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Behind the numbers

As Maple Leaf lags, CEO's pay keeps pace with the giants Add to ...

Michael McCain, CEO of Maple Leaf Foods Inc. , has no peers among Canadian CEOs.

If you don't believe me, check the company's proxy circular, which shows the firm used only U.S. food companies - many of them international giants - for comparison in setting Mr. McCain's pay package.

Lack of patriotism isn't the problem. By crafting a peer group of large U.S. companies, then pegging Mr. McCain's pay to the median, the Maple Leaf board of directors has created a methodology that helps ratchet up his pay.

"The companies you look at, the comparison group, will drive your [pay] decision more than anything else," says Ken Hugessen, a Toronto compensation consultant. "So you need to roll up your sleeves and get it right."

Mr. Hugessen declines to speak directly about Maple Leaf. I am not as circumspect - nor are the folks at West Face Capital Inc., a Toronto investment firm, which purchased a 10 per cent stake in the company with an eye toward prodding its management.

When it comes to the value of the companies in its self-selected peer group, Maple Leaf is one of the runts. It ranked 20th in market capitalization among the 25 firms in the group at year-end 2009. At about $1.5-billion (U.S.), Maple Leaf was dwarfed by the $40-billion-plus Kraft Foods Inc., plus three others that exceeded $20-billion: General Mills Inc., Kellogg Co. and Archer Daniels Midland Co.

But compensation consultants prefer revenue rankings to market cap comparisons, because of the ephemeral nature of stock prices, says Christopher Chen of Hay Group. On a revenue basis, Maple Leaf falls in the middle of its peer-group pack. And Mr. McCain's three-year average annual compensation of $6.6-million (Canadian) resembles the CEO packages at J.M. Smucker Co. ($5.4-billion (U.S.)) and Hershey Co. ($6.5-million), the two firms with annual revenues closest to Maple Leaf Foods.

Like compensation consultants, Mr. McCain has good reasons to prefer a revenue-based comparison, as the two companies closest to Maple Leaf Foods in market cap - Tootsie Roll Industries Inc. and Lancaster Colony Corp. - paid their CEOs an average of $3.9-million and just over $800,000, respectively, in the last three years.

While Mr. McCain's pay package fits neatly in a revenue-ranked U.S. food company comparison, the fact remains that Maple Leaf is not a U.S. company, as 75 per cent of its revenue is Canadian. Maple Leaf recognizes this reality in its other compensation decisions. It uses a blend of U.S. and Canadian companies' numbers in setting pay for two of its other top executives and only Canadian comparisons for a third.

So what if we redefine the peer group? What if we say the comparison should be to Canadian companies in the consumer staples and consumer discretionary sectors?

The results are not good for Mr. McCain. The two companies closest in annual revenue are Rona Corp., where CEO Robert Dutton made an average of $2.7-million (Canadian) over the last three years, and Sears Canada, where Dene Rogers averaged $2.3-million in 2008 and 2009.

Maple Leaf spokeswoman Lynda Kuhn says the company uses U.S. peers because Canada doesn't have a large number of food companies. She notes the company's outside compensation consultant also signed off on the methodology. "We see the talent market as North American in scope," she added.

Wayne Johnson, the company's chief human resources officer, notes the reported compensation in the proxy includes performance-based shares that only vest in full if the company's stock price matches the return of an index of food products companies.

Over the last five years, however, it has not done so, and it has also failed to keep track with the S&P/TSX Composite. Mr. Johnson says Mr. McCain's actual payout from the stock plan, which represents half or more of his compensation each year, is smaller than the target numbers disclosed each year.

It must be noted, though, that this significant compensation could all be Mr. McCain's if the company merely matches, not surpasses, its peers. And Maple Leaf's share-grant plan allows executives to keep half the performance shares no matter how poorly the company does.

The unfortunate result for Maple Leaf shareholders is that while Mr. McCain's pay package is keeping pace with the industry's giants, Maple Leaf's performance is not. The company's board might examine whether the two should be better linked.

Special to The Globe and Mail

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