Mining companies are accustomed to working with long lead times: potential plays can take years to assess, mines can take a decade to develop and operate for decades more while commodity cycles rise and fall.
This year, as those companies’ boards are preparing for the annual meeting season, they are being prompted to make some serious decisions in a rather short time frame. It’s not that the market’s lengthy decline is a sudden surprise. But with share prices near 10-year lows and reserves under stress, costs are being slashed wherever possible. And boards, with an eye to activist shareholders and a few high-profile rows over executive pay packets, are now tackling the thorny question of executive compensation. Should the CEO and other executives take a haircut, and if so, how much?
“There is a sense, that predates even the rout in prices, that compensation in the mining industry, particularly in gold mining, has gotten a bit outsized relative to the rest of the world,” says Ken Hugessen, CEO of compensation adviser Hugessen Consulting Inc. (and a Listed columnist.)
Often, reworking executive compensation in what looks to be the darkest days of the current cycle is more difficult than simply slashing paycheques, especially with options in deep submergence. “In some cases their current [compensation] programs literally cannot be applied because you just don’t have that many shares available and you don’t have that much cash,” he says.
Hugessen, who recently hosted a presentation with a number of mining company executives that dealt with the compensation conundrum, says it’s a hot-button issue but for the most part mining companies are keeping their intentions to themselves until their proxy circulars are released.
A few got their news out in 2015, announcing compensation rollbacks for top officials. Last August, Tahoe Resources Inc. (TSX:THO) announced a 20% reduction for the executive chair, a 10% cut in director fees and a 5% salary cut for senior executives. Similarly, Eldorado Gold Corp. (TSX:ELD) last fall cut its CEO’s base salary by 20% and reduced salary for its executive team by 10% and its directors’ retainers by a similar amount.
Jonathan Rubenstein, a veteran mining company director who sits on five mining company boards and is chair of Eldorado Gold’s compensation committee, says that the impetus for executive compensation reductions came from the CEO rather than directors. “It was led by [CEO] Paul Wright and it pretty much has to be, because of course we have written contracts with our executives and the reduction would have been impossible without their cooperation.”
Given that Wright had become a regular on highest-paid CEO lists, these efforts might be taken with a grain of salt. Still, after announcing the executive compensation cuts, Eldorado executives met with several large shareholders to outline the latest moves. There was no shareholder pressure or outside agitation to cut salaries or mollify shareholders, Rubenstein says, but developments leading up to last year’s annual meeting, including ISS recommending against his election as chair of the compensation committee, did play a role in the investor presentations. “We saw several and it was really a positive engagement.”
Other mining companies, including Yamana Gold and Kinross Gold, held similar meetings regarding their executive compensation with shareholders last year as well. Two of the three say-on-pay votes that went against Canadian companies last year involved mining outfits, Yamana and Barrick Gold. Both firms vowed to fix their pay schemes. In the case of Yamana, advisory firm Glass Lewis recommended rejecting, citing high compensation and one-time awards combined with a “significant disconnect between pay and performance.”
Hugessen predicts that announcements of cuts to compensation for top officials to be routine this spring in the mining space. “I expect that most responsible companies will take a big axe to traditional bonus levels. You will see the salaries frozen for sure, you will see the bonuses come down significantly, anywhere from 25% to 50% and in some cases it will be zero.”
To the surprise of some, the poor performance of most mining companies at the bottom of the commodity cycle has not triggered a wave of departures among CEOs. Nor has it provided indications that boards are holding executive teams to performance targets established when times were good. The most notable recent departure of a senior executive was Hudbay Minerals Inc. (TSX:HBM) CEO David Garofalo, but that was only because he was selected for the top job at Goldcorp Inc. (TSX:G) to replacing the retiring Chuck Jeannes.
In some cases, the issue of management performance may take care of itself as some top executives decide to shift companies or firms are gobbled up and absorbed as they run out of capital.
A related headache now emerging for resource company boards is just how to utilize share options as long-term compensation to retain key management in an environment of plunging share prices. “The challenge that boards are facing, is management is arguing that because of the depressed prices which are industry-wide, the competitor is in a hiring position to essentially replenish underwater options that look to be almost definitively zero value,” says Paul Gryglewicz a senior partner at Global Governance Advisors in Toronto. Jumping ship can allow executives to reset their long-term compensation, in other words. Companies can compete to keep their own talent by re-pricing their options, but allowing executives to surrender options in order to be later granted a new reward could be a difficult sell with investors, particularly retail shareholders. “Boards are struggling here on this.”
Meanwhile, critics of executive compensation in the mining sector received more ammunition recently with the release of the 2015 REM Report by London-based specialist banking and asset management firm Investec. Its survey of 100 mining companies found only a weak relationship between CEO pay and financial performance. The annual survey noted that miners have attacked costs with vigour but have at best kept executive compensation flat. “We are now well into the fourth straight year of underperformance of the mining sector in equity markets and the question remains whether companies are doing enough to restructure executive pay,” Jeremy Wrathall, head of Investec’s Global Natural Resources, says in a statement. “It seems from this report that they are not, despite industry wide cost-cutting efforts.”
Photography: Rick Wilking/Reuters