Michael Byers





For a few months there, 2016's political earthquakes seemed to signal a power shift away from the 1%. What started with the Brexit vote escalated when Donald Trump won the White House. Now, as we barrel toward an apocalypse incited by ill-advised presidential tweets, all that anti-elite anger has somehow been forgotten—and with it, any hope of a crackdown on runaway CEO pay.



Need proof this is an outrage that must be reined in? In an era of ruthless corporate cost-cutting and job losses, CEO pay on both sides of the Canada-U.S. border is astronomical. According to the Canadian Centre for Policy Alternatives, the top 100 highest-paid CEOs in Canada made, on average, $9.5 million a year in 2015. That's 193 times the average industrial worker's wage and a 30% increase from 2008, the start of the global financial crisis.

Take H&R REIT: CEO Tom Hofstedter won the corporate governance lottery last year when his board blessed him and fellow executives with a batch of exceptionally lucrative stock options (on top of the $78-million worth of stock he already owned). In a perfect world, options are granted at idealistic future prices, as a reward to executives for boosting the company's equity value. But H&R's board issued Hofstedter's practically at-the-money, which meant he could use them to buy shares almost right after he got them. And the timing happened to fall in late February, 2016—the same month H&R's stock fell to its lowest level in over five years.

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The stock rebounded in a flash, and by the end of 2016, the total options package for five executives was worth roughly $21 million. Hofstedter's take amounted to $11.8 million. Not a bad annual bonus, especially given H&R's lacklustre performance.

It goes on. In March, Bombardier's board had the audacity to pay the top five executives and executive chairman $32.6 million (U.S.) in 2016—a one-year increase of almost 50%—even though the fallen aerospace angel is now effectively a ward of the state. In the U.S., Westinghouse Electric disclosed in May that it awarded its former chairman and CEO $19 million (U.S.) last year—right before the nuclear power giant filed for bankruptcy.

In a perfect world, corporate directors and chief executives themselves would rally around the outrageous pay issue the way they've come together to save the Paris Agreement on climate change. But let's be honest: Executives who stand to make millions in bonuses and other perks probably aren't going to be the ones to call for a reduction in their own compensation. For one thing, pay packages are deeply personal, serving as a measure of worth, so psychological issues flare up pretty quickly. You can blame the cult of the all-star CEO for that (thanks a lot, Jack Welch).

Unfortunately, average investors are largely powerless here. And unless a truly flagrant foul hits the front page, chances are they don't even know how much CEO X gets paid, since pay disclosure is so unbelievably complicated to navigate, with the really egregious stuff—like one-time bonuses and departure packages—often buried in dense footnotes.

Institutional shareholders have considerably more pull. In May, soon after some of Canada's large pension funds (including the Caisse and CPPIB) came out against the Bombardier pay hikes, the board revamped its compensation scheme, and Beaudoin stepped back from his management role. At H&R, the board reportedly committed to changes after large funds voiced their anger in private. The REIT promised to institute an annual say-on-pay vote, install new independent directors and give the board the right to claw back more pay. (Notably, though, that last rule is forward-looking; Hofstedter's lucrative options aren't getting returned.)

The problem in Canada is that large shareholders are usually too polite (or timid) to speak up. Even in the case of Bombardier—whose pay proposal was one of the most outlandish in memory—the pension funds' statements were bland. If it weren't for a public uproar in Quebec, they might not have had any impact at all. It fell to the retired head of the Ontario Teachers' Pension Plan, Jim Leech—finally free from corporate restraint—to speak candidly. "It is unconscionable," Leech tweeted, "that the Beaudoin family would take any $ (salary, fees or dividends) out of Bombardier before taxpayers are reimbursed."

Until institutional shareholders get comfortable with calling out boards and CEOs (and let's hope they do, soon), a few structural fixes could do wonders. For starters, make say-on-pay votes binding. As of early this year, according to the Montreal-based Institute for Governance of Private and Public Organizations, 80% of large Canadian companies have embraced say-on-pay. But such votes are meaningless if boards aren't required to act on the results—and they often don't. (A notable exception: Barrick Gold reformed its compensation after failing say-on-pay votes twice in three years.)

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Radically simplifying pay disclosures would also make it far easier for investors to figure out just how much top brass are making. Or here's an even more audacious suggestion: How about we rip up the current model for pay packages all together? Get rid of the dizzying mix of cash, restricted share units, options, "non-equity incentives" and pension contributions, and limit executive compensation to cash only, with bonuses reserved for truly spectacular performance.

Ask the board of just about any publicly traded company and they'll say that the point of all those compensatory perks is to align management's objectives with those of shareholders. But plenty of research suggests these variables can do the opposite.

One study by behavioural economist Dan Ariely and others found that while incentives do indeed improve motivation, if they are too high, people tend to choke under pressure, leading to worse performance. Others have pointed out that CEO compensation is almost never indexed, so all oil executives see their pay soar when the price of oil goes up, whether they're leading their companies effectively or not.

Even CI Financial chairman Bill Holland has said the current model is broken, noting that it's too easy to game a complex and obscure system. "The formulas keep changing to be beneficial to whatever the changing times are." For proof, look no further than H&R REIT.