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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 14 - Evidence


OTTAWA, Wednesday, February 26, 2003

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:10 p.m. to examine and report upon the present state of the domestic and international financial system (Canadian perspective to the Enron collapse).

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: We will continue our examination and report upon the present state of the domestic and international financial system, which is the Canadian perspective to the Enron collapse.

Our witness this afternoon is Mr. Pierre Geoffrion, Vice-President, Aon Consulting.

[Translation]

Senator Prud'homme: We receive many, well-prepared briefs. They always include a note stating the following: Please find enclosed the English version of, and so forth. So and so is scheduled to appear. The French version will follow as soon as possible.

Increasingly, we receive the French versions after the witnesses have actually appeared before the committee. There are no television cameras rolling, so it will not be quite as embarrassing for a non-expert like myself. I have always taken a very firm stand on this issue in the House of Commons, and I am not pointing a finger at the witnesses. They are free to address the committee either in French or in English, and to submit their documents in whichever language they prefer.

The further west we go, the more people have the impression that submissions must be made in both languages. That is not true. The committee welcomes submissions in either language.

It is our responsibility to have the tools we need to facilitate our work to the greatest possible extent.

I already have a difficult time as it is understanding what is said in English. I have made my point and I am certain the clerk has duly noted my comments.

[English]

The Chairman: Senator Prud'homme, we only received the French version at a quarter to four this afternoon. It is in front of you.

Senator Prud'homme: Do not apologize. I just want to make a point.

The Chairman: Mr. Geoffrion, do you have a statement? Perhaps we can give a background to what it is we are trying to do here and why we are particularly pleased to have you here today.

We have been doing a study on corporate governance for a few months. The theories of corporate governance seem to be undergoing an evolution, if not a revolution.

Our job, because we are a committee of government, is at some point to suggest or not suggest legislation on the whole subject. One of the trickiest parts of the equation is compensation, which many people seem to think has gotten out of hand.

The conundrum is what to do about it, if anything. If you could think about that as you go through your presentation and give us some bright ideas, we would appreciate them.

Mr. Geoffrion: I would like to move quickly through the main principles of compensation because it is necessary to bring everyone up to the same level of understanding. We will look at the different forms of compensation and how their levels are determined. We will also examine the sources of compensation data, the notion of trade-off between fixed and variable compensation and the impact of compensation on the behaviour of executives.

There are five components to executive compensation divided into two main areas: fixed compensation and variable compensation. Fixed compensation is made up of base salary, pension benefits and perquisites. Base salary recognizes individual expertise and contribution, pension benefits to provide security and protection and perquisites bestow prestige and recognition.

Variable compensation is divided into short-term and long-term. Short-term incentive or annual bonus focuses on operating in a profitable way; long-term incentive focuses on creating value and growth and retention purposes. The sum of all these is total compensation.

These levels of compensation will vary with the function of the level of the position in the organization. Obviously, the higher you go up in the hierarchy of the organization, the higher your salary is. Other factors are the size of the organization. In a $5-million company versus a $5-billion company, your salary will vary as a result of the industry and the individual circumstances of the incumbent.

With respect to benefits, packages are standard, and include life insurance, long-term disability and medical insurance. However, pension will vary with the size of the company, the industry and also individual circumstances. It varies with the level of employee contributions, defined benefits plans versus defined contribution plans and the advent of SERPs.

Perquisites, or perks, include automobile, club memberships, financial counselling, medical services and others. Coverage will vary as a function of the level in the organization, but is usually offered only to top management executives.

Bonus target levels are set at a percentage of base salary, for example, 30 per cent or 40 per cent of base salary. Percentage will vary as a function of the level in the organization; the lower you are, the lower your target bonus will be, and also the size of the company. Bonus levels usually have a maximum between one and a half and two times target bonus, so you can double your target bonus if objectives are surpassed.

Long-term incentives are usually in the form of stock options in public companies, although phantom stock plans and performance unit plans are also prevalent as a form of LTI. I believe we will see more of them in the future. LTI levels have increased substantially over the last few years as a result of U.S.A. practices and dot-coms. Dot- coms did not have any money to pay their employees, so they paid them in stock options. As a result, there was a proliferation of stock options.

Ideally, though, in the principles of compensation, LTI levels should be identical to STI levels to force managers to put focus on operating profitability as they should on creating growth and value for the company.

Compensation data is usually gathered in compensation surveys sponsored by the participant or a general sponsor. However, only the participants have access to the data. Human resources consulting firms such as ours perform market studies for clients with the help of our surveys or through a custom survey. In a custom survey, we determine where the reference group is and we ask each of the participants in the reference groups to give us compensation data.

Another source of data is proxy circulars, which provide compensation information for the five best-paid officers of public companies.

The Chairman: Are you sure about the last item? Proxy circulars provide compensation information on the five best paid, or is it the five top decision makers?

Mr. Geoffrion: It is supposed to be the five best paid.

The Chairman: That is not my understanding, but we can check it.

Mr. Geoffrion: Regarding variable versus fixed compensation, the higher the level of a position in an organization, the higher the variable compensation should be as a percentage of total compensation, which implies more compensation at risk. The trade-off between fixed and variable compensation depends on the level of risk. A sure dollar today against two dollars in the future illustrates this notion. Variable compensation should be linked to performance criteria, whereas fixed compensation should depend more on competence levels of responsibility. Good performers prefer more variable compensation as they believe they can earn more.

Generally, annual bonus payouts in the market respect the performance condition. However, the stretch of objective setting may be inconsistent from company to company. If a company sets the target at a budgeted profit figure, it might be easy to attain that objective, while other companies set unobtainable objectives.

Stock option payouts, however, have not always been linked to good performance because they are only tied to the stock price. Recent events have triggered drastic changes to stock option programs. There are many more performance conditions and criteria tied to options, such as a grant, which means you have to earn your grant, to vesting, which is conditional upon attaining certain performance criteria, or to exercise price. Your exercise price will move up with time indexed.

Also, minimum holding periods after exercise are also become being prevalent. The recognition of stock options as an expense in financial statements will certainly change the landscape as companies begin to offer fewer stock options because of the effect of this new accounting world.

The impact of compensation on behaviour is high when the amounts are important. With the proliferation of stock options, the executives place the highest priority on boosting the price of the stock even at the expense of good decisions and they are not the only culprits. They want stocks that gain value, and there is a lot of pressure to create this value quickly. They sit on the boards and they put pressure on the CEOs and the management team. The importance of quarterly reporting on the price of the stock has also played a role in how the executives focus on short- term price gains.

You do not need to motivate good managers, as they are already self-motivated. However, we must avoid demotivating them with badly designed incentive plans that do not adequately reflect their performance.

Senator Kelleher: Did you read this mornings article about the CPP investment board talking about issuing tough new governance regulations or guidelines?

Mr. Geoffrion: No, I did not.

Senator Kelleher: They are taking a strong stand against all stock option plans. What is your comment on their position?

Mr. Geoffrion: We have not had a scandal to compare to the Enron scandal in the United States. We did not have the same excesses in compensation and in stock options. We have been following the 14 guidelines from the Duff report of the mid-1990s, and generally, the majority of public companies were following these rules in a fairly good manner.

I think we should be cautious in over regulating stock options because they are not all bad. In some cases they are a good form of compensation. However, there must be a balance between short-term and long-term options.

Right now long-term compensation is three and four times short-term compensation. The CEOs are putting a lot more focus on creating stock value by acquiring companies and so on, and this might not always be the right decision for the company. I would not want an over-regulated environment where the result is demotivation of the executives. We want to motivate them to perform. If there is too much regulation it becomes almost impossible to get remunerated in line with the performance that you are bringing to the company, and then no one wins.

Senator Kelleher: You have listed various forms of compensation. Do you feel that any of the compensations that you have listed can have a deleterious effect on executives, and if so, what would they be?

Mr. Geoffrion: I believe if they are used appropriately, they will balance the equation. When you start over- weighting one compared to the other, the incumbent will try to create the gains that he thinks he is able generate with the stock options.

Therefore, I say that we need to be careful about how we over-weight one compared to the other. The value of long- term incentive given to an executive should be approximately equal to short-term incentive. Each day a manager must decide whether he makes the decision to be profitable or to grow. Here is an example: the manager wonders if he should hire two new salesmen? If he does, he will not see a profit this year. However, the two new salesmen might generate more sales and profits for the future. The manager must make a decision based on these two ideas. It is all about balance. If the executives are not given enough security with their benefits, then they do not feel right. You give salary to recognize competence, and perquisites because you want your executives to new cars.

Senator Kelleher: Do you think that having more independent board members will have a moderating influence on some of the salaries that the executives seem to win from their boards?

Mr. Geoffrion: Probably. I caution how boards and management teams work together. I think good companies have good working relationships between their board and their management team. If we get into a position where the board is always in a conflict situation with the management team, the shareholders will not win. I think independent board members are important, but good relationships with the management team are also important. There is no doubt that a competent compensation committee would be helpful. Very often we present reports to the compensation committee, and they do not have many questions. They do not really understand all the principles of executive compensation and how we determine value of long-term compensation, black shoals. I think it would be important that board members get the appropriate training to be able to ask the appropriate questions. The same thing for audit committees, obviously.

Senator Kelleher: Thank you.

The Chairman: There was a famous writer who said a rose is a rose is a rose. You make it sound like an option is an option is an option. One of the things we are trying to get at here whether we should just give a blanket yes to options. Should companies be allowed to reprice?

Mr. Geoffrion: Never.

The Chairman: I know, but they do. Should we be legislating against it?

In the United States, they talk about recapturing options. A CEO gets paid $12 million for a terrific short-term performance over a two-year period. In the third year, the company goes to hell in a basket. Should we be legislating on things like that? We are at a loss here.

Mr. Geoffrion: In the past plain vanilla options were given out. That means that performance criteria was not tied to the options. Executives just expected to get their grant every year.

The Enron situation has put a lot of focus on the issue of options and subsequently we have made changes to the plans. I have not seen one option plan that has come out this year which is plain vanilla. They either have performance criteria tied to them or they have a minimum holding period. The entire area of options will be much better managed as a result of these changes.

Senator Kroft: Can you describe your client base?

Mr. Geoffrion: For the most part we deal with public companies, but we also have private companies.

Senator Kroft: Do the public companies have outside directors and boards?

Mr. Geoffrion: Yes. We present most of our reports to compensation committees of boards.

Senator Kroft: Who is typically on the compensation committee?

Mr. Geoffrion: Generally it is outside members although, sometimes, there is one inside member. When there are decisions to be made the insider is asked to leave the room.

Senator Kroft: Who makes the decision to retain your services?

Mr. Geoffrion: I like to be hired by the compensation committee, but that is rarely the case. Most of the time I am hired by the management team and asked to do market studies.

I have never been in a situation where I felt that questions would bias me in one direction or another.

Senator Kroft: You said that most often it is management that gives you direction as to what is required of you to bring to the board committee?

Mr. Geoffrion: Yes, except for the CEOs. When I am asked to deal with a CEO situation I am usually hired by the board.

Senator Kroft: I presume your studies are similar to ones we have seen in terms of quartiles and analysis of where you stand.

Mr. Geoffrion: Yes, that is correct.

Senator Kroft: Would it be normal for the board to indicate as a matter of board policy what quartile they would like to see their compensation fall into? Could they suggest that they would always like to be on top or in the third quartile? Is there that kind of guidance?

Mr. Geoffrion: We would discuss it. When we prepare the reports we try to articulate a compensation policy. The compensation policy addresses all the components of compensation. The board or the compensation committee has to approve the position of the compensation or the comparison group. That is one of the most important functions of the compensation committee. When we present to the board we tell them this is very important.

Does the board tell us what it is? No, we usually come out and say what we think it should be.

Senator Kroft: Do you mean as to which quartile, for instance?

Mr. Geoffrion: That is correct. Most of the time we will suggest that they be in the median. If there is a change from that, it is given to us by the board.

I have never suggested we should be a quartile higher than the fiftieth percentile.

Senator Kroft: Have you ever had management suggest they should be higher than the median?

Mr. Geoffrion: Yes.

Senator Kroft: It strikes me that if everyone wants to be in the same place it becomes complicated arithmetically. If everyone wants to be in the third quartile, then you keep going until you run off the chart because there is nobody left for the first or second. Inherent in the concept of a median is that there are some above and some below you.

Do you ever see the same directors from one board to another?

Mr. Geoffrion: We certainly do.

Senator Kroft: Would it be surprising that the knowledge and information that one carries from one board to another board becomes part of the intellectual pool of an individual director?

Mr. Geoffrion: There can be a trendy effect to it.

Senator Kroft: This leads me to suggest that there is a multiplicity of options. One has to do with the multiplicity of boards on which the same directors sit, which provides for this contagion of information going from one to the other. It then becomes important as to who the consultant is. If the same consultant is popping up, it can be a tight little circle.

Mr. Geoffrion: There are not that many of us.

Senator Kroft: The directors are overlapping, as are the consultants. It is not surprising that there is homogeneity in the corporate community, in particular in a place like Canada where the number of large companies is fairly limited. I am only searching for truth and objectivity.

You talked about rewarding in two different directions, that is, operating profitability and creation of value and growth. Do I take it that when you talk about creation of value you automatically mean value as registered in the performance of the stock, or do you mean value as recorded by the balance sheet?

Mr. Geoffrion: It depends on the industry. In the banking industry it would be assets. Most of the time, it is the stock price, or the total capitalization.

Senator Setlakwe: Mr. Geoffrion, you said in your opening statement that there was more wrongdoing on the part of American companies than there is on the part of Canadian companies. Further, you said that you did not feel that we should overregulate.

Would you say that Sarbanes-Oxley was an example of over-regulation and that we should be careful in that respect?

Mr. Geoffrion: I think so.

Senator Setlakwe: What do you do with Canadian companies that are listed on the New York Stock Exchange?

Mr. Geoffrion: They do not have a choice; they have to abide by Sarbanes-Oxley.

Senator Setlakwe: That is a big percentage of the Canadian economy, is it not?

Mr. Geoffrion: You have to be listed in the States, though. Since Sarbanes-Oxley, other reports have come out: the blue ribbon commission by the conference board and others, and we feel that they are just going too far. However, they have had big scandals. Trillions have been lost in the States.

Senator Setlakwe: Some of ours have been pretty big too.

Mr. Geoffrion: They are not scandals though. It is just that the price of the stocks has ended up in the basement.

Senator Setlakwe: If we do not go as far as the Americans, do you think they will be upset or expect more from us? Can they do any more to harm us other than what they have been doing in the area of trade?

Mr. Geoffrion: That is a good question. We are different in many ways from the U.S. We do not have the same competition between countries.

It is incredible. Over the last 15 years American CEOs have been able to get a signing package going into a company and getting still another package when they leave. It is outrageous. I am not saying that we do not have that situation in Canada, but it is on a much smaller scale.

Our accounting rules have helped us. Our accounting rules are based on recommendations, whereas in the United States there is a fast speed for everything. Here in Canada, an accountant has to think in order to give an opinion on the financial statements. In the U.S. the account just applies a rule.

Here in Canada we supply a financial statement that reflects the financial position of the company. It is not perfect, but because the accountant must apply more judgment we are seeing better financial statements.

Senator Setlakwe: I spent part of the last week travelling in Western Canada. The American remedial trade action being taken Americans is frightening. I am concerned that they will do the same in the financial sector as they are now doing in the trade sector. Does that concern you or is that not a problem?

Mr. Geoffrion: Again, their reaction to Enron was sort of the same. I believe it is an overreaction, but they have to have the overreaction. It is a human trait. We all overreact, then we come back and we swing from one side to the other. The same thing applies with trade and finance. Compensation within the financial sector is special.

Senator Meighen: I notice that in the different forms of compensation you described you did not mention profit sharing. Whatever happened to profit sharing and the ability to extend it down the line within a company? It seems to me that it would avoid a lot of the problems that stock options have raised.

Mr. Geoffrion: Senator Meighen, profit sharing is a form of short-term incentive. There are industries where their annual bonus is profit sharing. We see that a lot in the pulp and paper industry, where they establish a pool of money based on profit levels or profit targets. Whatever pool they get, they divide it up based on the target bonus of individuals; the president gets 50 per cent, the vice-president 40 per cent. There is no differentiation of employee performance. It is just across the board, there is no emotion in deciding, and no notice is taken of who performed better, or who performed less. However, good performers do not like these incentives because they do not have a chance to differentiate. The only way these companies differentiate is with salary, and I do not think that is right.

However, there is good and bad in both. There are short-term incentive plans that are completely sectoral or departmental, and then you have companies or industries that are just too profit-sharing. Profit-sharing is just another form of short-term incentive.

Senator Meighen: Senator Kroft the small pool of independent directors. In terms of issues, though, we have all read about the debate about the audit community auditing firms doing an audit on the one hand and doing consulting on the other. Everyone is in a knot on that one. Has Aon tied itself in a knot on that question, on the grounds that you sell insurance and you also counsel in terms of compensation? How do you avoid any perceived or real conflict in that area?

Mr. Geoffrion: That is a good question. First, Aon Consulting Group and Aon Insurance are two different entities. I do not even know anyone in Aon Insurance. If I get an executive compensation mandate and I do not give the appropriate compensation to the VP-HR, will I still get the pension work?

That has not happened to me yet, and hopefully it will not, but I know that it has been an issue for other consulting firms. We have even considered the spin-off of the executive compensation, similar to the practice of spinning-off the consulting side of accounting firms.

However, in comparison to the consulting arm of accounting firms, executive compensation is very small. We are two in executive compensation at Aon.

Senator Meighen: When you say you are two, are you two employees?

Mr. Geoffrion: Yes, it is a small practice, and we do not charge very much for our work. We charge $40,000 or $50,000 for a mandate, whereas pension mandates are $1 million, $2 million, or $3 million.

I am not sure the companies would like to have a report say Pierre Geoffrion Inc. at the bottom. We work within a large firm and because of that we are able to invest in research and make sure that we recommend the best compensation programs. Within the large firm we are able to do our compensation surveys. There are millions invested in doing these surveys. I could not make that kind of an investment on my own. This is definitely something that we have to consider.

Senator Meighen: Would your industry consider it unethical or perfectly appropriate if you were doing a human compensation job and, in the course of your work, overheard the CFO express a need to improve the company's insurance plan. Would there be any reason for you not to call the other side of Aon and tell them to get in there quickly?

Mr. Geoffrion: I would not be a very good businessman if I did not do that.

Senator Meighen: That is correct, but is there an ethical issue involved?

Mr. Geoffrion: We are two separate businesses.

Senator Meighen: Same name.

Mr. Geoffrion: There certainly is a potential conflict of interest, and not only between Aon Insurance and Aon Consulting but also within Aon Consulting.

Senator Meighen: It would be interesting to know whether the problems that have arisen in the accounting world would apply to you, too. They obviously consider it to be a problem and they are dealing with it.

Mr. Geoffrion: Definitely.

Senator Meighen: I am not making any accusations or suggestions; I am just wondering whether you people consider it a problem.

Senator Moore: Mr. Geoffrion, you mentioned the creation of value and you mentioned that that relates primarily to stock price. What about the shareholder and dividends? Do you take that into consideration? What determines the creation of value? Is it just stock price or is it performance to ensure that shareholders are getting some value for their investment?

Mr. Geoffrion: We rarely consider the dividend portion. When we create value, we think about growing the value of the company. The decision to pay or not to pay dividends is based on whether you have to reinvest the annual income or whether you want to pay it to your shareholders. It also depends which phase you are in your company life; if you in a growing mode, you obviously will not pay as much in dividends as you would if you were in a cruising mode.

The dividend portion would not be considered as important to us. Actually, we do not consider it. Creating value for us is just making sure that the company is gaining in value.

We mentioned stock price, but other measures of growth are book value and revenue line.

Senator Moore: Have you ever been in the situation of advising a company on its compensation package and also advising that company's financial institution and seeing similar directors there?

Mr. Geoffrion: I am not sure I understand the question.

Senator Moore: Have you ever been asked to provide compensation information to a company where a certain person is a director and also been asked to do similar consultancy work to the bank of that company where the same person is a director?

Mr. Geoffrion: No that has never happened to me.

Senator Moore: What would you do if that happened?

Most of the problems, Mr. Chairman, relate to money. In the Enron situation, it was the desire for more money.

What would happen in that situation?

The Chairman: Let us separate this. The Enron situation is straight thievery involving a bunch of crooks. There are laws against that. In this instance we are discussing a perception and perhaps some conflict of interest. There is a bit of a difference.

Mr. Geoffrion: Compensation committees usually have three, four or five members. If a person in a potential conflict of interest acted inappropriately, I am sure that others sense it. I am quite comfortable that it would happen.

Senator Moore: In the hope that high principles and fair play will prevail, you do not see a need to try to regulate on this?

Mr. Geoffrion: No, I do not. I think we will have a lack of directors. With everything that is happening, good directors will lessen their load of directorships and we will have a big problem with a lack of directors very soon.

[Translation]

Senator Biron: If these options were exercised and this led to a decline in the value of the stock, will the impact be such that shareholders will refuse management's request to grant stock options, or only agree to fewer options than requested? Do you think we should wait and see how this plays out on the market? Should we introduce legislation, as Senator Kolber has suggested?

Mr. Geoffrion: Are you saying that you would like to see limits imposed on the number of options a company may issue?

Senator Biron: Percentage wise?

Mr. Geoffrion: Percentage wise, the figures are much lower in Canada than in the United States. Generally speaking, if we look at companies listed on the TSE, I would say that the option reserve is in the neighbourhood of 8, 9 or 10 per cent. I do not have the latest figures, as they need to be reworked.

Senator Biron: ATE Technologie was at 20 per cent.

Mr. Geoffrion: That is correct. Obviously, in the technology sector, some reserve levels are much higher.

Should the amount that can be issued by companies as reserves be legislated? I think we should leave that decision to company directors. It represents a form of compensation that can be used when cash is in short supply.

A new biotechnology or technology firm may need to hire 200 or 300 persons. It needs individuals who are good performers. Granting employees stock options is one way for companies to attract young persons with PhDs and the like. Companies must be able to resort to this practice and I do not think it should be legislated in any significant way.

In my opinion, the majority of companies in Canada are well managed. It is up to them to decide whether or not to increase or lower company reserves.

So far this year, my sense is that boards of directors want to limit reserves. They do not want to exceed the 7,8 or 9 per cent mark. They want to limit reserves and rely on other forms of long-term compensation, such as stock plans tied to performance.

[English]

Senator Kroft: In his opening remarks, the chairman told you that we are looking for the opportunity to make useful recommendations. Are there any recommendations that you can give us?

Mr. Geoffrion: I am not sure that establishing compensation through marketing studies is the best way to go about it. There should be another way to establish the right level of compensation.

If you form your own little company and you have five to seven employees, you must look at the amount of projected revenue, the expenses and how many employees you need. You will try to determine how much compensation you can give to your employees.

There should be a better way of doing compensation establishments than by going to market with data that is often imprecise and that requires interpretation. It is difficult, whether you are in one company or another. Data is imperfect.

CEOs get good data from the proxies. As we move down through the organization, it is difficult to find reliable data.

We use the data and our experience. This is not a science; it is an art. We try to establish the best value for the position. Management will decide what the incumbent will be paid. We try to evaluate the position.

Options have been given liberally and freely. Changes have occurred over the last few months: we are attaching performance criteria to options, and including either a grant, or investing with some minimum ownership guidelines and holding periods. These changes will be helpful. However, the executives do not like these changes. We may be asked not to use stock options and to use cash plans based on attaining performance criteria like an ROE. The institutional investors usually respond that they do not want plans based on the stock price because that is where they make their gains. It is always the same battle.

Senator Kroft: There is pressure from the institutional investor to have options based on stock prices because they think that will move the stock prices. Is that correct?

Mr. Geoffrion: They want plans that will boost up the price of the stock. If the price of the stock does not go up, they do not want executives to make money. They own more and more companies and there is so much cash going around in pension plans.

Senator Kroft: Their view is short-term rather than a long-term view, would you agree?

Mr. Geoffrion: There is also quarterly reporting. If we had annual reporting, we would be better able to manage the companies. Quarterly reporting is crazy. That came about fifteen years ago as a result of wanting more information to make investment decisions. That has created a monster because we are now thinking in a short-term way far too often.

Senator Kroft: I wish to return to one point that confused me. You spoke of the institutional investor who likes his companies to have options tied to share price. Presumably that means that they think that management will move share price up and a higher share price is what the investor wants. However, that strikes me as an odd view.

I would have thought that the institutional investor would be more inclined to have a value or performance related type of option that would look to the longer-term health and growth of the business.

Mr. Geoffrion: They are prepared to have programs tied to some measure of growth or profit, but in the end the payment must be if the stock price moves up.

The Chairman: I have read that Coca-Cola and a few other Warren Buffet holdings say they will not give quarterly guidance any more.

Mr. Geoffrion: There is a movement for that.

The Chairman: As Senator Meighen points out to me, you cannot enforce annual reporting only.

Mr. Geoffrion: I did not know that.

Senator Meighen: I do not know how you would enforce it.

Mr. Geoffrion: Quarterly reporting is also encouraged in terms of cut off.

The Chairman: Our problem is that we have to make recommendations and hopefully some of our recommendations should result in some legislation somewhere. We have to show the Canadian public that we care and we want to protect them.

I believe you said that management hires you.

Mr. Geoffrion: Yes, that is correct.

The Chairman: If management hires you, I am hard pressed to understand how you can be objective and do the job that you are required to do. I am not suggesting that you do anything wrong, do not misunderstand me. However, for three years I was the chairman of the human resources committee of the Toronto-Dominion Bank. When I took over, I insisted on hiring my own compensation consultant from New York.

Mr. Geoffrion: Was that person different from the person they employed?

The Chairman: That is correct. I was not saying that their people were doing a bad job, but I wanted a fresh look. My problem was that the vice-president of human resources reported to the CEO and did not report to me. The compensation consultant did report to me. I met with him, but eventually I had to meet with the VP of human resources, et cetera. There is something wrong with the system.

I would like your advice. The only way we can get anything legislated is through the CBCA, because we are the federal government and that is where we legislate. If you are provincially incorporated, we cannot touch you. We can issue strong signals, but we cannot touch you. We have that limitation.

We ought to legislate along the lines of saying that the companies that do hire a compensation consultant must hire through the compensation committee and not through management. The compensation committee cannot have management people on it. Otherwise, they are deciding on their own salaries.

Mr. Geoffrion: I agree with that. However, I do not think we should have two consultants working on the same area.

The Chairman: I know, but it is the compensation committee making recommendations on the recommendation or the advice of the consultant that they hire.

Mr. Geoffrion: Do you mean for the management team?

The Chairman: Well, no, they will come up with a list of who gets what.

Senator Meighen: There would be two compensation experts hired under your scenario.

The Chairman: You cannot have that.

Mr. Geoffrion: I think your suggestion is good. The compensation committee should hire the consultant to do the CEO's compensation, which is happening right now, and they should also hire the consultant who will do the management team, the executives.

The Chairman: Are you familiar with the Hay system?

Mr. Geoffrion: Yes.

The Chairman: That is what we use. We have 28,000 employees, and virtually all of them got a number of evaluation points. The boss gets 3,500, the next one gets 3,100, and a bunch get 2,800, et cetera, and the pay scales are so much per point.

Mr. Geoffrion: They do not all use Hay system, but I understand what you are saying.

The Chairman: Hay is a typical system. Do you think that should be legislated?

Senator Meighen: There are two different points of view here. I heard Mr. Geoffrion say that for the CEO and senior management, the compensation committee should hire its own expert firm.

Mr. Geoffrion: Right.

Senator Meighen: However, what about the rest of the employees of Toronto-Dominion Bank, and the directors?

Mr. Geoffrion: We can still be hired, but we do not need to be hired by the compensation committee for that. It is up to the company to decide how they will pay the rest of the employees.

The Chairman: All you are talking about is someone to get advice from. I would have to think that one through, but if you are setting a philosophy on how to pay your staff, the philosophy should be reasonably consistent.

Senator Kroft: It would not go any higher than the top group.

Mr. Geoffrion: Compensation committees will be sitting on a lot of committees. Definitely, for top management, the compensation committee should be hiring the consultant.

The Chairman: Thank you for your time, sir. It has been very interesting.

The committee adjourned.