This blog was meant to be a sequel to last week's about how Canadians are being set up to fail with retirement; however, in response to the backlash surrounding RBC this week, and in particular, against RBC CEO Gordon Nixon, let's look at how CEOs are compensated. Last year, RBC posted record earnings of $7.5 Billion and CEO Nixon received a pay hike of $2.5 million -- with millions in stock and option-based awards, incentives, and bonuses -- for meeting or exceeding expectations set out by the board of directors.
I thought that was pretty shocking until I read that Canadian Pacific Railway Ltd. Chief Executive, Hunter Harrison "earned" $49.2 million in 2012. Comparatively, Dean Connor, the Chief Executive of Sun Life Financial Inc., only "earned" $8 million. What makes these people so valuable and worth so much to a company? Someone tell me please.
If you've been following me on Twitter or my blogs you know that I'm extremely concerned about how the average Canadian has now become responsible for their own retirement savings. For most, this involves investing in the stock market, either directly or through mutual funds. The bottom line is that this type of financial abuse affects everyone.
One has to question how these compensation decisions are made and who's making them. There are so many excellent books out there that deal with this issue but one I particularly like is The Battle for the Soul of Capitalism, by John C. Bogle. Although the book references the United States, the results are the same in Canada. Too many companies are now being run for the benefit of first management (including their respective board of directors), then the employees and finally the shareholders.
We're told that the main reasons companies sell shares to the public are to raise money and spread the risk of ownership. Sounds reasonable, but raise money for whom and for what?
One would hope that the money would be used to help the company to grow and prosper, but what if that doesn't happen? What if the shares issued extracted value to shareholders and didn't add value -- not one cent? How can that be you ask?
A lot of compensation "earned" by management, board members and employees is in the form of stock options and employee stock purchase plans. In Mr. Connor's case he was "awarded" Sun Life shares worth about $2.375 million and a similar amount in options. So where do these shares come from? Usually they come out of treasury. If this is the case the number of shares outstanding is increased and the value of the existing shares is reduced.
If the company isn't issuing new shares from treasury they would be using profits to buy back shares on the open market. Neither way is good for existing shareholders.
We're also told that by making stock option plans and employee share purchase plans available to managers, board members and employees better aligns their interest with those of shareholders (owners). Once again it sounds reasonable; however, most stock options exercised are immediately sold for cash. If you think about it, stock options are a no loss proposition for those who get them and a no win situation for existing shareholders. If the option price is below current market value they are allowed to expire. If, however, they are trading for above the option price they are, without exception, exercised. Does this sound reasonable?
So how much is enough? I guess that depends on who you talk to. Last year Warren Buffet was paid $100,000 in salary as chairman and CEO of Berkshire Hathaway. His total compensation last year was $423,923. Why so low? Because most of his wealth is tied up in Berkshire Hathaway, his interests truly are aligned with his fellow shareholders. No one can argue that he doesn't add value to Berkshire.