Knowledge Center
Reports
TSX Energy Industry: A Look at CEO Compensation
April 7, 2014
The energy industry is a profoundly important pillar of the Canadian economy and was directly responsible for
9.5% of the country’s Gross Domestic Product in 2012. Other energy-intensive industries in the country (such
as aluminum production) depend on easy access to cheap fuel. Canada’s generous energy resource endowment should
help ensure that the energy industry is a key growth area for the Canadian economy in the coming years.
As Canada’s energy industry draws greater scrutiny both within Canada and internationally, so too will the industry’s
executive compensation practices. This analysis examines chief executive officer pay practices among energy companies
listed in the TSX Composite index for the last three years of available data. To provide additional context,
comparisons were drawn both to non-energy sector TSX Composite companies and to publically traded energy companies in
the United States.
Key Findings
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2012 was a strong year for TSX energy CEOs, especially at the top.
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Growth in TSX CEO pay was driven by equity.
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TSX energy CEO pay mix is more similar to U.S. energy companies than it is to other Canadian companies.
Methodology
This analysis examined the compensation of TSX Composite energy company CEOs and how their pay compared to that of
CEOs at other TSX companies, as well as to that of CEOs at energy companies listed in the Russell 3000. Data were
compiled for companies’ 2012, 2011, and 2010 fiscal years. The currency used throughout is the Canadian dollar.
TSX Energy Industry CEO Pay
On average, Canadian energy industry CEOs saw a significant rise in total compensation from 2011 to 2012,
especially near the top of the income distribution.
In 2012, returns among the energy sector of the TSX Composite were down 7.5%, while the TSX Composite was up 4%.
Despite historical highs in global commodity prices at this time, export capacity constraints (primarily into U.S.
refineries) combined with slowing global growth, particularly in China, led to deep discounts on Canadian oil prices.
Meanwhile, the Canadian natural gas industry continued to suffer the effects of a strong U.S. gas production environment
together with stubbornly high storage levels due to increased availability of gas from unconventional sources.
Notwithstanding the stock market returns in 2012, the energy sector continued its recovery from 2009 toward pre-2008
levels. CEO pay in 2012 largely reflected the solid execution of strategies in reaction to market conditions, while
also reflecting a philosophical shift in pay mix toward full-value equity and away from the use of stock options. The
increased use of performance-based, full-value equity allows boards to use a degree of judgment in assessing performance
relative to long-term strategic imperatives.
Hugessen Consulting Commentary
As can be seen below, most of the variation in CEO pay between executives at the 75th percentile and those at the 50th
percentile or below is due to the larger equity grants prevalent among executives near the top of the distribution.
Over the last three years, the TSX energy industry’s pay mix has increasingly favored equity vehicles over cash.
In 2012, nearly two-thirds of industry CEO pay was equity.
As the industry exploits a mature basin and technology makes known reserves economical, the industry is moving
to a manufacturing-type operations base where low cost and sustainable cash flows are critical. As such, investors
are demanding dividends, and as dividend yields increase and volatility decreases, stock options have become less
valuable and more dilutive and thus less desirable. As a result, full-value shares have been increasing in prevalence.
This shift was partly management-driven due to the significant loss in the value of stock option awards made to
executives pre-2008. This shift is viewed positively among shareholders and their representatives and advisors as it
aligns with the trend toward performance-based awards observed within the broader market.
Hugessen Consulting Commentary
TSX Energy Industry CEO Pay in Context
TSX energy industry total compensation is similar to that of other Canadian companies and energy companies located
in the U.S. TSX energy industry pay shows a slightly more compact distribution.
The pay mix of Canadian energy companies in 2012 was nearly identical to that of major U.S. energy companies.
Only one percentage point separates their breakdowns of cash and equity. This stands in contrast to TSX non-energy
companies, which pay a considerably larger share of their CEO compensation in cash.
Energy companies require significant capital and are increasingly important due to increased demand from developing
nations. In addition, the wide price differentials with Europe and Asia make Canadian resources attractively priced
on a global basis. Therefore, we can expect energy companies to continue growing and executive pay to continue to
attract further investor scrutiny. In response, we expect the energy sector to migrate to broader industry norms
with respect to executive compensation governance (for example: clawback provisions, Say on Pay, employment
contracts, enhanced incentive designs, etc.).
Hugessen Consulting Commentary