The restructuring of Maple Leaf Foods, including the sales of its non-meat businesses, has been a success for shareholders, as the stock has doubled since the end of 2012.
But, it's fair to ask, were the divestitures so successful as to merit millions of dollars in bonus pay to some of the company's top executives?
The details of the bonuses are revealed in the company's recent proxy circular: Maple Leaf set up a "divestiture incentive plan" that would pay awards if it were able to sell its Canada Bread subsidiary, setting out a schedule that suggested the company could fetch as much as $90 per share.
Ultimately, however, it sold for $72 per share, not counting an $8 special dividend. Despite Canada Bread coming out at the lower end of the anticipated sales range, Maple Leaf paid bonuses of $8.5-million to its executives, plus another $4.7-million to Canada Bread leaders.
Before we delve more into these details, let's acknowledge that Maple Leaf has come a long way in its executive compensation plans. In October, 2010, soon after activist investors took a position in the company, I criticized Maple Leaf for using a "comparator group" to set CEO Michael McCain's pay that was composed entirely of U.S.-based food companies, some of which were giant-sized. Using much bigger companies as a comparison for Mr. McCain's compensation packages was probably a factor in how his pay, in 2009, was well over $6-million when a number of comparably sized Canadian companies were giving their CEOs less than $3-million.
To Maple Leaf's credit, the company has completely overhauled its pay peer group, and Mr. McCain makes less now than he did then. ISS and Glass Lewis, two prominent shareholder-advisory firms, suggested their clients vote "yes" this year in Maple Leaf's say-on-pay vote, based on the stock's outperformance and the performance-based nature of the company's stock plans.
The award pay for the Canada Bread sale, however, is a one-time program – and while it may be performance-based, it's not clear to me that the sale performance matches the pay that resulted.
Maple Leaf says it "has used divestiture incentive plans so that executives engaged in the sale of operating divisions are motivated to achieve best terms for the sale without being distracted by the personal impact the sale will have." In the case of Canada Bread, it set up an award pool that wouldn't pay out unless Canada Bread sold for at least $70.65 per share. At $80.65, the bonus pool would be just under $12.9-million; at $90.65, the "maximum amount," the pool would be just over $16.1-million.
We don't know exactly when Maple Leaf created the plan, but those higher numbers were within the realm of possibility. At the time, Michael Van Aelst of TD Securities Inc. suggested the bakery business could sell at 10 to 12 times its expected EBITDA, or earnings before interest, taxes, depreciation and amortization. Precedent bakery deals were sold at an average of 9.9 times trailing EBITDA, and Mr. Van Aelst believed Canada Bread could fetch more because it "holds the No. 1 market position with about 43 per cent market share in a virtual duopoly." (The other "virtual duopoly" giant is Weston Foods.) He suggested a price that worked out to the mid-$80s per share.
That's not an apples-to-apples comparison to the $72 Mexico's Grupo Bimbo agreed to pay, because Canada Bread paid an $8 dividend before the sale was complete and also sold its pasta operation separately. Still, Mr. Van Aelst said in February, 2014, when the Canada Bread sale was complete that the price was "at the low end" of the range of his expectations.
Maple Leaf's bonus plan, however, paid out $8.5-million in awards because it deemed a sale price of $77.25, including a portion of the special dividend. Richard Lan, chief operating officer of the company's foods group, received just under $2.95-million, while chief financial officer Michael Vels got $2.5-million. Maple Leaf paid Deborah Simpson, who replaced Mr. Vels as CFO in May, 2014, just over $1-million, while unnamed executives received a total of just over $2-million.
Mr. McCain was not one of the recipients, but he offered his take on the plan in an interview with The Globe and Mail on Wednesday: "The management team that was actually on the front lines of participating in the sale of the assets [was] incentivized to sell the asset at the highest price. So the award pool was correlated exclusively to the transaction price."
Correlated exclusively, perhaps, but maybe not correctly. The executives, who all had past share awards from Maple Leaf, stood to gain from the stock's rising share price as long as Canada Bread got sold. If they left the company, they had generous severance arrangements. So the special bonus plan should have rewarded a truly exceptional price for the business — not what Maple Leaf realized.
David Milstead