The answer lies in the details of their pay programs, Global Governance Advisors says
Behind a strong provincial economy, 2023 saw increased compensation in executive suites, with a median increase of over 10 per cent in total compensation.
While this was fuelled largely by higher salaries and higher cash bonuses in the energy sector, some other industries also reported sharp increases in the value of long-term incentives granted.
Global Governance Advisors (GGA) worked with Postmedia again this year to examine executive compensation, this time expanding beyond the borders of Calgary to include Alberta’s top 100 publicly traded companies.
While market capitalization was generally up in 12 of 18 sectors, GGA found the energy sector’s performance was flat (plus two per cent in Energy Services and minus two per cent in Oil, Gas & Consumable Fuels). The bright spot was Gas Utilities which jumped 24.5 per cent.
Inquiring minds, or at least investors with skin in the energy game, should be asking ‘why were executive cash bonuses up if share price performance was flat?’ The answer lies in the details of their pay programs.
Most investors understand three key elements make up total compensation packages for executives: salary, bonus and equity-based awards (stock options and/or share unit awards). Additionally, they understand and expect there should be a strong link between pay and company performance.
But some complexity enters the picture based on what is referred to as “pay mix” (how much weight is given to each pay element) and timing.
With a snapshot in time like we have summarized in our study, the only fixed portion of a typical CEO’s pay is base salary, which comprises only 10 to 25 per cent of their total compensation. The remainder is ‘at risk’ and is only paid out if company performance warrants it.
While the pay-performance linkage has been strengthened in recent years, even more interesting are the performance criteria that determine whether or not those huge at-risk portions are realized by the executive.
While metrics like safety have been included in executive performance scorecards for years, well-governed Alberta companies are now linking pay to non-financial metrics such as diversity, equity and inclusion (DEI) improvements and environmental, social and governance (ESG) initiatives.
Large investment funds are putting their money where their mouths are by refusing to invest in companies that do not include and link CEO pay to issues that are becoming more important to their investors.
The other key factor for the perception of pay-performance differences in any one year is the difference in timing of the payouts.
In short, salary is right now; bonus was for last year’s results and equity-based award granted this spring will be eligible to payout (if specific performance is achieved), some time in the next three to five years for most plans.
The upshot is that at any single point in time an executive has multiple short and long-term pay elements that are affected by their decisions and actions. This has been designed to create balanced, fiscally and socially responsible decisions that create long-term value and sustainability for their organization.
While executive will not be worrying where their next meal is coming from, their compensation is now more complex, but set for the right reasons.
Arden Dalik and Peter Landers are senior partners at Global Governance Advisors