New rules for executive pay

Posted on July 25, 2011 in Policy Context

Source: — Authors: – business
Published On Fri Jul 22 2011.    By Josh Rubin, Staff Reporter

What happened?

The Canadian Securities Administrators — the umbrella group including 13 provincial and territorial securities regulators —Friday unveiled new rules on executive compensation, beginning in October.

The changes are designed to help investors have better access to information.

The biggest changes?

Requiring the boards of publicly-traded companies to show they’ve considered the risks of how much they’re paying their executives, such as whether the CEO’s pay packet is so high that their personal interest isn’t aligned with the shareholders’. Also, companies must now disclose the fees they’re paying to outside compensation firms.

What do the changes mean? (Part 1)

Boards have always had a responsibility to consider general risk faced by a company. By making it this specific, that increased the odds they’ll take it seriously, says Queen’s University business professor Steven Salterio. It’s the same idea behind the Sarbanes-Oxley act in the U.S. unveiled in 2002, which required senior executives and auditors take personal responsibility for corporate reports they signed.

“People thought those changes . . . wouldn’t make a difference, but there’s a lot of evidence that there’s less monkey business with numbers in reports now. Once people have to sign on the dotted line, they tend to take more responsibility,” said Salterio.

What do the changes mean (Part 2)

Many boards rely on an ostensibly-neutral outside firm to set executive pay. The problem is those firms might be tempted to tell a board exactly what it wants to hear in order to lure lucrative consulting business from the same corporation. By disclosing the fees paid to the compensation firms, the new rules allow investors to judge the extent of the conflict for themselves.

Will the new rules work?

The jury’s still out.

“The biggest problem is that a board can consider the risks, decide everything’s fine, and then not say or do anything,” said Laura O’Neill, director of law and policy at Share, a B.C.-based proxy advisor and research firm, referring to the risk-consideration requirement.

“It’s been a long-standing theory that disclosing the conflict makes it less likely that there will be an actual problem. But it’s an open question whether that theory is accurate,” said Salterio, speaking about the fee-disclosure.

A pat on the back?

Er, no, says Salterio. “It’s nice that we’ve finally caught up with the rest of the world. They’ve had this in London and New York for a while now.” (In the U.S.’s case, similar rules were introduced in 2006.

O’Neill says she would have liked to see the new rules require companies to disclose the discrepancy between an average employee’s pay and that of top executives.

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