Canadian-based compensation programs can be highly influenced by the U.S. dollar and the weakened loonie can cause many challenging issues over the coming months, says Mercer Canada.
Mercer has compiled a list of five things companies should consider because of a weaker Canadian dollar:
1. Benchmarking and setting executive pay relative to a U.S. peer group: Companies that benchmark and set pay relative to a U.S. peer group will see competitive compensation decrease by up to 25% (at current rates) purely due to foreign exchange. While the obvious considerations are financial in nature, companies also need to consider whether potential changes to compensation currency will be temporary or permanent in nature and whether those changes will create internal equity issues among the senior ranks.
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2. U.S. directors on Canadian boards: U.S. resident directors serving on Canadian boards is not a new phenomenon and while some companies have policies in place to compensate both U.S. resident and internationally resident directors in U.S. dollars, this creates an immediate internal equity issue amongst the entire board. Not only does this pose a challenge for annual cash-based retainers and other cash-based compensation, equity-based retainers would be further impacted by a weakening loonie for Canadian-listed companies.
3. Performance measurement and variable pay: The assessment of performance to determine payouts under variable plans will be directly impacted by foreign exchange for Canadian companies that have U.S. operations, import U.S. goods for production and manufacturing, etc. While some companies take the view that senior leadership should not be held accountable for factors outside of their operational control, others take the position that the management of interest rate risk, foreign exchange risk, etc., are all important areas of corporate risk, for which senior leadership should have some oversight.
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4. Disclosure: Disclosure of a change in pay policy to compensate executives in U.S. dollars must be clearly explained in the proxy disclosure. For companies that disclose in Canadian dollars, they will see significant swings in year over year compensation and pay for performance outcomes that do not directly align with performance.
5. Recruiting and retention efforts: Recruiting and retention costs may be the one unknown variable as lost opportunities for talent may be difficult to quantify; the potential value that a new executive hire will deliver is neither guaranteed nor easy to measure in the short term. In addition, the cost of uprooting family and leaving the socio-cultural benefits that Canada has to offer may be far greater than the lure of financial gain south of the border. In other words, when dealing with cross-border mobility, many other variables may influence an executive’s decision to stay or leave.
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