonuses and stock option packages—is largely responsible for the crisis that’s crippling the global economy. At the recent G20 summit in London, the Financial Stability Forum, which includes central bankers and other major national financial authorities from around the world, delivered a stinging rebuke of the prevailing compensation culture among CEOs, and urged sweeping reforms to rein in runaway pay.

Luis Navas, who runs independent compensation advisory firm Global Governance in Toronto, says that if they’re not careful, CEOs could soon find the government getting involved. “Finally, it looks like they want to regulate the compensation process and create accountability,” he says. “They’ve actually come out with worldwide regulation regarding executive compensation, and Canada’s head of the Office of the Superintendent of Financial Institutions was part of it.” In its own formal and diplomatic way, the Financial Stability Forum expresses the very same exasperation that millions of angry workers have been expressing for years: it’s not right that CEOs can ratchet up their salary when times are good, and then keep their bonuses when times are bad. But it’s more than unjust, says the forum, it’s dangerous. After all, if you got huge bonuses when your stock went up, but lost nothing when your stock tanked, you’d bet the house every time. As the report puts it, “compensation must be symmetric with risk outcomes.” The “asymmetry of bonus practice,” it says, “encourages taking of excessive risk.”

Navas, Griggs and Hawton all agree that given the current state of economic affairs, the political and social will is finally here to make real, lasting changes to executive pay. The more difficult question is: how? The Financial Stability Forum plan is a good start, and Navas agrees with many of its recommendations. He’s particularly keen on regulating firms such as his own, which advise boards on setting executive pay. Right now, anyone can put out a shingle and start advising boards for $700 an hour, and the profession is known for its yes-men, who were famously mocked by Warren Buffett when he described the fictitious consulting firm of “Ratchet, Ratchet and Bingo” a few years ago. As Navas says, “Auditors, doctors and lawyers are monitored. So why not us?”

Ed Woolard, the former CEO of Dupont and past chair of the New York Stock Exchange’s compensation committee, also has a few ideas. In a speech to corporate directors a few years ago, he set out a blunt plan for addressing an issue that “has eroded the trust and confidence in American business leaders.” In his speech, he attacked the time-worn excuses given for lush pay packages one by one. CEO compensation is driven by competition? “Bull,” he said, arguing that directors needed to tie CEO pay to the pay rates of other executives within a company, rather than competing for higher pay with the CEOs of other firms. Compensation committees are independent? “Double bull,” he retorted, suggesting that the committees should deal only with outside consultants who are not allowed to talk to anyone at the firm, including the CEO. What got him the most riled up though, was the idea of paying CEOs huge severance packages for failing. “No one else gets paid excessively when they fail,” he said pointedly. “They get fired.”

Navas says it’s all got to come back to accountability. The simple truth is that many CEOs will set their pay as high as they can, unless someone stops them. That’s where the shareholders are supposed to come in, which is why Gary Hawton’s mission to give them a voice is so important. Hawton’s say-on-pay movement will help because, while the votes are non-binding, such votes won’t allow the boards to maintain the illusion that shareholders are okay with outlandish pay packages. In the U.K., where say-on-pay has been standard for years, Navas says the votes haven’t lowered CEO pay rates across the board, but they have helped to solve the most galling problem: bad CEOs who still reward themselves with huge bonuses.

So far, Meritas and other investment firms have managed to pressure more than a dozen big blue chip companies into allowing say-on-pay votes at shareholder meetings. Hawton’s next step, he says, is to convince the Canadian Securities Administrators to enact new regulations that would force every public company in Canada to adopt say-on-pay.

These days activist shareholders like Hawton are looking less and less like Don Quixotes, and more and more like trailblazers. Hawton says he was taught long ago that unbridled greed inevitably leads to disaster, and while that kind of thinking seemed almost heretical a few years ago, today it’s hard to argue with. Hawton still believes in capitalism, he says. He still believes in compensating executives well for a job well done, and he believes in the free market. “But there has to be balance, too. It’s not just how much money you make—it’s how you make it.”

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