Canada's top executives saw their pay soar to an average of $5.5-million last year, thanks to huge gains in stock options and generous grants under long-term compensation plans.
While the average annual salary barely budged -- at $728,949 -- total compensation more than doubled when all forms of rewards, such as option gains and restricted shares, are included, a Report on Business survey has found.
Compensation experts say the surge in total payouts is likely the beginning of a string of banner years for top executives who are now cashing in the rich option grants doled out in the late 1990s. So long as markets remain strong, Canada's top executives are in line to make hundreds of millions of dollars on option gains in the next three to five years.
"Nobody in their right mind exercised options in 2001, 2002. So guess what's happening?" said Ken Hugessen, head of the compensation practice at Mercer Human Resources Consulting. in Toronto.
Indeed, option gains were the main driver of the dramatic increase in total compensation for CEOs in 2004, a year that saw the Toronto Stock Exchange gain 14.5 per cent. Quite simply, more CEOs cashed in options -- many with eye-popping results.
Among the top 10 highest-paid executives in Canada last year, six pocketed more than $325-million from options.
More than half of that amount went to Robert Gratton, CEO of Montreal-based Power Financial Corp., and the top earner on the list. He exercised options for a gain of almost $170-million, one of the largest windfalls from options in Canadian history.
Among CEOs who cashed options, the average gain was $6.9-million last year, compared with $4.4-million in 2003. The median gain on options was $2.1-million, up 7 per cent from $1.98-million. The number of CEOs taking option gains increased by 25 per cent.
The survey also found that CEOs are sitting on millions in unexercised stock options that have a limited shelf life, an indication that more big paydays are on the way.
The average compensation for a CEO jumped 57 per cent to $5.5-million, from $3.5-million in 2003.
The median total pay for top executives was $1.8-million, up 30 per cent from $1.4-million. The average bonus rose 24 per cent to $813,716, while base salaries edged down 1 per cent to $728,949. Since all figures in the ROB survey are converted to Canadian dollars, executives paid in U.S. funds saw their pay levels hit by the rising loonie.
ROB reviewed compensation at 198 of the 225 companies that make up the S&P/TSX index. These are the firms that had filed compensation numbers by April 22. Statistics are for companies' 2004 fiscal year, so companies such as Bombardier Inc. that have already reported compensation for fiscal 2005 do not have those numbers included. Firms that have not yet reported include Rogers Communications Inc. and Biovail Corp.
Only compensation for CEOs who have held their post for two years or more are used for comparison purposes. That amounted to 161 top executives in our survey.
Canada's benchmark S&P/TSX index rose 14.5 per cent last year while profits at TSX companies were up 30 per cent, according to research by UBS Securities Canada.
This year, as in the past, we are publishing full compensation results for the top 100 CEOs. As an indication of just how much higher levels are this year, the cutoff for the top 100 is just under $2-million. Last year it was $413,000.
There was one woman on the list -- Nancy Southern, CEO of Atco Ltd. -- compared with three last year.
This year's results show that the rising pay packages of CEOs also were boosted by hefty grants of restricted share units, many of which had performance strings attached.
Manulife Financial Corp. CEO Dominic D'Alessandro received three kinds of restricted share grants, two in connection with his company's $15-billion acquisition of U.S. insurer John Hancock Financial Services Inc. One of those, valued at $4.1-million on the grant date, vests only if specific cost savings from the merger are achieved.
Unlike an option, which has no value unless the company's shares rise above a certain level, the value of RSUs mirror the value of shares.
Those who support options as an incentive that links executives' fortunes with that of shareholders say this year's large payouts represent years of work.
PetroKazakhstan Inc. CEO Bernard Isautier did not draw a base salary early in his tenure. At yesterday's annual meeting, he said his option gains reflect the company's strong performance, but he acknowledged the payoff was more than he expected. "I feel I have been very well compensated over all," he said.
Edward Johnson, general counsel for Power Financial's parent, Power Corp. of Canada, said the board's compensation committee prefers options with delayed vesting. "They figure options give the most effective alignment of the interests of management on the one hand and shareholders on the other."
"I love stock options," said Fiona Macdonald, who heads the compensation practice of Towers Perrin in Canada. She said that if the right performance hurdles are included, options "are the cleanest way to measure performance."
Others are not so sure.
David Beatty, head of the influential Canadian Coalition for Good Governance (CCGG), agreed that some CEOs, such as Power Financial's Mr. Gratton, have created "tons of value" for their shareholders, but others "are just riding on the boat" that has been lifted by overall rising market levels.
"They are giving away a lot of the company for nothing. There are other ways to reward people."
Mr. Beatty said that for the investor members of the CCGG, linking pay to performance is by far their most pressing concern. "Our top three priorities are compensation, compensation, compensation."
Bill Mackenzie, head of Institutional Shareholder Services Canada, formerly Fairvest, said it's hard to link huge option gains with individual performance. "It just means there were big grants. Whoever has options has beautiful leverage, and they are making a killing."
Claude Lamoureux, CEO of the Ontario Teachers Pension Plan, argues that options do not always reward performance. "It is very random. You could do wonderful work and not be rewarded, and you could do crappy work and make a lot of money with your options."
Compensation consultants say Canadian companies are shifting away from large option grants in favour of a combination of options and RSUs, or just RSUs alone. The ROB survey found that the number of companies handing out fresh options to their top executive fell only slightly last year, while those that issued restricted share units or some other form of long-term incentive payout rose to 23 per cent from 20 per cent in 2003.
Mr. Hugessen from Mercer predicts RSU grants that do not come with performance measures will receive increased attention from investors. Such grants ensure that executives will get some reward even if the stock declines.
That kind of certainty has made RSUs hugely popular with executives in the post-bubble market. "If you just want to get paid, these restricted stock units look awfully good," he said. "The truth of the matter is most recipients think they've died and gone to heaven."
Mr. Hugessen expects investor groups will pressure boards to be more selective about when they hand out share units, rather than just making grants a given every year for anyone "who fogs a mirror."
"It begins to feel a little like a money machine. People are hankering on to this."
As well, consultant Luis Navas believes compensation committees are continuing to use long-term rewards, such as options and share units, to give a little extra to corporate leaders who have had a mediocre year. "The board may feel they don't want to lose the CEO. They can't give the person a raise, but they feel they have to give more money," said Mr. Navas, senior vice-president of Toronto-based Executive Risk Consulting.
That's just the kind of thinking that Mr. Beatty at the CCGG wants to stop. Citing the work of Harvard law professor Lucian Bebchuk, he said many compensation decisions are based not on performance but on a desire for collegiality, a sense of loyalty to the CEO and conflict avoidance. The result, he said, has been "outrageous costs."
With a file from reporter Richard Bloom
Canada's top 10 earners
Canada's top earners in 2004 saw their base pay remain flat, but they reaped substantial gains through restricted share units and by cashing in options. The average total compensation last year was $5.5-million
$173.2-million
ROBERT GRAFTON
POWER FINANCIAL CORP.
$93.1-million
BERNARD ISAUTIER
PETROKAZAKHSTAN INC.
$76.4-million
GERRY SCHWARTZ
ONEX CORP.
$52.5-million
FRANK STRONACH
MAGNA INTERNATIONAL INC.
$21.9-million
PIERRE CHOQUETTE
METHANEX CORP.
$21-million
HUNTER HARRISON
CANADIAN NATIONAL RAIL
$19.7-million
SIEGFRIED WOLF
MAGNA INTERNATIONAL INC.
$16.3-million
DOMENIC D'ALESSANDRO
MANULIFE FINANCIAL CORP.
$14.1-million
HANK SWARTOUT
PRECISION DRILLING CORP.
$13.1-million
JOHN HUNKIN
CIBC
NOTE: AMOUNTS REPORTED IN U.S. DOLLARS HAVE BEEN CONVERTED INTO CANADIAN DOLLARS
SOURCE: COMPANY REPORTS
Cashing in on options
Option packages substantially boosted the total compensation for many executives last year.
| Name | Company | Value exercised options |
| Robert Gratton | Power Financial | $169,365,407 |
| Bernard Isautier | PetroKazakhstan | 92,621,450 |
| Gerry Schwartz | Onex | 63,941,100 |
| Pierre Choquette | Methanex | 18,599,161 |
| Alain Bouchard | Alimentation Couche-Tard | 10,744,500 |
| David Stein | CoolBrands International | 10,604,365 |
| Raymond McFeetors | Great-West Lifeco | 10,007,272 |
| Hank Swartout | Precision Drilling | 9,980,211 |
| Richard Ross | Inmet Mining | 9,883,910 |
| Dominic Gammiero | Norbord | 8,645,965 |
| Richard Smith | CoolBrands International | 8,350,678 |
| Frank Weise | Cott | 7,662,600 |
| Paul Desmarais | Power Corp. of Canada | 7,345,437 |
| William Fraser | Manitoba Telecom Services | 7,111,250 |
| James Buckee | Talisman Energy | 6,907,375 |
© The Globe and Mail
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