TSX: Just 10 percent of companies cut executive pay in 2020

Only around 10 percent of TSX companies issued some form of pay cut to CEOs, other executives, or their board of directors in 2020, according to research from Diligent.

And where cuts were implemented, they were minimal. ‘Using 2019 realized compensation as the basis, we find that the pay cuts issued by the companies represent only about 1 percent of total projected realized pay,’ write the study authors.

Edna Frimpong, head of research at the Diligent Institute, warns that companies should be prepared for an investor revolt this year. 

‘We expect a lot of scrutiny from investors as to why executives failed to share the pain with other stakeholders,’ she tells IR Magazine. ‘In 2020 the Investment Association issued a warning that it would expect executives to bear some of the cost of the pandemic. The Covid-19 pandemic has disrupted lots of business activities and one would expect executives to take massive pay cuts to solidarize with their investors and employees in particular but, evidently, most issuers failed to do so and for those that did, the pay cuts were found to be shallow – merely window dressing. 

‘As 2020 proxy statements are being filed, we are seeing that, as we predicted, executives’ take-home pay is still on the rise and shareholders are not likely to take that lightly. Our expectation is that there may be a greater number of revolts on remuneration reports this year.’

Across the TSX 240, pay-performance alignment is low, with Diligent reporting that 58 percent of firms have not yet aligned executive pay with company performance. But there are big differences across sectors.

‘Our analysis suggests the industry with the highest number of companies with relative alignment between pay and performance is the healthcare sector, in which more than 80 percent of companies show alignment between pay and performance,’ write the report authors. The IT sector is at the other end of the scale, at just 12.5 percent. ‘Interestingly, [the IT sector] also has the highest percentage of companies displaying misalignment,’ notes Diligent. ‘Forty percent of companies in the sector have their CEO pay ranking higher than performance on a relative basis.’

Diligent points out that there are different ways of looking at CEO pay. One is to look at disparities between total realized compensation (TRC) and total granted compensation (TGC). The study shows that publicly listed companies in the US, where CEO pay has been rising due to higher long-term incentive awards, ‘have a significant disparity between TRC and TGC.’ Disparities in Canada, however, are less noticeable.

Another way of examining CEO compensation is by looking at the pay ratio between the CEO and the average employee, note the report authors. ‘While CEOs in the US earn 400 to 500 times more than the median salary of their employees, their European counterparts earn only 10 to 30 times more.’

This information does not need to be disclosed in Canada, but Diligent notes that ‘CEOs in the consumer discretionary sector in Canada earn more than the average of their peers in the rest of the other countries [studied] for both TGC and TRC. For all other sectors, Canada’s average CEO pay is relatively lower.’

Although the study focuses on 2020, ‘as stakeholders question whether executives are sharing the pain of the pandemic with the rest of their employees’, it also looks further back, uncovering an interesting finding from Canada’s 2018 slowdown.

‘A key takeaway we see from the analysis is the growth between the 2018 total shareholder return (TSR) and the 2019 TSR of the TSX 240,’ says Diligent. In 2018 Diligent notes a big drop in TSR, due to a major fourth quarter slowdown in the Canadian economy before a rebound. From 2018 to 2019, though the TSR in the TSX 240 grew by 31 percent, TGC dropped by 9 percent. Average TRC increased by 6 percent from 2018 to 2019.’