Canada's gold companies are notorious, to use a loaded word, for the millions of dollars they've paid their executives in the past several years even as the price of gold, and the companies' share prices, have tumbled.
But there's one place in the summaries of executive pay where gold chief executive officers are racking up zeros: The current profits of the stock options they hold.
A look at the options held by the top executives at five major TSX-listed gold companies – Goldcorp Inc., Barrick Gold Corp., Agnico Eagle Mines Ltd., Yamana Gold Inc. and Eldorado Gold Corp. – shows none of the five men held any stock options at the end of 2014 that were "in the money," or exercisable for any profits.
That certainly could change if the mining industry's fortunes improve, because many of the options don't expire for two to five more years. On the flip side, however, a number of the options the executives held at the end of 2014 have since expired, useless.
A prolonged slump, then, could mean that what has been a key compensation tool will turn out very different than expected. We calculate that the miners originally valued the options granted from 2010 to 2014 at $37.3-million. Right now, it's quite possible they won't yield a single dollar of profit for the executives.
Stock options allow the holder to buy shares in a company at a set price, presumably the price the stock traded at the day the options were issued. As the stock rises, the options became more valuable – a feature that has made them a key component of compensation, all in the name of aligning executive pay with shareholders' interests.
The problem with options, however, is that if the market as a whole is posting consistent gains – as it did in the late 1990s, and has in recent years – the rising tide lifts all executives' boats. It can be a particular issue in the resources industries, where a spike in the price of the underlying commodity can drive all the share prices in the sector higher, regardless of how well the companies are managed.
For these reasons, many companies have been de-emphasizing options in their compensation plans, moving instead to stock-based awards that are contingent on company performance measures such as profitability, or that require the company to actually outperform its peers. At Agnico, CEO Sean Boyd received 60 per cent of his 2010 pay of $8.13-million in the form of options; in 2014, options represented 28 per cent of his $9.51-million package.
Companies that continue to rely heavily on stock-based compensation, absent performance elements, are subject to shareholder ire: Goldcorp, which has made options roughly 20 per cent of CEO Charles Jeannes's pay package in four of the last five years, had 25 per cent of shareholders vote against its compensation plan in 2014 in a "say-on-pay" vote. In addition to options, the company had a large portion of its long-term incentive plan based on restricted stock awards that had no performance requirements, an issue the company fixed in time for its 2015 proxy.
"The value of these awards depends entirely on Goldcorp's share price, not on how well the executives perform," argued the Vancouver-based Shareholder Association for Research and Education, or SHARE, in its 2014 Key Proxy Vote Survey in explaining its "no" vote in 2014. "Share price is not a fair measure of executives' performance because it often influenced by factors that are beyond the executives' control. … [T]he price of gold has a strong effect on the value of Goldcorp's shares, regardless of how well or how poorly the company is doing."
SHARE is concerned about options gaining value as gold prices rise. The irony is that the price of gold has been falling from its peak, wiping out what was originally reported as millions of dollars of executive pay:
Agnico's Mr. Boyd had 300,000 options, originally granted in 2010 at an exercise price of $56.92 and originally valued at $4.9-million, expire in January because the company's stock was trading in the low-$30 range.
Paul Wright, CEO of Eldorado, had 600,000 options, granted in 2010 at an exercise price of $13.23 and originally valued at $2.54-million, expire in January when the stock traded around $7.
Mr. Jeannes of Goldcorp had 150,000 options, granted in 2010 at an exercise price of $44.50 and originally valued at $2.24-million, expire earlier this month because the company's shares traded at half that level.
But what of options granted during the gold bear market? With most miners moving to other elements of compensation, there are fewer outstanding stock awards from the companies' darker days. And even then, many miners' shares still trade below the lowest of the exercise prices.
Eldorado requires 30-per-cent gains before any of Mr. Wright's currently held options return to profitability. Goldcorp's Mr. Jeannes has 120,000 options that were granted all the way back in 2007 that return to profitability if the stock gains about 15 per cent, but otherwise he, too, requires a 30-per-cent gain to use his more recently granted options.
Yamana must gain 75 per cent for CEO Peter Marrone to use his 2013 stock options. Barrick shares must rocket nearly 120 per cent for co-president Kelvin Dushnisky to use options he received in 2008, and which expire this December. (Agnico made option grants in January, 2014, to executives other than Mr. Boyd that are solidly in the money, and Mr. Boyd has a small potential profit from his 2012 options, thanks to Agnico's gains this year.)
All this is not to say miners' top executives are heading to the poorhouse, because salaries, cash bonuses, other stock awards, pensions and perquisites all add up to make them millionaires. It's just the numbers shareholders have seen in their proxy circulars aren't turning out quite as large as they – or perhaps the executives themselves – expected.