"What does Shaw mean to you?" the Calgary cable company asks on the cover of its latest annual report, with "Community Wi-Fi zones" and "250 Mbps download speed" among the helpful suggestions.
Missing, however, is my answer: Shaw Communications means excessively generous executive compensation.
Indeed, the company has found itself in the headlines again, as the recent release of its proxy circular reveals that the estimated future cost of Shaw's executive pension plan ballooned to a total of $334-million at the end of the company's last fiscal year. More than half of that obligation is owed to company founder JR Shaw and his sons Jim and Bradley; other generous amounts are slated for non-family executives.
The problem from an investor's perspective isn't so much that the pension plan is generous, although it is; the issue at Shaw is that it simply pays its executives too much, starting at the top with founder and executive chairman JR Shaw.
For some time, Mr. Shaw's bonus plan has called for the company to pay him anywhere between 0.5 and 1 per cent of the company's operating profit, subject to a few adjustments. While it requires that Shaw hit its financial targets before any payment is made, Mr. Shaw's bonus history suggest the company has rather consistently hit its goals.
That plan may have been appropriate for a smaller company, but Shaw now tops $1-billion in operating profit. And while Mr. Shaw voluntarily limited his bonus to a mere $6.3-million in recent years, the company's board awarded him his minimum 0.5 per cent in fiscal 2011, or $8.8-million. Combined with his $1.5-million salary, Mr. Shaw took home more than $10-million in cash compensation.
When you pay the executive chairman that much, you've got to fork out for the CEO, too. Jim, who served in the role until January, made $8.5-million in 2010, including a $6-million bonus. Younger brother Bradley, who took over as CEO partway through the fiscal year, made almost $8-million, including a $5.5-million bonus.
A look back at the salaries and bonuses for the Shaw sons shows frequent annual increases of $500,000 or more. And that's the biggest driver behind the ballooning pensions, which use an average of the three highest years' pay in their payout calculations.
At the end of the 2008 fiscal year, Jim Shaw was entitled to an annual pension of about $4.7-million, I calculate, based on his prior three years' average earnings of about $6.7-million. But by the end of 2010, the annual pension had increased to more than $5.8-million because his three-year average pay then topped $8.3-million.
It's a ratcheting effect: When JR Shaw accepted his bigger bonus in 2011, it drove his three-year average earnings higher, and added $650,000 to his annual pension amount.
Shaw justifies its pay levels by saying they're reviewed annually versus a comparison group of 25 companies. The problem with that, however, is Shaw has chosen a batch of much larger "peers" who would naturally pay their executives more than companies Shaw's size.
Looking back at Aug. 31, 2010, when the group might have been chosen for the 2011 fiscal year, I find that Shaw's $4.6-billion (U.S.) in revenue is $700-million less than the smallest of the 25; the median figure is $13.5-billion. The median market capitalization of the peer group, at $18-billion, was more than twice Shaw's value at the time. (Data from Standard & Poor's Capital IQ.)
The most galling thing about the Shaw family's compensation is that the appreciation in the company's share price – more than 50 per cent in the five years ended in August – has markedly increased their wealth. The shares held by JR, Jim and Bradley at the end of 2006 increased in value by more than $300-million (Canadian), to more than $1-billion. The shares also paid the three men roughly $160-million in dividends, I figure.
That share performance may lead some to say that the Shaw family's pay is no big deal. (The company, offered the opportunity last Thursday to answer questions on this topic, has not called.) This is how I see it, however: 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.
It sounds like the perfect target for a Say On Pay vote. But, alas, the Shaw shares available to the public have no voting rights, so buying into the company gives you little say in anything. Things have gone well for the company in recent years, so perhaps investors have been unconcerned. If the shares' performance turns and the family still make their millions, however, the company might be wise not to ask stockholders what Shaw means to them.
Special to The Globe and Mail