7/31/2019 Anderson on Fairness in Executive Pay - ICSA Chartered Secretary (Mar 2012)

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All the fun of the fairnessinstitutional investors more than 20 years ago,

as those investors were in search of higher

returns to cover pension obligations for an

unfavourably shifting demographic base.

Despite directors apparent lack of progress

in reining in executive remuneration, corporate

boards are taking executive remuneration

decisions far more seriously. For example,

directors spend considerably more time in

discussions on pay to understand remuneration

plan details, test a wide range of scenarios toappreciate the implications of the pay formulae,

explicitly tie pay to performance over longer

time frames, use advisors who are independent

of management, and have changed the balance

of reward away from options toward actual

stock. More recently, theres been a movement

to replace share price as the criterion for

executive performance with more organic

evidence, corporate performance, less subject

to manipulation and consistent with longer

term shareholder value creation.

Yet the reality remains that executive

remuneration is far higher than it has ever been

and the pay gap between senior management

and employees is also at its widest. As a

result the perception has arisen that executive

remuneration is fundamentally unfair.

This problem is far bigger than any one

board can solve. Yet each board must consider

the reputational consequences to the business

and the possible actions of stakeholders in

protest. In doing so, each board must weigh the

attraction and retention risks to the corporate

talent pool. But can boards be relied upon to do

this themselves? Is this a job for governments?

The best vehicle for government to address

perceived unfairness in executive remuneration,

and the resulting income inequality, is not by

imposing constraints on companies in howthey can pay people, but via the income tax

code (with higher marginal rates at top income

bands) and the corporate tax code (limiting

deductibility of pay in any form above a

threshold (e.g. an absolute value or a multiple

of average pay in a company/industry)). In such

matters, we must take care not to disadvantage

public companies over private ones.

as one of their chief responsibilities is to set

executive remuneration philosophy and make

final pay decisions. Despite institutional investor

efforts through dialogue and Say on Pay

voting schemes, executive remuneration has

continued to outpace many economic indicators

and employee wages.

While the UK implemented Say on Pay

years before we began to see Canadian and

US corporations do the same, shareholders

and various advocacy groups on this side of

the Atlantic have been vocal in their efforts to

encourage and shame boards of directorsinto reining in the perceived excesses.

The central complaint that pay is too high

has two components: the disproportionate

growth of executive over employee pay

(expanding the gap by almost an order of

magnitude in 30 years), and the disconnect

in regard to actual performance. The primary

source of this wealth explosion has been the

equity awards (options in particular) offered by

boards to entice executives to increase the share

price. The lesser exposure to equity of junior

executives and far less exposure of employees

explain the widely differing accumulated wealth

outcomes. Its instructive to recall that the push

for amped equity inducements came from

In Canada, as in the UK, the perennial

lament that executive remuneration is

too high made news early in 2012. The

Toronto Starreported with zeal that in

those first three days of the new year, some

corporate executives had already received

more than the average Canadian worker

would earn in the entire year. Was that fair?

Picking up on the news story in his popular

radio talk show, respected host (and former

executive) John Tory asked me whether

corporate boards were concerned about the

broader stakeholder perception of executiveremuneration or whether they were deaf to

the concerns being raised.

For years, institutional investors in

North America and Europe have expressed

consternation over rising executive

remuneration in public companies. Now, with

sluggish economies holding down employee

wages and adding to unemployment, average

citizens and the politicians who represent

them are speaking up, too. At a time when

the growing wealth disparity between the 1%

and the rest is getting attention, executive

remuneration seems perfect as Exhibit A in the

prosecution of capitalism gone wild.

Boards of directors are in the line of fire,

Executive pay is Exhibit A in the

prosecution of capitalism gone wild.

18 w w w . c h a r t e r e d s e c r e t a r y . n e t

Board talk

David Anderson MBA PhD ICD.D is the

President of the Anderson Governance

Group based in Toronto. He can be

reached at david.anderson@taggra.com

and +1 (416) 815 1212.

David Anderson is President of the Anderson Governance Group

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