Shaw cuts executive salaries, but pensions remain plump

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If you're a shareholder of Shaw Communications Inc., there's some good news for you where executive compensation is concerned. CEO Bradley Shaw and other top executives took a 20-per-cent salary cut last year as their company shrank with the sale of its media division. To recognize that a smaller company should equal smaller salaries is a good thing.

If you have read my past works on compensation at Shaw, however, you may recall that it's not the weekly paycheque that drives wealth for the company's management team. Instead, it's a wildly generous executive pension plan, driven by multimillion-dollar annual bonuses. And evidence of this is found elsewhere in the Shaw shareholder circular, where it is revealed the company estimates Bradley Shaw has now accumulated a pension worth more than $107-million in just 21 years of service at the company.

He's not the only one, of course. When Bradley's brother Jim retired as CEO in 2010, Shaw made headlines by acknowledging he'd receive a $5.9-million annual pension. All told, there are just 15 members of the company's "supplemental executive retirement plan," which was closed to new members in 2012 after just 10 years in operation. And by the end of the company's 2016 fiscal year in August, those 15 current and former executives had earned pensions totalling $553-million.

A refresher on how on earth this happened: The SERP, as it can be called, is like many gold-plated executive pensions in that it combines salary and incentive pay in its payout formula. Shaw takes the average of the executive's three highest base salary years, and then adds the average of the three years where the total of the cash bonus and stock-award grant values were the highest.

The way Shaw constructed this plan means the gigantic payouts are no accident, though. Here's how:

• Bradley Shaw’s 2016 salary cut to $2.26-million is irrelevant to that portion of the pension formula, because he’s already banked three years of a $2.5-million salary. That higher number, then, goes into the calculation.
• Shaw’s choice to include the value of restricted and performance share awards in the pension formula is not a universal practice. Many executive pension plans limit the compensation used in the formula to cash payments and leave equity awards out of it. While Shaw doesn’t award stock every year, it gave Bradley Shaw $1.34-million in share and option-based awards in 2016, more than offsetting the $1.15-million declines in salary and bonus from 2015 to 2016.
• By treating the highest salary periods separately from the highest incentive-pay periods, Shaw executives get the best of both worlds, and an unquestionably higher number in the formula than if the pension were based on simply the three highest years of total compensation.
• And, importantly, the Shaw bonus plan remains outsized. Founder JR Shaw, who still serves as executive chairman in his 80s, received a $9.6-million cash incentive last year because he has a contract that calls for him to receive a payment of between 0.5 per cent and 1 per cent of the company’s operating income if Shaw hits its financial targets. As I’ve suggested in past columns, when you pay the chairman of the board roughly $10-million a year in bonuses, the cash tends to trickle down to the top executives. Bradley Shaw’s 2016 bonus was $5-million last year, down from $5.9-million in 2015 and almost $7-million the year before.

In five years, the pension obligation for these 15 plan participants has grown to $553-million from $334-million. Now, to be fair, I will note this: In the world of pension accounting, more things go into this estimate than compensation. To figure out the present value of a stream of pension payments, you have to discount them to today's dollars using an interest rate. The lower the interest rate, the bigger the present-day value looks.

And part of the rise from 2015 to 2016 came as Shaw cut that discount rate from 4.1 per cent to 3.5 per cent. That was the primary driver, in fact, in adding $18-million to Bradley Shaw's total pension value over the course of the year, even as Shaw figured he'll be getting less incentive compensation in the future. Shaw figures a decrease in the discount rate of one full percentage point adds $96-million to its estimated obligations for all 15 members of the SERP.

Rates could rise, and the obligation could fall, instead. Still, these can end up being very real dollars. Shaw has just $432-million in assets in the plan, meaning shareholders are on the hook for more than $100-million to fully fund the pension, based on current estimates. The company has said it intends to get to 90-per-cent funding by 2018, and Shaw spokesman Chethan Lakshman says "it would be unusual to fully fund the pension plan." Mr. Lakshman declined to comment on my broader questions about the generosity of the plan.

Some companies have managers richly compensated for building shareholder wealth; others are run by founders who profit when the value of their holdings increase. The Shaws have it both ways.