March 26, 2018

in Executive Compensation

The Link Between Corporate Financials and CEO Compensation.

 

The Link Between Corporate Financials and CEO Compensation.

Compensation can have a very strong linkage to corporate financials. In today’s marketplace, common practice is to benchmark CEO pay against a peer group of organizations with industry classification and financial performance being the main determinants of the group’s makeup. In our experience, four distinct pay zones form around Canadian CEO pay levels.

These zones can lead to psychological barriers for many boards when finalizing annual CEO pay packages. Comfort lies in remaining in your organization’s regular zone. Stepping up to that next zone will almost always catch shareholder attention.

Many times, companies will look at ways to hold reported or “targeted” compensation consistent, while including a greater amount of leverage under the pay program, thus potentially yielding higher payouts in the years to come. Based on this, understanding the design of the pay program is just as, if not more, important than the values being reported.

 

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Figure 1

CONCENTRATED ZONE ($2M TO $5M)

This zone is where the clear majority of CEO pay practices amongst the TSX Composite are found and is more or less the pay range for a typical Canadian CEO, with roughly half of them found in this zone. Targeted annual compensation is much more consistent in this zone year after year and shareholder concerns tend to be limited at these levels.

LEADER ZONE ($9M TO $12M)

Many of the companies landing in this zone are leaders in the Canadian marketplace. Like the Concentrated zone, targeted pay in this range tends to be consistent for many of the members. The top five banks are typically found in this range.

TRANSFORMATIONAL ZONE ($15M TO $17M)

Occupants of this zone can typically be counted on one to two hands in any given year. Canadian CEOs rarely land in this zone consistently and boards tend to be cautious of compensating at this level due to associated shareholder attention. That’s why this zone is typically limited to CEOs responsible for transformational corporate performance, M&A activity, cyclical commodity trends, or other special situations.

 

THE OUTLIERS (+$20M)

The Outliers in the Canadian Market, not shown in the above image, are bound to catch the headlines and attract shareholder attention. These compensation levels are almost always related to a one-off situation — many times linked to the hiring of a new CEO. 

 

DOWNLOAD THE CANADIAN EXECUTIVE PAY TRENDS REPORT

The raw data utilized in preparing this report was provided by Equilar, the number one provider in executive data. All data was extracted from publicly disclosed documents (e.g. annual report, management-information circulars, corporate websites) as of August 2017.

You can download this comprehensive report for free below to learn more about Canadian executive pay trends. 

Are you comfortable with where your CEO’s compensation lands on the pay spectrum?

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