It is proxy season, when investors get the documents that detail companies' executive compensation. This year, the pay tables show the value of U.S. executives' pensions are exploding, gaining millions of dollars in 2014 alone. By contrast, the gains in executive pensions here are quite modest, according to the reporting in Canadian proxy circulars.
Another triumph for restraint in the Canadian capitalist system? Actually, no. Chalk it up instead to a difference in disclosure rules, probably the biggest discrepancy between Canada and the United States in the method of reporting executive compensation. And Canadian investors who are receiving pay data from companies in both countries would be wise to be alert to the difference, which suggests there isn't as much difference in pension payments as it may seem.
The system for reporting executive pay centres on a pay grid – the Summary Compensation Table – that adds up to one number that shows just how much companies' executives got paid in the prior year. An important part of that is the value of executive pensions, which can end up being worth tens of millions of dollars in the aggregate for long-serving, well-paid corporate leaders. That liability increases each year as an executive works an additional year of service time, or earns extra pay. It also changes, however, based on movements in interest rates, as well as other "actuarial" changes such as life expectancy.
In the United States, the entire annual increase in the pension value gets listed in the compensation table as pay. In Canada, though, the amount is limited to what are called "compensatory" changes. The effects of interest rates and actuarial changes aren't included.
This may not sound important. And in an environment of stable rates, it's probably not. But that's not what we've had the last couple of years.
The inexorable math of pensions is that when interest rates rise, the liability for all the future payments falls. That happened in 2013, making the change in pension value negative for many executives. When rates fall, though, the liability increases. That is what happened in 2014.
Let's use a cross-border case study in the reporting differences. At railway Norfolk Southern Corp., chairman and CEO Charles Moorman has reached the maximum 40 years of service time for his executive pension, so the compensatory change for his retirement earnings was a mere $14,000 (U.S.). But other actuarial changes added $3.1-million to his pension value, so that's the number that appears in the Summary Compensation Table. That represented about three-quarters of a raise of almost $4-million, to $13.5-million, in 2014, in the column marked "Total."
At Canadian National Railway, president and CEO Claude Mongeau, in his 20th year at the company in 2014, had a compensatory increase of $40,000 (Canadian) in his pension as part of total pay of $9.3-million. The footnotes show, however, that the value of his pension increased by $4.4-million in 2014 from changes in interest and currency exchange rates. Adding $4.4-million to Mr. Mongeau's total pay would bring his total pay to $13.75-million, making him better compensated than Norfolk Southern's Mr. Moorman.
So, which method is right? It's all in the eye of the beholder, one supposes. When the SEC overhauled its pay-disclosure rules in 2006, it said disclosing the full actuarial change as part of total compensation "permits a full understanding of the company's compensation obligations" since executive pensions "guarantee what can be a lifetime stream of payments and allocate risk of investment performance to the company and its shareholders."
In Canada, however, dissatisfaction with this approach was one of two major areas of comment when the Canadian Securities Administrators proposed to adopt the U.S. rules, says Frederic Duguay, a partner at Hansell LLP who chaired the CSA's committee to amend Canada's rules.
The CSA had already published a "best practices" document for pension disclosures in 2005, and many big companies were using it to go "over and above the requirements of the time," Mr. Duguay says. So Canada tweaked its proposed rules to make the compensatory change the only amount that would appear in the table and count toward the total.
That decision is making Canadian executives' 2014 pension gains look small, at least compared to U.S. numbers, and creating the appearance that our CEOs are working at a discount to their south-of the-border peers.
An apples-to-apples comparison, however, tells a different story.
David Milstead