Women Get On Board Inc. (WGOB) is a member-based company that connects, promotes and empowers women to corporate boards.
On June 8, WGOB hosted the final part of their three-part WGOB Speaker Series on Stakeholder Incentives & Director Compensation Trends for 2023, sponsored Southlea Group. The discussion focused on exploring Southlea Group’s findings from reviewing the S&P/TSX60 company pay levels and pay practices annual analysis and discussing key trends and predictions for the future of executive pay.
To kick off the conversation, Deborah Rosati, FCPA, FCA, ICD.D, GCB.D, CCB.D, Founder & CEO, WGOB, introduced the speakers:
Trends in executive compensation
Ryan opened the conversation by reflecting on the trends in Canadian executive compensation from the past two years. The analysis was based on Southlea Group’s research, which utilized disclosure from a sample of TSX 60 companies.
CEO and CFO compensation
According to the research, pay year-over-year for CEOs was up 12 percent in 2022 compared to 2021, while pay for CFOs in the sample was up three percent in the same time period. The increase rates have declined from the previous year, primarily because the 2021 numbers reflected the effects of companies emerging from the pandemic.
Ryan noted that the variation in pay for executives between companies is quite wide, and he attributed the discrepancies to differences in size, industry and complexity. He also highlighted that although bonuses decreased year-over-year, salaries and long-term incentives increased overall pay increases.
In 2022, there continued to be a focus on a mix of financial and non-financial measures within compensation programs, with profit forming the highest weighting for short-term incentives—at close to 50 percent prevalence among companies. For long-term incentives, stock options account for around 20 to 30 percent of the overall mix, and there has been an increasing focus on performance share units.
“Despite the mixed perceptions around the usage of stock options, they still remain highly prevalent, at over 60 percent of the large-cap companies,” explained Ryan.
ESG in Incentives
“ESG is a hot issue, coming up around boardroom tables across the country,” said Ryan.
The research shows that close to 65 percent of TSX 60 companies include ESG metrics in their compensation design, and that proportion has remained consistent year-over-year. Globally, the prevalence is much higher, with more than 80 percent of companies including the measures in their pay programs.
There are a range of methods for including the metrics within executive compensation. Within the TSX 60 companies analyzed by Southlea Group, 61 percent used standalone metrics, 71 percent included ESG within their scorecard, and 39 percent measured the executive’s individual ESG responsibilities. Environmental measures were the most common, but social metrics were also prevalent. Governance metrics were included in a small portion of compensation plans.
“Say on Pay”
Ryan outlined the current tracking on “say on pay” votes in Canada and the U.S. from 2021 to 2023. The numbers revealed that most companies received more than 80 percent support in their “say on pay” votes, and that average has risen slightly in 2023.
“What we’re seeing thus far is overwhelming continued support for executive pay designs in Canada,” said Ryan.
The future of executive compensation
Following the analysis, Ryan turned over the conversation to Amanda and Dawn for a fireside chat on executive compensation trends and best practices. As an experienced board member and executive at some of Canada’s largest publicly-traded companies, Dawn brought immense knowledge and expertise to the discussion.
The first topic the pair discussed was executive recruitment. How tough is it to recruit executives right now, and how is that challenge affecting compensation?
“The U.S. has been much tougher to recruit in,” said Dawn candidly. “Canada is still highly competitive, but in the U.S., we have seen this aggressive swing in compensation when you’re trying to go after real talent at an executive level.”
Similarly, companies are becoming more aggressive in their retention efforts. The result? Increased compensation rates across the board.
A silver lining of this trend is that there has been a dramatic increase in the pursuit of women executive talent across North America.
“If you are a highly talented female in the North American market today, you can almost write your own ticket,” said Dawn.
Seeing this shift happening at the executive level, Dawn noted that it’s more important than ever to ensure that talented women—particularly talented minority women—are not being blocked in their career moves. She said that boards should be thinking about how their company can accelerate the advancement of women leaders, shift the company culture to better support women and stay in touch with what’s really going on within the organization when it comes to gender equity.
Overall, Dawn observed that executive recruitment and compensation issues could be largely solved by better nurturing talent internally.
“We have got to, as organizations, do a much better job of grooming people inside the company. When you lose someone who has three, five, or seven years of really good experience because they walk out to go somewhere else, no amount of money replaces that internal knowledge, talent, and history at the company,” said Dawn.
Later in the conversation, Amanda asked Dawn more specifically how boards could improve compensation structures. Dawn’s response? Simplification is needed. Compensation design is often too complicated, and it’s important to simplify it to clarify incentives to drive your desired behaviour. She also noted that consistency is essential. After all, if you constantly change your incentive structure, it’s akin to constantly changing your corporate strategy.
When it comes to ESG incentives, Amanda and Dawn agreed that they should be placed within long-term incentives since most ESG outcomes take years to complete. They also highlighted that ESG incentives should be specific and directly linked to the company’s strategy.
“It’s important that you think through your ESG metrics and how well you know them, understand them and measure them,” said Amanda.
Over the past three years, new trends have emerged in executive compensation, including increased competition for executive talent, ESG metrics, and changes in the design of short- and long-term incentive structures. Experienced and aspiring board members should keep an eye on these trends and how they will shape board strategy in the years to come.
Interested in learning more about building a more inclusive board? Join us for our next WGOB Speaker Series (virtual) on September 14, 2023, which will explore what boards need to consider to ensure that diverse voices and perspectives are meaningfully contributing to decision-making. Register here.