Deborah Baic/The Globe and Mail
Canada's biggest companies have made strides in linking CEO pay to performance, but the effort remains a work in progress in many boardrooms.
A new
[Try the tool now: Pay for performance: How Canada's CEOs stack up]/relation>
The Web-based tool plots the CEOs of Canada's 60 largest public companies on a graph, allowing users to select from seven performance criteria – including shareholder return, return on assets, return on equity and net income growth – to see how pay correlated to the company's performance for the year.
One quadrant of the graph shows companies whose CEOs are paid more than average compared to others in the S&P/TSX 60 index while their companies' performance falls below average, which "starts to show that the executives are winning and the shareholders are losing," said Paul Gryglewicz, managing partner at Global Governance Advisors.
Mr. Gryglewicz said the analysis shows that the connection between pay and performance can vary significantly, depending how performance is measured.
Telecommunications companies such as BCE Inc. and Telus Corp., for example, typically place heavy emphasis on return on capital and return on assets in their business strategy.
The analysis shows strong performance for telecom companies based on those measures in 2010 – and similarly strong links to pay. And it shows a far weaker pay-for-performance link when looking at other ways of measuring performance, such as net income growth or total shareholder return.
Alternatively, most of Canada's big banks showed strong total shareholder return and earnings-per-share growth in 2010, and pay appears linked to performance using those measures. But there is far less correlation between pay and return on assets or return on capital, which are not as emphasized for financial firms.
"It starts to highlight what becomes an important metric for a company when designing a pay package," Mr. Gryglewicz said.
Because the new pay-for-performance tool relies just on 2010 data this year, Mr. Gryglewicz said the link between pay and performance can be affected by short-term issues that boosted or reduced a company's financial performance last year.
Manulife Financial Corp., which lost $470-million last year and has been struggling to turn around its U.S. operations, shows higher-than-average CEO pay and weak performance against all performance measures used.
Alternatively, Magna International Inc., which has become well-known for high pay levels, had stronger performance in 2010 after several prior years of weaker pay-for-performance correlation. Pay appears better linked to performance in 2010, but would not have shown the same correlation in 2009 or 2008, Mr. Gryglewicz notes.
He said GGA intends to continue the analysis in future years and build longer-term data, which will show broader trends for the link between pay and performance.
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Janet McFarland