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Across the Board talk pond

with David Anderson

David Anderson is President of the Anderson Governance Group

All the fun of the fairness

institutional 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 to appreciate 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 how they 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.

Executive pay is Exhibit A in the prosecution of capitalism gone wild.

n Canada, as in the UK, the perennial lament that executive remuneration is too high made news early in 2012. The Toronto Star reported 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 executive remuneration 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,
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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 directors into 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

About the author

David Anderson MBA PhD ICD.D is the President of the Anderson Governance Group based in Toronto. He can be reached at and +1 (416) 815 1212.