CEOs don’t work alone: bringing the rest of the workforce into focus in decisions on executive compensation

By Delaney Greig, Manager of Engagement and Policy 

Earlier this year our proxy team shared a post about the growing inequality between the compensation received by the average working Canadian and the CEOs of our major companies. While the median worker wage grew 2.3% from 2016 to 2017, median CEO pay grew 16.7%.

The growing gap between CEO and worker compensation is exacerbated by practices commonly-used by Boards of Directors to set executive compensation, which inflate CEO pay, but have little or no link to long-term value and company sustainability. Such practices include reliance on short-term stock price as a measure for company success, benchmarking that targets executive pay above the average of its peers (which in turn leads to increases at peer companies as they benchmark compensation as well), or selecting inappropriate peer groups that do not reflect the market in which the company is competitive.

At many Canadian companies, executive compensation has become completely unmoored from the compensation paid to the rest of the workforce.

SHARE’s engagement team recently looked at the disclosure around compensation practices at companies with CEOs among the highest paid in Canada. We found that many relied heavily on low performance targets. We also found that they relied heavily on horizontal comparison with select companies, but showed little consideration of the vertical alignment of the pay structure through the company.

New CEO to median worker pay ratio disclosure requirements in the US provide an opportunity for companies to re-evaluate their overall approach to remuneration. In the UK similar disclosure will be required beginning 2019, and since 2013 Boards have been required to explain whether and how the pay and employment conditions of employees of are taken into account when determining executive compensation. These reporting requirements provide a signal from governments and regulators that inequality within a company is relevant to board discussions of compensation and to shareholder analysis, engagement, and voting in those jurisdictions.

We believe that it is relevant to the compensation discussions of Canadian boards and shareholder, as well.

Last quarter we sent letters to a number of Canadian companies asking them to take compensation, advancement and retention practices throughout the company into consideration in setting executive compensation. Our request follows the approach now required by all companies in the UK and is consistent with what shareholders are beginning to ask of US companies to supplement their pay ratio disclosures.

In the coming months we will provide more detailed analysis of our approach. Once we hear from the companies, we will report back to clients and consider next steps to ensure compensation decision making at the board-level looks at the best interest of the company and its stakeholders, including employees.

Delaney Greig is Manager of Shareholder Engagement and Policy at SHARE. You can contact her at [email protected]

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