A Tiny Insight Into Executive Pay


As we study the multiple concepts that go into the development of a company’s compensation strategy, we do not often have an opportunity to delve into the complexities of how executive level compensation is determined.

A recent announcement by the shareholders of Canadian Pacific Railway Limited (CP)provides us with an opportunity to dig a little deeper into how executive compensation is either curtailed or increased.

Click here to read the article.

A number of compensation-related questions arise from the reading of this announcement. Who determines the executive levels of compensation? How are the levels determined in a pay-for-performance strategy? How does the shareholder influence executive compensation? Why is there a need to focus on safety as part of a pay-for-performance strategy?

Some of the answers to these questions may be found in CP’s public documents, such as the April 2016 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT. This document is available in the public domain. It provides us with an opportunity to explore, just a little bit, the role of governance structures and shareholder decision making linked to the determination of changing executive-level pay metrics.

Click here to read CP’s shareholder document.

CP also posts executive-related metrics as part of its fiduciary responsibilities as a publicly traded company.

For the 2016 Executive Compensation metrics linked to stock valuations, click here.

As the shareholder document was issued prior to the decision to curtail the levels of executive compensation, it provides us with clear expectations of the pay-for-performance philosophy, which was identified as part of the organization’s governance structures and metrics. Further, this public report offers insight into the levels of compensation structures for both internal executives and shareholders benefiting from the ongoing profitability of the company. Profitability came from effective operations, according to the 2016 report. The posted pay metrics were linked to stock values. These documents confirm that pay-for-performance was directly linked to profit levels and both executives and shareholders benefited accordingly.

We can only surmise that, as a result of the information provided in these documents, along with other internal sources, shareholders made the decision to re-shape the performance drivers by introducing ‘safety and operating income’ as metrics for determining compensation levels and rewards.

This appears to reflect a shift in focus. One wonders if the compensation and performance levels will shift accordingly. The results from the next set of public documents will tell that tale.

Discussion Questions:

  1. After reading the CP shareholder document, identify the compensation strategies that link pay for performance.
  2. What benefits do shareholders who serve as directors for CP receive?
  3. From a compensation analyst perspective, how could the decision to cut executive-level perks influence compensation planning for the rest of the organization?
  4. As a consumer, what do you think about the changes to executive-level compensation for CP?

Good news. Good choices.

People in a Meeting and Single Word Rewards

For many students, the study of compensation planning takes place mainly within a theoretical framework. There are limited opportunities to explore real consequences of designing and deploying pay systems.

How do performance pay choices work in ‘real-life’ situations? Fortunately, the team of employees led by the owner of Homestead Organics is able to provide us with a step-by-step example of the application of theory to reality.

Homestead Organics, located in eastern Ontario, started as a family based business dedicated to growing and developing sustainable agricultural products.

Click here to access Homestead Organics website.

As this particular company developed and expanded in size, so too did its profitability. Homestead Organics decided recently to share its good fortune with its employees by introducing an Employee Share Ownership Program (ESOP).

Click here to read the article on Homestead Organics’ ESOP implementation.

Both the article and the information from the website reinforce the importance of a high-involvement managerial strategy in the application of successful pay for performance systems. Further, the article provides us with an overview of the key elements that need to be in place from the beginning of the design process through to the delivery of returns to employees who have chosen to participate in this plan.

From theory to reality, this is indeed a good news story worth ‘sharing’!

Discussion Questions:

  1. What are the positive effects for employees as share-owners of Homestead Organics?
  2. How does the concept of share-owner differ from stock-holder in this case?
  3. What types of employee behaviours will this share-owner agreement reinforce in order to ensure continued success?
  4. How do you think the values of Homestead Organics influenced the decision to provide a share-ownership program for its employees?