Recently, a group representing Canada's biggest pension plans stood up and voted "no" at the Barrick Gold Corp. annual meeting. When asked to approve a pay package for its CEO and board of directors, shareholders voted 85.2 per cent to reject the high-priced plan.
Barrick is only the second Canadian publicly traded company to lose a say-on-pay vote. Last year, pharmaceutical company QLT Inc. lost a similar vote. While non-binding, these votes do serve as advice from the company's investors.
The Barrick revolt is a sign of shareholder unrest over how much some top corporate executives earn while their companies' investment value shrinks. In 2011, the top 100 Canadian CEOs were paid an average of $7.69-million, or 235 times the average income of $45,488 earned by ordinary Canadians.
The Barrick package included an $11.9-million signing bonus for co-chairman John Thornton, which was supposedly required to induce him to take the job. He was previously president of Goldman Sachs. In 2012, Mr. Thornton's take-home pay was a reported $17-million, while Barrick reported a $665-million loss and its share price fell by more than half.
Six other Barrick executives made a total of $47-million last year. Founder and chairman Peter Munk paid himself $4.3-million, up from $3.7-million in 2011. He also allocated $2.5-million to his friend, former Prime Minister Brian Mulroney, as senior advisor of global affairs because of his long-ago international contacts.
The group of dissenting shareholders said "this compensation is inconsistent with the governance principle of pay-for-performance."
Around the same time as the Barrick meeting, Hunter Harrison, CEO of Canadian Pacific Railway Ltd., was reporting what he called the best quarter in the company's 132-year history. Last year's controversy was his hiring. Harrison's compensation for 2012 was $49.2-million. Suddenly, his compensation was nothing to rankle CP's shareholders, as the common shares rose from $71 to $133. He was worth the money.
Mr. Harrison was a "superstar" lured from rival Canadian National Railway Co., One Bay Street analyst compared him and CP's new president and chief operating officer, Keith Creel, to Larry Bird and Michael Jordan on the 1992 U.S. Olympic Basketball Dream Team.
But his success at CP might be an anomaly. Top CEOs are more likely to flop when they switch companies, according to Executive Superstars, Peer Groups and Overcompensation, Cause, Effect and Solution, a recently published study on executive compensation by University of Delaware corporate governance professors Charles Elson and Craig Ferrere.
The paper says executives are overpaid and their interests are not aligned with shareholders' interests. The fault lies with an approach used since 1949 to determine an appropriate pay structure.
In setting a pay structure, boards practice what's known as competitive benchmarking, peer grouping or horizontal comparison. They use other executives in similar industries and companies of similar size and complexity as a reference point when establishing compensation targets for senior executives.
The study found that the comparisons became scorecards for CEOs and companies that didn't want to fall behind their peers. Pay below the 50th percentile sends a negative message about the relative merit of the executive, and by extension, the company. Pay hikes escalate and the compounded effect is a significant disparity between the CEOs' pay and what is appropriate for the companies they run.
Superstar athletes, actors, performers and best-selling writers earn tremendous rewards for their talents. They fill stadiums, arenas, cinemas and bookshelves, based on their individual merits. Superstar executives are in the same compensation class, but their contributions are less direct and discernible. The CEO doesn't always have a direct effect on the company's and stock's performance. External economic factors often have more of an effect.
Looking at the way sports superstars are compensated can provide lessons for investors in how to get some bang for the CEO buck. When the Toronto Blue Jays decide to sign a baseball free agent, such as Melky Cabrera or R.A. Dickey, they apply a statistic known as WAR (Wins Above Replacement). WAR shows the number of additional wins a player contributes to a team compared to a less expensive, ordinary player at that position.
When the Blue Jays sign Cabrera at millions of dollars, they try to calculate what his worth is over a player that can be hired for thousands of dollars. So, too, company boards operating on behalf of investors can calculate the value in dollars a superstar CEO can bring to the company.
Since the calculation can only measure past performance and not the future, it works out sometimes and not other times. Even if they calculated their WAR, the Blue Jays' investment in free agents hasn't seemed to pay off this season. Baseball free agents, like CEOs, are often paid too much. The great ones are rarely paid enough.
So who is responsible for creating better rules for compensation?
I paid my way through college by counting proxy ballots for a temp agency commissioned to tally votes for publicly traded companies conducting annual meetings. Before computers did it better, I had to open envelopes that shareholders sent in, sort yes and no votes into separate piles and add up each pile.
No matter how big the no pile in front of me got, the company always had more votes in its back pocket than I could ever pull from the proxy envelopes.
Reining in executive compensation should be a key part of a board's role, but in Canada corporate boards are more like to be allied with top management. Board members are often appointed at the senior executives' recommendation. They are well-paid and, thus, unlikely to ask a CEO to deliver comparable performance for less money.
That said, it is good to see investors in Barrick realized there are ways shareholders can be active participants in the search for more effective executive compensation.
READERS: What sort of Win Above Replacement metric should we apply to CEO pay?