Tuesday, 26 June 2012

CEO Compensation: Jarislowsky Opines, Algoma Central Delivers

It's reassuring that it isn't just me complaining that CEO compensation is way too high these days. Billionaire investor Stephen Jarislowsky recently appeared in this BNN clip saying he doesn't believe it is either wise or necessary to pay CEOs amounts that have gotten totally out of line. Amusingly, or scarily, he admits that he, a highly experienced and sophisticated investor, has a great deal of trouble figuring out the extremely complex pay schemes found in most big publicly traded corporations. He blames the historical out-of-line rise in CEO pay as being due to two factors: the public disclosure of pay, which made CEOs ask for what others were getting and the arrival on the scene of the compensation consultants, who have created all the insanely complex pay structures that magically produce higher pay whatever the company results or stock performance (I think there is probably a rule of thumb that the more opaque a CEO pay plan is, the more likely the shareholder will get taken advantage of). 

Whether pay gets reduced, both in relative and absolute terms, by shareholder "say on pay" or Boards putting the hammer down, it needs to happen. Another BNN clip with Globe and Mail reporter Janet McFarland and Fair Canada (as in, fair to investors) executive director Ermanno Pascutto, talks about the small advances in Say on Pay votes in Canada, which as ever in the hands-off Canadian regulatory landscape is voluntary here in contrast to the mandatory regime in the USA.

One company that caught my eye through this Globe and Mail article as being more on the right track than many others is Algoma Central (TSX: ALC). The description of it as old style with no stock option plan for the CEO, which is what Jarislowsky recommends, made me look up the latest Management Information Circular on Sedar.com to see the pay structure. Indeed, the CEO pay scheme is actually understandable, only a base salary plus an annual cash bonus scheme, half of which gets deferred and paid out only after three years. There are no options, no benchmark peers that automatically drag up pay, no golden parachutes and the pension accrual formula is the same as for other employees (CEO Wight is grandfathered in a very generous DB plan of 2.25% per year while new executives (after the Jan 2010 closure of the DB plan to new employees) go into the DC plan that all employees apparently receive). There is a new twist to the bonus plan for next year - half the cash bonus, instead of merely being deferred for three years, is notionally invested in common shares that vest in three years and are paid out based on the value of the shares then. In other words, unlike options, which have no risk to the CEO, there is downside risk - if the shares go down, the CEO loses that amount of the bonus, just like a real shareholder would. Sounds good to me. The only part of the pay that looks dubious is that the CEO Greg Wight's base pay, on which bonuses are based, rose at more than double the inflation rate in both 2010 (+6.6% over 2009) and 2011 (+5.5%).

Of course, sensible pay doesn't guarantee good stock performance. ALC's stock return has languished in the last five years, doing worse than the overall TSX. As the Globe article says, it might be a buyout value play since it looks quite under-valued (a P/E of 6.3 and a P/B around 1, profitable every year for the last 5 - see TMX here). The controlling ownership structure and the consequent lack of liquidity and analyst coverage seem to be getting in the way of value recognition.

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