Dec '10/Jan '11

Misaligned risks and rewards

Study discovers wrinkles in mining executive pay

By Genny Griffiths

Bedford report
A study released in November by The Bedford Consulting Group offers a detailed look at compensation practices for executives and directors in Canada’s mining industry and unearths some surprises about how CEOs and board members are — or are not — rewarded for their work.

Combining base salary, bonuses and share-based rewards, the report notess the industry’s highest-paid CEOs (the top 25 per cent of companies with a market capitalization of $4 billion or more) bring in more than $6.9 million a year in salaries, bonuses and share-based rewards.

On the opposite side of the coin are audit committee members, nearly 60 per cent whom do not receive a retainer for their extra work, and 20 per cent receive no extra compensation of any kind. Audit committee chairs are only somewhat better compensated, with 88 per cent receiving an additional retainer, at a median value ranging from $14,900 in smaller companies to $27,500 in the largest ones.

“The audit committee chair and members bear a great deal of responsibility for approving the accuracy and appropriateness of the company’s financial condition,” said Howard Lichtman, Bedford’s chief marketing officer. “We wonder if these companies are rewarding the risks appropriately.”

The authors of the report surveyed 105 companies listed on the Toronto Stock Exchange, with a focus on juniors and development firms. It is a cohort that Lichtman said had lacked hard numbers. The companies were divided into four tiers to provide meaningful peer group data to industry professionals. The study showed that managers’ compensation packages grow “in lock step” with the company’s market capitalization level. The median salary for a CEO at a company rated in the $50 to $500 million category is $270,900; $500 million to $1 billion, $375,000; $1 to $4 billion, $497,500; and more than $4 billion, $925,000.

In keeping with other industries, the ratio of stock options, shares and bonuses to fixed pay for CEOs also grows in proportion to the company. In the under-$500 million category, this “pay for performance” totals 53 per cent of a CEO’s total compensation package; in the over-$4 billion category, the number climbs to 86 per cent.

Some years are lean and some years are fat; those are the risks and rewards for being in charge. “When all is said and done, the CEO is accountable for the combined results of all the managers who report to her or him, which in turn represents the overall results of the company,” said Lichtman.

The study also tracked the trend of reduced or non-existent bonuses for CEOs at struggling companies, with 42 per cent of companies not offering bonuses for CEOs last year. In addition, 13 per cent did not grant CEOs share-based rewards. For the top-tier executives studied, that means a multi-million dollar pay cut.

Rewarding executives for performance is a simple way to reduce conflict by aligning their interests with the interests of shareholders, said Wei Wang, assistant professor of finance at Queen’s School of Business, who is currently researching the retention and compensation of managers at firms in bankruptcy.

The same is true of board members, but according to the report, their ratio of share-based pay to fixed pay actually decreases as the size of the companies studied increases. In the under-$500 million bracket, 70 per cent of the total compensation for board members is share based, while at the biggest companies — the $4 billion-plus bracket — just 40 per cent of remuneration is linked to share value.

This is unusual, said Wei. Normally, studies show board member compensation to be increasingly tied to share value as companies grow because bigger companies tend to have big institutional investors on their boards, and those investors want share-based rewards.

For smaller cap companies without much revenue, “shares are the carrot on the stick,” said Lichtman. They have to attract able board members. “As you move into the $4 billion range, a mining company’s compensation structure begins to resemble that of any large corporation.

Bedford hopes to repeat this survey in the future, making it possible to compare year-on-year data.

To download Bedford’s original report, “Hitting Pay Dirt,” go to

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