Saturday, June 04, 2016

Oil execs excessively rewarded for mediocre performances

A Globe article on executive compensation highlights the glaring disconnect between private sector business performance and the salaries granted to company CEOs (and, to a lesser extent, other executives). Nowhere is this more apparent than in the oil and gas and other natural resources sectors, which have seen a dramatic downturn since 2014. You would never know it from their executive salaries, though.
Take Encana Corp, the Calgary-based energy producer. Hit by falling oil prices, the company lost US$5.2 billion last year as revenues tanked by almost half, the share price dropped 56%, dividends were slashed, and about 20% of the workforce was laid off, with another 20% reduction expected over the course of this year. 2015 was not a good year for Encana, to put it mildly. And yet, CEO Doug Suttles, who presided over this carnage, was granted a 14% increase in total compensation (largely in the form of shares and stock options), up from $7.7 million in 2014 to $8.8 million in 2015.
Now, no-one is suggesting that EnCana's dire results and consequent job losses were the personal fault of Mr. Suttles, but this does seem in a little bad taste given the economic climate, and sends a horrible PR message to both eliminated and current employee, not to mention the companies' shareholders.
Neither is this an isolated example. Enbridge Inc.'s CEO Al Monaco saw his total pay package increase by 50% to $8.9 million in 2015, for what a company spokesman describes as "strong financial results" (it actually posted a loss of $37 million, its share price fell by 23%, and 600 jobs were cut). Suncor Inc.'s CEO Steve Williams received $12.2 million in compensation for 2015, more or less unchanged from 2014 (although only due to a large adjustment to his pension valuation), a handsome reward that came on the back of a $2 billion loss for the company and over 1,700 lost jobs.
Mining companies have been facing down a commodity price slump for three or four years now, but that did not stop Teck Resources Ltd, which lost $2.5 billion and 9% of its workforce in 2015, and saw its share price shrivel by 66%, from voting CEO Don Lindsay a 2.4% increase in his compensation, which totalled $10.24 million. Finning International Inc. gave CEO Scott Thompson a 10% increase ($5.3 million), despite losing $161 million and cutting 1,900 jobs (or about 13% of its workforce).
Nor is the natural resources sector the only, or perhaps even the most egregious, sector involved. Valeant Pharmaceuticals International Inc. CEO Michael Pearson was paid a ridiculous $183 million in 2015, a year in which the company faced scandal and legal investigations over its drug-pricing policies, and its share price fell by 29% on the NYSE.
Some companies argue that such rewards are necessary to retain top executives, particularly during difficult times, or that they deserve recognition for making difficult but necessary decisions to strengthen their companies during this challenging period, or just that the companies did relatively well compared to others in the sector who did still worse, and so deserve financial praise for that alone. The truth is, though, that many top execs are the financial equivalent of mercenary fighters, who will cut and bail at the first sniff of a better position elsewhere, and have no loyalty to anything other than themselves.
But not everyone thinks this way. Canadian Natural Resources Ltd, a company which is as deeply invested in the oil sands as anyone, and has suffered accordingly in recent months, has worked hard to avoid any lay-offs at all, and has instead instituted a 10% salary cut for senior management and staff in order to save money. Company president Steve Laut set an example, by taking a 46% total compensation cut (although this still left him with a pretty handsome $5.1 million for the year).
It seems to me that the pool of high-level executives in Canada cannot possibly be so small that companies have to resort to these kinds of financial bribes to keep them from leaving during hard times like the present. Bear in mind that these people are all multi-millionaires anyway, and can easily afford to "take one for the team" during temporary economic lulls. Such unwarranted compensation increases smack of rewarding execs for, if not bad behaviour, then at least mediocre and unexceptional performance.

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