 The Skinny on Executive Pay |
Sometimes we get amazing content that, for lack of space, just doesn’t make it into the print edition of Alberta Venture magazine. This is one of those cases. Here are Marzena Czarnecka’s supplements to her story, The Year the Penny Dropped.
Bad times are good for something
A downturn is the time to ensure your compensation plan doesn’t inadvertently foster “inappropriate” behaviour, says Mercer’s Lisa Slipp. Red flags you should look for include:
- Too much emphasis on the short-term, such as quarterly or annual, results
- Uncapped incentive plans
- Over-reliance on highly leveraged equity vehicles
- One-dimensional performance measurement within plans or use of the same metrics for both annual and long-term incentive plans
- Lack of focus on the quality of earnings and sustainable performance
- Failure to “stress test” plans for outcomes under extreme scenarios
- Poor ties between the compensation time horizon and the time horizon for sustainable results
- Lack of appropriate equity holding requirements (including but not limited to post-retirement holding requirements) and incentive payout deferrals
Source: CICA Director Alert July 2009, “Human Resource and Compensation Issues During a Financial Crisis: questions for directors to ask,” by Lisa Slipp, Worldwide Partner with Mercer and head of the executive remuneration segment of Mercer’s Human Capital business in Canada.
The advantages of RSUs and DSUs
… and why are they better than stock options?
RSUs: Restricted Stock Units
Quantitative: There’s less risk (counterpoint: less upside). A stock option priced at $5 has no value when the stock trades at $4 – never mind $0.50. An RSU is worth whatever the shares are trading at: it retains some value, even when the markets plummet.
Qualitative: Advocates of RSUs claim that while stock options do little to instill a sense of ownership in a company, RSUs do so right away. An employee is an owner of the company from the moment the RSU is awarded – no further action or calculation is required.
DSUs: Deferred Stock Units
DSUs don’t kick in until some specified date or event, such as when a company reaches certain profitability or performance benchmarks. Subordinate to all other shares, DSUs are becoming an increasingly popular way of rewarding directors.
The low-down on pay cuts
Or
Why you probably don’t want to add insult to injury
There are pay cuts and then there are pay cuts. Total Reward Professionals’ Marc Lattoni has worked with a number of clients over 2009 where the executive team as a body has taken a voluntary salary roll-back (10 per cent seems to be the magically consistent number), even after “their options disappeared and their bonuses disappeared.”
The key word there is voluntary.
Involuntary pay cuts – ouch. Lattoni’s not a fan. He might counsel a company to consider pay cuts before job cuts… but not necessarily.
“Pay cuts are terribly demotivating,” he says.
And they’re rarely enough to save a company, adds James Pasieka, a corporate partner with the Calgary office of Heenan Blaikie LLP and a director of several oil and gas companies. Really troubled oil patch companies “won’t be talking about salary cuts, they should be talking with the banks about how to stay in business,” he says.
In Alberta, the situation is most acute for – who else? – gas-weighted juniors. “It’s calamitous,” says Pasieka. “And while cost-cutting measures across the board and responsible budgets are the only responsible thing to do, in many cases it won’t save the companies.” Pasieka was chairman of two such players – Alberta Clipper Energy Inc.. and Pegasus Oil and Gas – the boards and management of which, after considering pay cuts, job cuts and other measures, chose to sell themselves instead. Alberta Clipper went to NAL Oil & Gas Trust and Pegasus to Harvest Energy Trust; both deals closed this summer.
“We sold for the best proceeds we could obtain, but given the environment, it was unfortunately it was a loss position for most shareholders including board members,” says Pasieka. “But it was better than receivership.”
It’s a good time to pick up superstars and shed dead wood
Here’s the silver lining: if some of your competitors don’t crack the compensation code for 2009, there might be some top-notch management talent you might pick up (if you’ve figured out a way to crack it yourself).
“With many of the old retention hooks gone, there are companies in the market looking to pick up superstars,” says Mercer’s Lisa Slipp. Even in the hardest hit sectors – this is their big chance for a talent hunt. So as boards and compensation committees ponder across-the-board guidelines, plans, formulas and packages, they should also think hard about what they need to do to retain superstars “and whether – and when – they should make exceptions.”
A compensation plan is more than a tool for retaining and rewarding top people. Use it to send messages to mediocre peformers, suggests Scott Munn, a consultant with Hugessen in Calgary.
“Some companies have used this occasion to deal with the softer issues – to think about to what degree they thought they still had an excellent management team versus a good management team, whether the people they had were the best people they could find, or whether they could find better talent,” he says. “And they started to make very specific decisions around compensation based on whether they wanted to retain the top people or whether they wanted to go out and be able to find better people.”
Cash alternatives
Baby boomers think of compensation in terms of pay and bonuses (and the financial requirements of their looming retirement). But don’t forget that your younger people may prefer to be rewarded in non-monetary ways, says Dr. Rick Nash, a National Practice Leader in Leadership & Talent with the Hay Group. “They may be more concerned about their career growth and opportunities for advancement and learning,” Nash says. Some of these retention strategies may cost you relatively little – or nothing at all. “This is the time to ensure an organization gives its people opportunities for learning, development – enables them to make lateral moves that help them build a career.”
The take-home message
Midlake’s Rick Nixon has a message for any executive who’s disgruntled because his or her 2009 take home ain’t want it used to be. “It’s not about executive pay,” he says. “It’s about getting a return for the shareholders, for the investors. That’s the key message here: You never want to see an investor lose money.”
