Just who is calling the shots at Toronto Hydro?
The century-old utility, which provides power to almost 700,000 homes, is 100-per-cent owned by the city of Toronto. But the Star has learned that when Toronto Hydro was asked to reduce its executive bonuses to bring them in line with a city policy on bonuses paid out to top brass at other city-owned corporations and agencies, the company’s board politely refused.
With the CEO earning $ 1.33 million in total compensation — more than the $ 1.08 million earned by the current CEO of Hydro One, which is seven times the size by total revenue — several long-time employees of Toronto Hydro have contacted the Star saying that executive pay has gotten out of control and it’s time for the city to take action.
Toronto Hydro’s refusal to comply with the city’s request can’t help but stir memories of another recent clash over executive pay at an electricity company. During his campaign to become premier, Doug Ford dubbed Hydro One’s then-chief executive officer Mayo Schmidt the “six-million-dollar man.” Once elected, his government passed new legislation to force the partially privatized company to limit annual CEO pay to no more than $ 1.5 million.
It was messy and expensive — Schmidt left Hydro One in 2018 with more than $ 10 million in severance and stock options — but in the end, the province got its way.
Over at Toronto’s City Hall, however, the fight over executive pay seems to be more of a slow burn.
The city has been trying to rein in executive compensation at city-owned agencies and corporations for about a decade, stating in a 2012 report that the 2008 financial crisis spurred public demand for more transparency and equity in executive pay. After several years of review, by 2014, the city had adopted guidelines that included a limit on incentive pay for strong performance — bonuses — to no more than 25 per cent of base salary.
Despite those guidelines, last year Toronto Hydro Corp. CEO Anthony Haines took home a bonus of $ 641,763, equivalent to more than 96 per cent of his base salary.
In fact, Haines has received a bonus of between 95 and 100 per cent of his pay every year since 2015 — while other executives routinely receive bonuses equivalent to between 50 and 60 per cent of their salary. Their formal bonus targets are set at 65 per cent of salary for Haines and 40 per cent for the others.
It has now been more than three years since the city last said it would review Toronto Hydro’s compensation policies and asked the utility to take another look at its executive pay and bonus packages. But nothing has changed, despite the fact that every extra dollar paid to top executives is a dollar that could help balance the budget for the city.
Stakeholder groups have had enough, with the Power Workers’ Union protesting to the Ontario Energy Board (OEB) during a hearing over electricity rates in 2019 that “executive and managerial compensation (at Toronto Hydro) has been increasing at an unreasonable and unsustainable rate.”
Energy Probe, which advocates for lower electricity rates (and opposes government carbon price programs) also said it had “major concerns about the levels of executive incentive pay (bonuses)” at Toronto Hydro.
“There’s a long history of council being frustrated by Toronto Hydro,” said city Coun. Gord Perks, who said he was on the company’s board from 2006 to 2010.
“Senior management at Hydro and its board have consistently taken the view that they’re a private corporation and that they should offer compensation and establish management policies as if they were just a privately held utility.”
The long-simmering battle raises serious questions about the city’s apparent lack of influence at the company, despite being its sole shareholder and having three city councillors on its board. Executive pay at Toronto Hydro cuts into the money the company pays to the city each year and, indirectly, the taxpayers who support it.
“They forget that they are owned by Torontonians,” Perks said. “And they have accountability there.”
Toronto Hydro has long used a policy of generous bonuses to reward its top managers, arguing that it operates in the private sector and has to compete to recruit and retain the most talented executives.
The company did not respond to numerous specific questions for this article, but spokesperson Russell Baker told the Star in an email the company uses a “market-based executive compensation system … designed to attract and retain executives who have the skills and experience to help the organization achieve its strategic goals.”
Baker said that system, “along with the benchmarking data that informs it,” is regularly reviewed by the OEB in the course of setting electrical distribution rates. Toronto Hydro’s next compensation review is scheduled for later this year, he said, and will be submitted to the regulator “in the normal course.”
“Toronto Hydro’s executive compensation is at or below the market median and has decreased by approximately 10 per cent over the last decade,” Baker said, though he did not provide sources for those data points. He said the company has paid almost $ 700 million to the city in dividends over that time period.
Marcela Mayo, a spokesperson for the city, said it “has observed gaps in compliance between Toronto Hydro’s executive compensation policy and practices and the city’s framework for executive compensation at agencies and corporations as indicated by city council direction.”
She said in an email that the city’s agencies and corporations are “separate employers who are responsible for the compensation of their employees,” and added that the city has established a framework for such organizations to consider when developing their own policies on executive compensation, which must in turn be approved by their respective boards.
“The city is committed to completing its general review of the city’s agency and corporation executive compensation policies, including Toronto Hydro, and updating the city’s 2014 framework in keeping with current leading practice,” Mayo said, adding that the work includes “procuring independent, external expertise to undertake a benchmarking study of Canadian municipal jurisdictions.”
Mayo said the city’s general review of executive compensation at city agencies and corporations had been delayed by the COVID-19 pandemic but is now “advanced” and on track to be completed this year.
In March, Toronto Hydro said it expects to spend almost $ 800,000 to top up the defined-benefits pensions of four of its highest-paid executives, including Haines, when they retire. The company also revealed it will pay Haines a separate retirement allowance of up to $ 1.5 million, an increase from a previously disclosed maximum payment of $ 1 million.
The pension top-ups, some of which followed a determination made by an arbitrator, were disclosed in the footnotes of a dense financial filing. But multiple Toronto Hydro pensioners took notice and contacted the Star, concerned that the benefits were simply the latest example of a long history of runaway executive compensation at the utility.
The Toronto Hydro board of directors did try to do something about CEO pay in 2015.
When Haines became CEO of Toronto Hydro in 2009, his bonus target was set at 65 per cent of his salary.
That was soon to be way out of line with the city’s 25-per-cent cap, which was part of the guidelines that the city developed after the financial crisis.
In 2014, the city asked all city-owned agencies and corporations, including Toronto Hydro, to review their executive compensation policies, specifically asking them to cap bonuses at 25 per cent of base pay “where possible.”
The Star has learned that Toronto Hydro’s board committed in 2015 to bring the CEO’s bonus target down to 40 per cent of salary, still above the city guidelines, but at least in line with the rest of the city-owned utility’s top executives.
Yet, the new bonus target will only take effect when Haines retires and a new CEO is named. And Toronto Hydro recently revealed — also via a footnote in a financial document — that Haines’s “active service will cease” at the end of 2024, almost a decade after the board committed to a more austere bonus policy for its top executive.
By 2015, Haines took home more than $ 1 million in total compensation and he has earned even more every year since.
The city again instructed Toronto Hydro to review its compensation policy for senior executives in 2016, once more asking the company to cap incentive pay at 25 per cent of salary and to apply the policy to new and existing contracts “that permit compensation adjustments.”
In a confidential response to the city in 2017, the utility’s board said it did not support bringing executive bonuses in line with the city’s 25-per-cent bonus policy for a host of reasons, including the risk of litigation if existing contracts are changed, discouraging the advancement of female executives and creating pay equity issues.
The board said in its response to the city that its variable pay program awards the achievement of “stretch” goals and its executive compensation policy, which it included in its response, states that “employees should expect significant variability” in awards payouts from year to year. Yet, financial filings show that Toronto Hydro executives seem to exceed those goals on a routine basis.
The board’s response to the city, which was disclosed in a filing with the 2019 OEB rates application, also cited a reluctance to depart from an approach of using incentive pay to motivate high-performing executives and said of the 25-per-cent cap “this practice is not consistent with industry practice.”
The question of how exactly to define “industry practice” is where things get tricky when it comes to Toronto Hydro, which can seem to straddle the line between the private and public sectors. It’s a for-profit company — it was incorporated under the province’s business corporations act in 1999, a move mandated by Mike Harris’s Progressive Conservative government — but its sole shareholder is the city and it operates in a closely regulated industry as a monopoly.
The city sets the governing principles for Toronto Hydro through a “shareholder direction” to the company, which specifies that three city councillors, including the mayor or a delegate, sit on the board of directors. City council is also responsible for appointing the remaining eight board members. The current councillors on the board are deputy mayors Stephen Holyday and Denzil Minnan-Wong, and Paul Ainslie.
“The idea (behind running municipal utilities as businesses) was they would be freed from many of the constraints that the public sector operated under,” said Andrew Sancton, professor emeritus of political science who taught at Western University. “They would be more entrepreneurial and efficient.”
Sancton said it is not uncommon for some public-sector executives to be paid private-sector rates for their work, pointing to the head of the Canada Pension Plan Investment Board, which manages almost $ 500 billion. And while many energy companies are government regulated, they also operate in the private sector and often face intense competition.
Yet, Sancton said, “a municipal electricity distribution outfit doesn’t strike me as being exactly in the same category.”
“What they do is buy electricity from the generator … and send it out to residents and businesses. It’s a complex organization but it’s not competitive at all, it’s a monopoly.”
While Toronto Hydro doesn’t generate power, it does maintain close to 30,000 kilometres of overhead and underground wires, plus tens of thousands of switches, transformers and poles. It also needs to invest in aging infrastructure and meet the needs of a rapidly growing city.
The company has borrowed heavily to invest in infrastructure, and in 2017 it got a $ 250-million investment from the city. Before that injection of funds, Toronto Hydro had said it would slash its annual payout to its sole shareholder to $ 25 million. Last year, the company paid the city a dividend of $ 92.6 million.
Haines outearns the CEO of Ontario Power Generation, who was the highest paid public-sector employee in Ontario in 2020 with a pay package of $ 1.23 million. And he makes far more than the CEO of Toronto Community Housing, another city-owned corporation, who took home $ 345,000 last year. The premier and the mayor both made around $ 200,000 in 2020.
He does take home less than the CEOs of EPCOR and Enmax, two Alberta-based energy companies Toronto Hydro used as comparators in a compensation benchmarking report included with its 2017 response to the city. The CEOs of those companies, which have out-of-province operations that go beyond local power distribution, earn more than $ 2 million each.
Toronto Hydro also noted in its 2017 response to the city that it does not provide long-term incentive payments, which often come in the form of stock options or grants.
Glen Hodgson, an economist with the C.D. Howe Institute who recently conducted a review of government-owned businesses, said Toronto Hydro’s governance on executive compensation appears to be working the way it is intended.
“It’s really the call of the board, it’s not the call of city officials or the council, because that’s why you created a state-owned enterprise in the first place and not another department of the city government,” he said, adding that if the city is unhappy with executive pay, it should raise that with the board of directors.
But Perks said the current administration at City Hall has not been “prepared to exert its authority” over Toronto Hydro. He said running the utility is similar to managing other public sector organizations and that compensation should not be benchmarked against private companies.
“It’s just an issue of fairness,” Bruno Silano said about the pension top-ups and executive compensation. Silano was an engineering technician who retired in 2020 after 30 years with the utility, including about a decade as a local union leader. “In the grand scheme of things, will (hydro) rates go up? No. But it’s just not fair.”
“It raises a whole set of questions about are these board members able to stand up to the executives and the president and CEO?”