Top 100 paid executives report: B.C. shareholders take aim at C-suite pay versus company performance

Business Vancouver

Published July 22, 2013 | ECONOMY AND FINANCE

By Richard Chu

It was another golden year for some of B.C.‘s highest paid executives.

The province’s top 100 collectively were paid $360.5 million in compensation in 2012. Nearly half of the total went to 25 executives from many of the biggest Vancouver-based publicly traded companies listed on the TSX and TSX Venture exchanges.
As in previous years, resource company executives dominated the list. Of its 47 companies, 32 are in the mining, forestry and oil and gas sectors.

This year’s top earner was Paul Wright. The Eldorado Gold CEO was paid $18.7 million in 2012, more than half of which went toward his company pension. The package is 64% more than the $11.3 million Wright was paid in 2011, ranking him fifth overall.
Telus chief Darren Entwistle came in second in B.C., earning just over $11 million, a 7.8% increase from what he was paid in 2011 and a rise of three places over last year’s rankings. Much of his compensation was made up of share-based awards.

Rick Van Nieuwenhuyse ranked third on this year’s list from his combined 2012 earnings when he was president and CEO of Novagold Resources and then became head of NovaCopper, which was spun out from Novagold in April 2012. Van Nieuwenhuyse’s ranking is 11 places higher than last year’s, when his $5.75 million earnings put him in 14th place.

Much of his 2012 compensation was share-based.
While compensation grew for many executives on this year’s list, the overall amount earned fell below the record $365 million paid out in 2011. Based on Business in Vancouver research, last year’s decline resulted primarily from a significant drop in options-based awards given out to executives.

Last year, the top 100 were collectively paid $77.8 million in stock options, a 45% drop from the $143.7 million in options handed out in 2011 and a 14% decline in the value of 2007 options.
That’s good news for many institutional and other activist investors who have demanded a clamp down on the use of options and the excessive pay given to corporate elites.

Jennifer Coulson, manager of stakeholder engagement at BC Investment Management Corp. (BCIMC), said at the Social Investment Conference this year that the institutional investor voted against most (58%) of the executive compensation plans this year.

A major issue was the use and amount of stock options in executive pay packages, but concerns were also raised over excessive pay levels, disconnects between pay and company performance and poor financial disclosure by a number of the world’s largest companies.

Debra Sisti, vice-president of Canadian research at Institutional Shareholder Services Inc. (ISS), said shareholder support for executive pay packages has continued to decline as more companies provide say-on-pay votes at their annual general shareholder meetings.

In total, 129 Canadian companies offered say-on-pay votes this year, up from 70 in 2011. During that time, approval levels fell to 89% from 94%. Barrick Gold suffered the worst voting result this year with less than 15% of shareholders approving the company’s executive pay package.

While the votes are largely symbolic in Canada, Sisti noted that is quickly changing around the world. Last year, a two-strikes law came into effect in Australia under which companies will be required to put their entire board up for re-election if shareholders twice vote down executive pay packages.

The U.K. and France are preparing legislation that requires binding shareholder votes on pay, something Switzerland passed in a referendum in March, and Germany has made regulatory revisions that require caps on total compensation, something U.K. unions have already imposed on their asset managers.

Many of these developments come as investors and the general public worry about the widening income gap in society.
Said Sisti, “Over the past proxy season, what became apparent, from a sustainability perspective, is that shareholder proposals were focused on income disparity.”

While the top 100 list declined in overall compensation, many executives earned more cash last year than in previous years. Overall, their salary, bonus or pension value earned accounted for nearly 51% of their total compensation. That’s up from 34% of total compensation paid out in cash in 2011, and even higher than the 47% earned in cash in 2007 and 2008.

Sisti said the changes have generally been at the discretion of the board and their compensation committees.
“As more pay becomes tied to performance elements, the payouts are lower, and in generally flat to down markets … stock options have not been terribly lucrative. So boards have quite often used their discretion to soften the pain and ensure some payout to senior executives.”

Pay restructuring needed
While many of Canada’s largest pension funds have taken a more activist role in addressing excessive pay, some suggest more fundamental changes are needed to improve the system altogether.

Michelle de Cordova, director of corporate engagement and public policy at NEI Investments, said compensation reporting needs to be revisited given the confusion over what executives are paid in each given year.

For example, an increasing number of management information circulars take pains to note that the value of stock options granted is theoretical and is not exercised or paid out in a given year.
“What [executives] get paid is not the same as what is in front of the shareholder. It can’t be good that shareholders are enraged by numbers that are never actually paid. That’s not sensible and that massively adds to the confusion and complexity.”

A global PwC survey of 1,110 executives found that complex and variable compensation packages were less valuable to CEOs. Two-thirds of CEOs surveyed would prefer packages that focused on internal company metrics they can control (like profit) instead of packages that emphasize external measures like total shareholder return.

Only a limited number of executives were motivated by pay packages based on highly variable outcomes.

Most executives were willing to take an overall pay cut if it meant that more of their compensation was fixed since executives generally discounted by as much as 50% elements like deferred bonuses and long-term incentives.

De Cordova noted that investors in the U.K. are already starting to push against large share-based awards in executive compensation on top of discouraging the use of options.

“We are certainly looking at and thinking about it here. Part of the argument is that [share-based awards] are distracting executives from the business of running the operations of a business and certainly puts an emphasis on what the share price is doing.”
De Cordova added that shareholders would also likely benefit longer term if pay packages incorporated metrics that reward an executives’ efforts to support other company stakeholders ranging from a business’ employees and customers to its suppliers, bondholders and other community stakeholders.

“Research shows that it’s very tempting for executives to do something or not do something that has an effect on the quarterly numbers because that is going to affect the share price. It’s probably not healthy in the long term that an executive is thinking like that.” •

© Copyright 2013, Business In Vancouver
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