March 20, 2003 Peter Saulnier,Corporate Governance and Executive Compensation,Current Compensation Committee and Executive Compensation Issues,2,Executive Compensation is in a State of Flux,Institutional Investor Activism,NYSE & NASDAQ Listing Requirements,Stock Option Accounting,New U.S. Governance Legislation,Loss of Investor Confidence,Uncertain Economy,Executive Compensation,3,Some of the Governance Concerns that have been Expressed:,Executive Pay: Not linked to performance Escalating ratio of executive compensation to the pay of other managers, workers What is a CEO worth? Executive loans Stock Options: Absence of accounting charge has facilitated excess use of options Equivalent cash value of a stock option to an executive is less than its economic cost to the company A rising tide floats all boats,4,Governance Concerns (Contd),In the Boardroom: The culture of most Boardrooms makes it easier to go along with Managements requests than to reject or reduce them Compensation consultants are usually not independent of management Improper use/overuse of compensation surveys cause a “ratcheting” effect in executive compensation Many compensation committees lack the experience necessary to analyze complex proposals and to develop informed opinions, pro or con,5,Meanwhile, Company CEOs also Have Concerns,Impact of new legislation and standards on governance and day-to-day operations Articulating corporate strategy in shareholder terms, with more Board involvement Achievement of financial results in an uncertain environment Shortened careersproduce or else Attraction, motivation and retention of key executive talent Cash compensation vs. equity incentives Other issues: succession, etc.,6,Shareholder Objectives for Executive Compensation,Build real long-term growth in shareholder value Competitive, performance-aligned compensation Avoid corporate future financial hardship as a result of special compensation arrangements Pricing relative to the marketproper use of compensation instruments Truly independent Compensation Committees Full, truthful and straightforward disclosure of The principles and structures of executive compensation systems (i.e., no “boiler plate”) Decision-making process for current year awards,7,Examples of Shareholder Resistance,CoolBrands: 21% drop in stock price following request for more options CHC Helicopters: “No” to 11% option dilution proposal ATI Technologies: Only 54% shareholder approval for new options Fairvest/Institutional Shareholder Services: use of the ISS option valuation model leads to more “No” recommendations Teachers Pension Plan: option grants should be proportional to executive ownership Angiotech Pharmaceutical: “evergreen” stock option replenishment rescinded due to institutional shareholder concerns and negative press,8,The Canadian Coalition for Good Governance is Gaining Clout,Launched last year Brainchild of Steve Jarislowsky and Claude Lamoureux Consists of Canadas largest pension funds, mutual funds and money managers Purpose is to share information and take the initiative to hold management accountable for growing long-term shareholder value The Coalition will support compensation schemes that reward employees for sustained performances Successfully attacked Angiotech proposal,9,New Legislation and Standards are Affecting Executive Compensation,U.S. Sarbanes-Oxley Act Proposed Changes to NYSE and NASDAQ Listing Rules Canadian Securities Administrators Disclosure Concerns International Stock Option Expensing Proposals Repap Court Case,10,Shareholder Disclosure Concerns,Canadian Securities Administrators Nov. 5, 2002 press release: Sample of 76 publicly-traded companies 95% had “inadequate” disclosure Watson Wyatt Proxy Circular Review 272 TSX companies in 2002 48% had no disclosure annual incentive determination,11,Stock Option Accounting Standards,Stock option expensing is just around the corner! International Board is going to mandate international stock option expensing standards this year Canadian Board has announced intention to require stock option expensing before the U.S. acts U.S. Accounting Board is considering mandatory adoption Many large North American corporations (over 150) have already decided to expense options:,Boeing (first) Coca-Cola Canadian Banks,Amazon.com Ford GE Inco,GM Wal-Mart Sun Life BCE,12,Meeting Shareholder Concerns with Options: Pros and Cons,Indexed options Premium-price options Performance-vested options Greater stock ownership Restricted stock units Cash long term incentive plans,13,Meanwhile in the Courts: The Repap Case,New Chairman was a retired U.S. lawyer; no experience in Repaps industry Summary of his contract: A multi-million dollar “market capitalization bonus” not linked to financial performance Shares and options amounting to 13.4% of the companys stock Immediate pension credits of 8 years A “single trigger” change-of-control severance package worth about $27 million Ontario Trial Court Judge