Industry Trends

Board Compensation Trends 2004 - 2005

How much should a Board of Directors be paid?
Key events such as the implementation of Sarbanes Oxley; more vigorous monitoring of Board member activities; and pro-active institutional shareholders and investors, have substantially increased the level of responsibility placed upon the Board.

Key Questions Among Board Members:
  • Have Board fees increased in 2004-2005, and by how much?
  • Should we be offering Deferred Share Units (DSU) grants?
  • Should we mandate Board fee deferral into DSU plans?
  • Are we looking at the entire market for Board compensation or should we look at our industry only?
  • How often does your Board meet compared to other companies?
  • Are there other elements of Board compensation that should be considered?

Board compensation issues, and adherence to corporate governance guidelines continue to be key areas of interest to the Board of Directors. As a professional advisory firm, 3XCD is the only group in Canada that works with the Board of Directors to provide the Board with the most current compensation and financial data, submitted and verified by the SEC for executive pay-for-performance and Board compensation. 3XCD works exclusively with the Board and does not advise management within the same firm. This eliminates inherent conflict of interest associated with the practice of trying to advise both groups.

Current Trends:
  • In 2004 to 2005, Board Member retainers increased on average by 27% at Canada's 60 largest companies.
  • DSU plans continue to replace stock option plans.
  • Approximately 42% of companies made Board grants in some form of share units.
  • 70% of these companies disclosed Board Member stock ownership requirements.
Board Member Stock Ownership Plans

"3XCD have been extremely responsive to any requests and delivered the required information in a very timely manner."

Peter B. M. Eby, Chair Governance,
Human Resource, Nominating and Compensation Committee.
George Weston Limited.

Case Study - Example Board Compensation Extract:

3XCD analyzed market data, market trends, board structure and reported details and recommendations directly back to the board of a large Real Estate Investment Trust (REIT). The market was analyzed according to company size and the industry sector:

  • TSX 190 - 220 companies
  • Companies with a market value of 1 billion
  • Real Estate industry sector only

XYZ Real Estate Investment Trust currently compensates Board Members $15,000 per annum. This is below market median and below average for both the Real Estate Investment Group and companies of equivalent size.

  • Note: XYZ Real Estate Investment Trust also offers restricted share units to Board Members

Findings:

  • In this situation, board members decided the most appropriate group was the Real Estate Peer Group rather than the Similar Sized Company Peer Group.
    • Even though Similar Size Companies paid higher board retainers and compensation.
  • This situation may differ within other Industries.
    • Example: When a company is one of the largest in the market, comparing it may require the company to look outside the business sector for more suitable peer group.

Board Assessment Costs:
A complete customized board assessment and report costs $9,000 per year based on a two-year commitment. Individual annual reports are available at a cost of $12,000.

Our Unique Approach to Working with Boards on Executive Compensation Analysis -

Peer Group Selection is Key to Appropriate Comparisons:
  • We request a board selected peer group.
  • Through the board, we request management's peer group suggestions.
  • 3XCD assesses peer group from current market data and provides information back to the Board.
  • All factors considered an appropriate peer group is determined by job.
Complete an Independent Look at Comparative Financials:
  • Provide peer group financial comparison using over 42 business metrics.
  • Provide comparative compensation analysis with this peer group.
Tailored Pay-for-Performance Analysis Provided:
  • Provide Board Members year-by-year assessment on pay-for-performance and pay-for-effectiveness compared with this peer group.