It has been a transitional time, shall we say, for Suncor shareholders, who spent 2010 waiting for the payoff from the Petro-Canada merger.
In Suncor's executive suite, however, 2010 was a year of rich rewards, with year-end bonuses that nearly tripled cash pay for chief executive officer Rick George. Other Suncor officers made more in bonus than in salary.
The details can be found in Suncor's proxy statement to shareholders, working its way through Canada Post now. Mr. George, who had a salary of $1.4-million in 2010, received "non-equity incentive plan compensation," as bonuses are now called, of $2.58-million. Chief operating officer Steven W. Williams received $1.15-million on top of his $761,327 salary. And executive vice-president Boris J. Jackman's $850,000 bonus topped his $750,000 salary.
How can Suncor's top officers get such payments when the company's stock lagged its Canadian peers last year, as well as for the last five?
In the bad old days of compensation disclosure, investors would have been left guessing. Now, we can see the exact math.
Suncor's filings reveal that the bonus plan has little to nothing to do with how investors fare. Indeed, Suncor has a number of other equity-based compensation plans, like stock options and performance shares, that are linked with investors' interests. And Suncor says that its stock-based awards from 2006 to 2008 were either out-of-the-money at the end of 2010 or had failed to pay out at all.
Instead, for Mr. George, the annual cash incentive plan is based on a couple of financial metrics - cash flow and merger-related cost-cutting - as well as safety and environmental factors, and the somewhat squishier area of "personal performance."
Suncor spokesman Brad Bellows says that's the way it's intended. "Current-year stock price, we keep away from the annual incentive, because particularly in a commodities business, you can have a lot of fluctuation."
Mr. George's "target" bonus is 125 per cent of his salary. But the target is by no means a limit. All the aforementioned performance areas have a certain weighting - 20 per cent for the financial factors, 60 per cent for safety, environment, etc., and 20 per cent for personal performance. The Suncor board, either by formula or fiat, can overweight any of the factors so that they add up to more than 100 per cent.
So, in 2010, the financial factors got a 27 per cent weighting. Safety and environment came in at 81 per cent. And the board weighted Mr. George's "personal performance" at 40 per cent, double its original heft.
The math ends up like this: a $1.4-million salary, times 125 per cent equals a $1.75-million target bonus, which is then multiplied by weightings that sum up to 147 per cent, for $2.58 million. The calculations are similar for most of Mr. George's top executives.
The issue that arises is whether this transparent system doesn't wind up arriving at bonuses that are just as arbitrary as they were before the current age of disclosure.
For Suncor, which has a recurring fire problem at its operations, the choice of a "safety and environment" factor well in excess of target appears questionable.
Suncor says that, "With the exception of the February 2010 fire at the company's oil sands facilities, operational reliability was strong." The company also says "the financial impact of this event was carefully considered by the Board in its deliberation on CEO compensation" without quantifying how much higher the bonuses would have been without the incident. Mr. Bellows adds that the fire was "not a significant issue from an environmental point of view" and it represents "one month that was a problematic month out of 12, at one part of our business."
To its credit, Suncor improved most of its financial metrics in 2010. It is undertaking a massive job in digesting the habitually underperforming PetroCanada, and so far the integration is going better than some expected.
But by how much? Using Standard & Poor's CapitalIQ, I crafted a peer group of the world's similarly sized integrated oil-and-gas companies, and Suncor has below-average profitability margins (gross, EBITDA, EBIT, and net income, to be specific). There is still some work to do at the company - even if 2010's bonuses suggest Suncor's executives can hardly do better.