Executive compensation is on the rise, as profits increase
Executive compensation is on the rise, as profits increase
The most exciting corporate takeover last year was the fight for Lac Minerals Ltd., a poorly managed Toronto-based mining company that controlled a rich body of gold ore in Chile. In the end, the fierce battle for control of Lac between Vancouver upstart Royal Oak Mines Inc. and Barrick Gold Corp., the leading North American gold mining company, was a contest of mismatched competitors. Barrick, based in Toronto, was more than 10 times larger than Royal Oak and, predictably, won the bidding war.
It paid $2.3 billion for Lac, a price that it now says was a bargain. But the financial manoeuvres employed in the takeover did not end when the deal was signed. They resurfaced again last month when Barrick released its executive compensation information for 1994.
There it was disclosed that the company’s board of directors rewarded Peter Munk, Barrick’s founder, chairman and chief executive, for concluding the deal by doubling his bonus to $1 million.
That was in addition to a $500,000 bonus that he picked up
from his holding company, Horsham Corp., for completing a $700-million takeover of the cash-strapped real estate company Trizec Corp. of Calgary.
How executives who pull off takeovers are rewarded is one of the business practices that has been revealed as a result of the Ontario Securities Commission’s (OSC) two-year-old policy requiring publicly traded companies to disclose the compensation packages of their top five executives. Because the information documents are distributed to shareholders prior to annual meetings, investors and analysts are getting their first glimpse of the various ways devised to pay and motivate top executives. On top of their base salaries, many senior managers also receive short-term bonuses, long-term incentives, stock options, low-in-
terest loans and takeover bonuses.
Munk is not alone in the million-dollar bonus league. Ted Rogers, president and chief executive officer of Rogers Communications Inc., picked up a $1.3-million bonus related to his company’s $3.1-billion takeover of Maclean Hunter Ltd. in 1994. Like Munk, Rogers is not just an employee, he built the company and owns a significant portion of its shares. Two of Rogers’s executives, Phil Lind and Graham Savage, each got $ 1-million-plus bonuses for the takeover. Takeover bonuses “go back to the takeover mania in the ‘80s,” explained Martin Harts, a partner at consultant KPMG’s compensation practice in Toronto. “Of course, some of the big takeovers, like
Cadillac Fairview and (Robert) Campeau’s, didn’t work out. So you could argue that they shouldn’t have been rewarded.” But, he added, “usually a takeover is done to meet some kind of established corporate goal, so when it’s done a bonus is paid.”
But there was much more than just takeovers fuelling the jump in executive compensation levels that are now appearing as the compensation disclosure information
for 1994 is being released: even more important to executive’s piggy banks was the return of many Canadian companies to profitability. While the domestic economy grew at a healthy 4.5-per-cent rate in 1994, corporate profits almost doubled to $40 billion, and the bonus packages now being reported are correspondingly lush. And with corporate profits expected to continue to climb—probably to an all-time record— this year, bonuses are expected to increase again for 1995. Allan Taylor, chairman of the Royal Bank of Canada, is an example of how an executive can prosper when a company’s financial performance turns around. In 1993, the bank reported a relatively meagre profit of $300 million due to a large writeoff of some of its bad real estate loans. As a result, Taylor did not get a bonus. Last year, however, the bank recovered and reported a record profit of $1.17 billion, and Taylor was paid a total of $2.65 million, including a $950,000 bonus. The story was similar at BCE Inc., which owns the country’s largest telephone company, Bell Canada, and was the most profitable Canadian company in 1994 with earnings of $1.18 billion. That compared with a loss of $656 million in 1993 as a result of writedowns and restructurings at the conglomerate. BCE’s chairman Lynton (Red) Wilson was paid $1.4 million in 1994, including a bonus of $590,000. But like Taylor, Wilson did not collect a bonus in 1993.
Although those were Canada’s two most profitable companies in 1994, neither of them employed the highest-paid executive. Leading the compensation sweepstakes—indeed, far out in front—is Frank Stronach, chairman of Magna International Inc., a Markham, Ont.-based auto-parts company whose sales have been jumping as North American auto sales recover from the recession. Magna’s 1994 profit rose 65 per cent to $234 million, and Stronach earned nearly $41 million. That included a modest salary of a $200,000, a regular bonus of $7.3 million, plus an additional bonus of $6 million for providing “consulting services” for the company’s expansion into Europe. He also received $27.2 million by exercising stock options that he had been given in previous years. In all, Stronach’s $41 million broke the previous Canadian record of $32.3 million, which Munk set in 1991 when he, too, cashed in stock options accumulated over several years.
Stronach and Munk’s huge compensation packages have not been widely criticized because both men built their companies almost from scratch. But some analysts have begun to complain that even such entrepreneurial executives are taking more than their fair
share while their companies’ real owners— the shareholders—have to settle for much less. Magna, for example, paid out a total of $46 million in dividends to all its shareholders last year, only slightly more than Stronach’s compensation package.
According to business watchers, the disclosure of executive salaries has greatly heightened the public focus on pay for performance. David Leighton, business professor emeritus at the University of Western Ontario in London and a member of several corporate boards, says that as long as com-
panies’ financial performances improve, he does not object to hefty pay packets for senior management. “If it drives up compensation,” said Leighton, “because it’s rewarding people for good performance, and penalizes others for bad, that’s a healthy thing.”
Still, as a result of such increased scrutiny, many companies are increasingly using payment methods that are intended to encourage executives to improve profits—and share prices. “There has been a general shift away from the fixed portion of the compensation, the base salary, to the variable portion, bonuses and stock options,” said Ken Hugessen, compensation partner at consultant William M. Mercer Ltd. in Toronto. “They’re increasing the one-time bonuses, but they’re not increasing the base salary much. So there is no ongoing commitment to keep on paying if the performance doesn’t keep up.”
In general, the OSC’s disclosure requirements, which had been strenuously opposed by a large portion of the business community, “has opened the whole process up to daylight,” said Leighton. Because of the widespread public attention, more corporate boards have established compensation committees composed of so-called independent directors to review and set pay levels. And Leighton says that he knows of at least one CEO who recently turned down a compensation package put forward by the board’s committee because he felt it was too generous and would set a bad example for the rest of the company. Leighton declined to name the executive or the company because the information was a confidential board matter.
Indeed, the OSC’s new rules have created a mini-boom for consultants. Hugessen says Mercer’s compensation work has almost doubled, and KPMG reports a similar increase. He notes that a top-ranked compensation expert needs skills that combine the toughminded approach of a labor negotiator with the diplomacy of a marriage counsellor. “The board wants someone who can go toe-to-toe with the CEO,” said Hugessen. “There’s no point in hiring someone who will cave in psychologically to the CEO, who, let’s face it, got there because he’s aggressive and assertive.” Certainly, restraining the inventive and imaginative arguments put forward to justify bonuses takes special skill: almost every executive, no matter how poor his or her company’s overall performance, can point to something that has improved under their stewardship. Indeed, while Munk and Rogers picked up bonuses for completing takeovers, other executives appear to have made equally convincing arguments for bonuses in the face of defeat. Peggy Witte, founder, chairman and CEO of Royal Oak Mines, may have lost her bid for Lac to Barrick, but she claimed a bonus anyway. Apparently, win, lose or draw, when companies spend millions financing takeover campaigns, a little of that cash tends to stick to the chief executive.
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