One of the keys to managing in the current environment–and thinking ahead long term–is having a motivated and experienced team. However, shareholders impacted by the significant fall in share prices and with the prospect of reduced dividends in the period ahead may be quick to criticize any perceived excessive reward. How to reward and retain the best in the mining industry in this environment will be high on the agenda of most public company remuneration committees.
According to the 2009 Mining Salary Survey by Coopers Consulting Ltd. and PricewaterhouseCoopers LLP (PwC), despite a slowdown in the mining industry, the CEOs of these companies have seen year-over-year increases in salaries. Average annual base pay for Canadian CEOs last year rose to $484,000 compared to $443,000 in 2007; however, the average Canada-wide bonus paid to CEOs declined from 79% in 2008 to 61% of the annual base pay in 2009.
93% of Canadian CEOs at mining companies were eligible for short-term incentive compensation (i. e. an annual cash bonus), but of the 54 companies reporting CEO salaries, only 34 (or 63%) reported actual cash bonus payouts.
The highest reported CEO cash incentive percentage amount was 118% of base pay.
The average actual CEO cash bonus payout was $303,000. The average total CEO cash compensation package was approximately $670,000.
Of particular significance is the fact that the data for the years 2005 to 2008 shows that the actual percentage increase of incentive granted to CEOs was above target in each of those years. But this trend did not carry forward.
For the first time since 2005, the proportionate amount of the annual incentive component has decreased, likely reflecting that actual performance over the most recent performance measurement period has been below expectations.
Mine site staff
Over 80% of mine site salaried positions are eligible for some form of short-term incentive plan, an increase of 21% since 2002 (59%). The average such bonus paid (across all mine site salaried staff positions) was 15%, a decline of only 2% since 2008. This a good sign, demonstrating that despite the current economic climate the industry recognizes the importance of incentive compensation, recruiting and retaining top performing staff.
A comparison of Canada-wide mine site average total cash compensation shows the average overall movement of the total cash compensation salary line for 2009 was only 1.45% (across all mine site positions) over 2008 (compared to 6.0% in 2008 over 2007), reflecting the measures put in place to reduce overall costs since the start of recent slowdown in the mining sector.
Responding to the reward challenges
One consequence of the economic downturn could be that it will encourage mining companies to re-look at their compensation design to consider whether their compensation systems have been designed to encourage and reward behaviour that is consistent with the objectives of the company stakeholders.
An emerging influence of note is ‘say-on-pay.’ This item would allow shareholder votes (typically non-binging) on the make-up and components of the executive compensation package. While they may be non-binding in nature, the effect of a negative shareholder vote can have a significant dampening effect, to the extent of causing an internal company to re-think the executive compensation package.
Another emerging influence (and one that is gaining increasing prominence) is a focus on internal pay equity. Internal pay equity uses the relationship between the CEO’s pay against one or more layers of the company’s employees (most often the other named executive officers and average employee) to evaluate CEO pay. Proponents of this approach state the advantages range from removing concerns about CEO pay being driven too much by competitive market data to restoring fairness internally.
Balancing short-and long-term expectations
There is a strong expectation from shareholders (and indeed the public) that executives should now see their realized compensation fall to reflect declines in profits and share prices. But some companies argue that motivating executives to deliver in a bear market is harder to do than in the good times, and therefore performance still warrants a similar bonus. In any case, the war for top talent continues to rage, and in the current environment companies need to make more realistic judgments about the risk of losing key people, especially as the retention of scarce mining skills continues to be a challenge.