A truck hauls a load at Teck Resources Coal Mountain operation near Sparwood, B.C.The Canadian Press
The global mining boom went bust years ago, but somehow, the board of directors at Teck Resources Ltd. missed the news.
From 2011 to 2015, the mining giant, which specializes in coal, copper and zinc, paid chief executive officer Don Lindsay roughly $10-million a year on average – among the most of any CEO in the country.
Over the same time frame, Teck's stock tanked. From their postcrisis peak in January, 2011, to the depths they reached last December, the miner's shares fell more than 90 per cent. Even after a big rebound this year, they're still down by more than half.
That the Teck CEO's pay barely budged as shareholders suffered is bad enough. But the split between long-term shareholders' fortunes and Mr. Lindsay's is about to widen: With the shares on a tear, soaring 432 per cent this year on the back of recovering commodity prices and a more manageable debt load, Teck executives will be swimming in money because of the way the company gives out options and other stock-based pay.
Teck's erratic results help illustrate one of the serious flaws in the way we pay executives. The compensation consulting community that advises boards swears that share-based pay is the best way to reward leaders, because it links incomes with performance for investors. But share-based pay is far from perfect – and its weaknesses are exposed when CEOs of cyclical commodity companies are given large dollops of it. When executives are handed stock – or worse, options – at lower and lower prices every single year during the downturn, their gains are torqued when the cyclical rebound takes hold. Canada is full of such companies.
To single out Teck would be unfair, because a good chunk of the mining industry is doing the same thing. Total pay to the top five executives at Pan American Silver Corp. jumped to $7.8-million in 2015, rising every single year from $5.2-million in 2011. The miner's share price tumbled 78 per cent over the same period.
It gets better: Total pay to the executive team actually amounted to even more last year, because the $7.8-million it disclosed didn't include a roughly $1-million bonus given to the retiring CEO for "service recognition." That bonus was paid in stock; those shares are now worth $2.2-million, as Pan American has enjoyed a big bounce in 2016.
"Pan American Silver's long-term incentive program is designed to focus executives on long-term shareholder value, and aligns management's interests with those of shareholders," the company said in a statement, adding that it holds annual say-on-pay votes and that it studies more than stock price performance when setting pay.
Ivanhoe Mines Ltd.'s shares have also skyrocketed 348 per cent this year – the second most on the S&P/TSX Composite Index after Teck. Before they took off, CEO Robert Friedland and some fellow executives were handed bonuses in 2015 simply for securing an investment from China's Zijin Mining in their Kamoa Copper Project. Fifty per cent of the bonuses were paid in restricted share units, priced around last year's low. (The exact price is never disclosed in the proxy circular.)
Mr. Friedland also has stock options, which are granted annually. Last year he got 1.1 million with an exercise price of 46 cents (U.S.); in 2014, he got 1.7 million that can be exercised at 71 cents (U.S).
Meanwhile, shareholders who bought into the miner's 2012 initial public offering and held on since are still down 43 per cent on their investment. "Ivanhoe Mines is very comfortable with its compensation philosophy and practices, and the compensation decisions that are based on its established approach," the company said in a statement. "Just this week, the company's share price on the Toronto Stock Exchange reached its highest point in three and a half years. In this respect, Mr. Friedland's interests are squarely aligned with those of shareholders through his equity ownership of more than 20 years."
Teck's situation, though, is arguably the most egregious. The giants of any industry are supposed to be role models.
Because the dollar value of the CEO's pay has stayed fairly steady every year, it means more share-based compensation is handed out as the stock price falls. In 2015, Mr. Lindsey got 703,000 stock options; the year prior he got 372,000. Those 2015 options can be exercised at $19.15, while the stock now trades for $28.33. That's a $6.5-million gain – although only one-third vests each year, and his options issued in 2010 to 2013 are still out of the money.
Teck's shares are still down 67 per cent from their 2006 peak.
In an e-mail, Teck said Mr. Lindsay, the CEO, was encouraged by the board to take more stock-based pay last year "in recognition of the cash pressures facing the company at the time" and that his decision reflected his "strong conviction in the prospects for the company."
Teck also noted that while the dollar value of Mr. Lindsay's pay stayed the same for four years, "the realizable value of that pay has been dramatically less" because the share-based portion fell as the stock declined. However, the miner noted that trend reversed in 2016.
The sector is getting a little bit better. After uproar over their practices in 2014, Barrick Gold Corp. and Yamana Gold Inc. both revamped their policies and slashed pay. Some miners also refuse to hand out stock options.
But share-based pay still lies at the root of many mining firm's compensation policies. This year we've seen evidence of why that's a problem.
Editor's note: An earlier version of this story made reference to stock options Robert Friedland received from a restructuring at Ivanhoe Mines in 2011. Those options expired in early 2016 without Mr. Friedland having exercised them. The story has also been updated to clarify that Mr. Friedland's 3.8 million remaining options are priced in U.S. dollars, and that 50 per cent of the bonuses paid to Ivanhoe executives for the Kamoa Copper Project transaction were paid in restricted share units.
Tim Kiladze