Thompson Creek Metals Inc. and Pan-American Silver Corp. can proudly report they received a clear majority of shareholder support for their executive-pay practices this year, receiving 64-per-cent and 75-per-cent approval, respectively.
The problem, however, is that the 71 Canadian companies that sought shareholder approval – so-called Say On Pay – averaged 94 per cent “yes” votes, notes compensation firm Hugessen Consulting. Thompson Creek Metals and Pan-American Silver were, in fact, at the bottom of the heap.
What were the two doing wrong? As it happens, there isn’t even a consensus between the two biggest advisory firms that make recommendations on Say On Pay votes.
Long-time leader ISS told its subscribers – institutional shareholders seeking guidance on proxy topics – to vote “yes” for Pan-American but “no” on Thompson Creek Metals. Competitor Glass Lewis & Co. made the opposite recommendations. It’s enough to make ordinary investors, who don’t have the benefit of expensive proxy-advisory services, scratch their heads.
For ISS, the compensation analysis is driven by whether pay matches performance. While Thompson Creek shares were up 25 per cent over 12 months at the time of the April analysis, they lagged their mining peers. The underperformance got worse measured on a three-year basis.
Yet Thompson Creek CEO Kevin Loughrey’s pay increased 6.8 per cent from 2009 to 2010. ISS particularly objected to a guaranteed retention-bonus program, as well as a performance-share plan with a lack of information on what performance hurdles Mr. Loughrey needed to overcome.
Mr. Loughrey says the company is locked into the retention payments through contracts signed by a predecessor company. It will also consider its performance-hurdle disclosure for next year.
But, more broadly, “I’ve not one time heard any shareholder raise a compensation issue with us. To me, these issues come about as a result of huge, outsized pay packages that are not justifiable under any scenario and are well out of line with common sense. We have none of that at our company.”
Mr. Loughrey’s specific objection to ISS’s analysis is that Thompson Creek Metals, as a pure-play miner of molybdenum, shouldn’t have been judged against “peers” that mine copper or gold, commodities that had differing past price performance. “There is no peer group for Thompson Creek Metals,” he says.
Glass Lewis, while expressing similar concerns about disclosure and pay-plan design, noted that overall pay levels at Thompson Creek Metals were below peers and, when a wide range of financial measures was considered, the company “performed about the same as its peers.” It found no serious pay-for-performance disconnect.
At Pan-American Silver, however, Glass Lewis found the biggest problem to be lack of disclosure, with too many of the pay policies vague and lacking objective performance measures. An example: The company said the criteria used to determine the CEO’s award size were “commitment, initiative, knowledge, leadership, teamwork and communication.”
“While compensation levels appear reasonable … we are extremely concerned about the [compensation]committee’s failure to establish any clear link between executive pay and company performance,” Glass Lewis wrote.
ISS, while also noting disclosure problems and a lack of long-term performance-based pay, noted that Pan-American Silver stock easily outpaced materials-industry peers over one-, three- and five-year periods, and found no pay-for-performance disconnect.
Pan-American Silver general counsel Robert Pirooz says the company is “very disappointed” by the Glass Lewis recommendation because it views itself as “extremely conservative” in its pay levels.
After getting the thumbs-down from Glass Lewis, Pan-American looked at proxies that got a positive recommendation from the research firm, and “there are 30 or 40 pages of disclosure,” Mr. Pirooz said. “I’m not sure that’s helpful or in anyone’s best interest. People need to understand the mechanics and the way in which success is tied to bonuses, and we really felt we did that.”
It’s easy to look at the conflicting recommendations from ISS and Glass Lewis and dismiss the whole process – who knows better how to pay executives than the company’s board? Yet despite the disagreement, the two advisory firms make legitimate points about the pay programs at both companies. Shareholders should consider their criticisms when they peek at other companies’ proxies in the future.