What gives at Onex Corp.?
The private equity manager could always be counted on for a juicy headline about the compensation of founder and chief executive officer Gerry Schwartz, who has topped the pay charts in Canada in recent years.
In 2013, for example, Mr. Schwartz made $85.3-million (U.S.) in direct compensation, thanks largely to a $60-million grant of stock options. But that was only the beginning. He also earned $41-million more from co-investing in Onex-managed funds and another $3-million in dividend payments, for a total of $129-million in 2013. And filings showed he also reaped a further $258-million (Canadian) in 2013 from exercising stock options that had been granted in prior years.
Then came 2014, when he was paid $19-million (U.S.) directly and earned a further $106-million in payouts from his ownership stake in Onex investments for a total of $125-million.
But things were different in 2015, according to Onex's new shareholder proxy circular, and pay levels could almost be called modest – or at least not exorbitant – by executive compensation standards. So much for the guaranteed headline.
Mr. Schwartz's base salary was unchanged at $1.3-million, his cash bonus was $6-million and he received no other direct compensation for the year. His gains from co-investments in Onex funds totalled just $1.9-million, and he exercised no stock options, for total compensation of $9.2-million. He is still paying his bills, but it's a far cry from $125-million the year before.
Part of the explanation for the lower pay last year could lie in Onex's financial performance and reduced payouts from co-investments. The company posted a loss of $505-million in 2015, and recorded losses relative to invested capital on major investments in Sitel World Corp. and Tropicana Las Vegas, which were both sold in 2015.
But Onex's compensation committee also called 2015 a "strong year," listing a string of major acquisitions and investments, as well as the completion of substantial financings at operating companies. The company's private equity investments increased 12 per cent, the committee said, and Onex's share price was up 26 per cent.
Ultimately, the compensation committee offered little direct explanation for the drop in Mr. Schwartz's bonus in 2015, saying simply that it recommended the $6-million total because of "Mr. Schwartz's efforts and achievements … all within the context of the additional factors taken into account by the committee in determining executive compensation generally."
Boards inclined to do so can always find a way to spin things to justify almost any quantum of pay for executives, even when returns are down. Onex's board doesn't offer much by way of detailed explanation for the reduced bonuses last year, but it also doesn't offer spin to justify a massive pay package either, essentially letting the pay restraint speak for itself.
Onex is not the only compensation high flier to show signs of moderation this year. Barrick Gold Corp., which garnered just 27-per-cent support for its pay vote last year, unveiled a far more modest pay package for chairman John Thornton this year after an uproar by investors about his pay raise in 2014, announcing that he took a $10-million pay cut in 2015, despite the fact Barrick had a better year in 2015.
Pay was also down modestly in 2015 for the CEOs of Magna International Inc. and Shaw Communications Inc., both often found at the top of the pay charts. Canadian Pacific Railway Ltd. CEO Hunter Harrison saw his pay rise slightly in 2015 to $19.9-million (Canadian), but only because he is paid in U.S. dollars and the Canadian dollar fell in 2015. If the exchange rate had not changed, Mr. Harrison's compensation would have been down 8 per cent last year.
It is very possible pay at companies such as Onex will vault back to more typical levels in 2016, but the tone of restraint comes in the right year, after shareholders clearly expressed their general impatience with spin and excuses last year. Three major Canadian companies – Barrick, Yamana Gold Inc. and Canadian Imperial Bank of Commerce – lost their say-on-pay votes in 2015, marking the greatest protest witnessed yet against undue compensation payments.
Some shareholders have become so disillusioned with spin and excuses that they have started calling for a radically different model for executive compensation, advocating moving away from the practice of granting huge amounts of equity to executives. They argue that what started as a good idea to align interests with shareholders has become perverted into a gravy train for excessive pay.
Compensation practices have fuelled that frustration. Lower pay packages at companies such as Onex may reduce opportunities for juicy headlines, but they will help investors feel their concerns are being heard, or at least not inflame additional anger as shareholders gird for battle. It is a wise time for boards to practise restraint.