Stock options have traditionally been used to incentivize mining company executives but are falling out of favor due to concerns about risk. While stock options continue to be useful for junior mining companies with limited cash, regulatory pressure is increasing oversight of executive compensation. To balance risk and reward, companies should consider longer vesting periods, bonus clawbacks, and a mix of short and long-term incentives tied to multiple performance metrics.
The changing face of reward examines how the business drivers of reward are changing due to the impact of the global downturn and other macroeconomic trends in the global economy.
Results of a survey I participated in at the beginning of the year around business improvement groups. An opportunity to break away from the competition during hard times !
The changing face of reward examines how the business drivers of reward are changing due to the impact of the global downturn and other macroeconomic trends in the global economy.
Results of a survey I participated in at the beginning of the year around business improvement groups. An opportunity to break away from the competition during hard times !
Mercer Capital | Valuation Insight | Distribution Policy in 30 MinutesMercer Capital
Of the three primary corporate finance decisions, distribution policy is the most transparent to shareholders. Distribution policy addresses both how much cash flow should be distributed to shareholders and the ideal form of such distributions. In the context of a company’s life cycle stage, directors can use distribution policy to manage the firm’s capital structure and tailor the form of returns (current yield relative to capital appreciation) in light of shareholder preferences. Diverse shareholder preferences and characteristics can enhance the attractiveness of share repurchases relative to dividends; however, for private companies executing share repurchases is not as straightforward as for public companies. The purpose of this whitepaper is to help directors formulate and communicate a distribution policy that contributes to shareholder wealth and satisfaction.
Executive Compensation at Financial InstitutionsDavid Stone
Executive compensation at U.S. companies has become dramatically disproportionate relative to the average workers at those companies over the past 25 years. Now, the current global financial crisis is putting a harsh spotlight on executive compensation at financial institutions in particular. This report looks at the basic nature of executive compensation packages and the issues or concerns that have been raised about them. That information provides a context for looking specifically at financial institutions: what makes their executive compensation programs different and how the current financial crisis is going to affect those programs.
This Data Spotlight provides data and statistics on the level and structure of CEO compensation in the United States. This data supplements in the issues introduced in the Quick Guides “CEO Compensation” and “Equity Ownership.”
Most corporations dedicate significant time and attention to managing their shareholder base. Furthermore, companies overwhelmingly prefer “long-term shareholders” to “short-term shareholders.”
There is little rigorous research, however, that conclusively demonstrates the impact that individual investor groups have on corporate decision making, or that quantifies the premium (or discount) that specific shareholder groups add to corporate value.
We explore this topic in greater detail, and ask:
• Does the composition of a company’s shareholder base really matter?
• What substantive impact do shareholder—including activists—have on strategy, investment, and management?
• How long is long-term? How short is short-term?
• Can short-term market pressures be offset by long-term compensation incentives?
Take this opportunity to learn about identifying and comparing to your competitors, building commitment and employee engagement and developing a total strategy that supports your organization’s mission and strategic plan.
Our webinar is structured to provide not only education but also useful strategies for addressing the many pressures on executive compensation, wages and salaries. Nonprofits are being scrutinized by the IRS, and executive compensation is a staple of all audits. Nonprofit managers and trustees must prepare for public, media, Form 990, IRS and State scrutiny. Wage and salary programs face a difficult economy as they struggle to attract and retain the best talent with scarce dollars.
In November 2008, CFO Research conducted a
survey among mid-size companies in the United
States on the actions that senior fi nance executives
are taking to ensure adequate capitalization to support
their companies’ growth over the next year.
We collected 129 responses from qualifi ed senior
fi nance executives.
Mercer Capital | Valuation Insight | Distribution Policy in 30 MinutesMercer Capital
Of the three primary corporate finance decisions, distribution policy is the most transparent to shareholders. Distribution policy addresses both how much cash flow should be distributed to shareholders and the ideal form of such distributions. In the context of a company’s life cycle stage, directors can use distribution policy to manage the firm’s capital structure and tailor the form of returns (current yield relative to capital appreciation) in light of shareholder preferences. Diverse shareholder preferences and characteristics can enhance the attractiveness of share repurchases relative to dividends; however, for private companies executing share repurchases is not as straightforward as for public companies. The purpose of this whitepaper is to help directors formulate and communicate a distribution policy that contributes to shareholder wealth and satisfaction.
Executive Compensation at Financial InstitutionsDavid Stone
Executive compensation at U.S. companies has become dramatically disproportionate relative to the average workers at those companies over the past 25 years. Now, the current global financial crisis is putting a harsh spotlight on executive compensation at financial institutions in particular. This report looks at the basic nature of executive compensation packages and the issues or concerns that have been raised about them. That information provides a context for looking specifically at financial institutions: what makes their executive compensation programs different and how the current financial crisis is going to affect those programs.
This Data Spotlight provides data and statistics on the level and structure of CEO compensation in the United States. This data supplements in the issues introduced in the Quick Guides “CEO Compensation” and “Equity Ownership.”
Most corporations dedicate significant time and attention to managing their shareholder base. Furthermore, companies overwhelmingly prefer “long-term shareholders” to “short-term shareholders.”
There is little rigorous research, however, that conclusively demonstrates the impact that individual investor groups have on corporate decision making, or that quantifies the premium (or discount) that specific shareholder groups add to corporate value.
We explore this topic in greater detail, and ask:
• Does the composition of a company’s shareholder base really matter?
• What substantive impact do shareholder—including activists—have on strategy, investment, and management?
• How long is long-term? How short is short-term?
• Can short-term market pressures be offset by long-term compensation incentives?
Take this opportunity to learn about identifying and comparing to your competitors, building commitment and employee engagement and developing a total strategy that supports your organization’s mission and strategic plan.
Our webinar is structured to provide not only education but also useful strategies for addressing the many pressures on executive compensation, wages and salaries. Nonprofits are being scrutinized by the IRS, and executive compensation is a staple of all audits. Nonprofit managers and trustees must prepare for public, media, Form 990, IRS and State scrutiny. Wage and salary programs face a difficult economy as they struggle to attract and retain the best talent with scarce dollars.
In November 2008, CFO Research conducted a
survey among mid-size companies in the United
States on the actions that senior fi nance executives
are taking to ensure adequate capitalization to support
their companies’ growth over the next year.
We collected 129 responses from qualifi ed senior
fi nance executives.
10
66 harvard business review | hbr.org
t’s become fashionable to blame the pursuit of
shareholder value for the ills besetting corporate
America: managers and investors obsessed with next
quarter’s results, failure to invest in long-term growth,
and even the accounting scandals that have grabbed head-
lines. When executives destroy the value they are sup-
posed to be creating, they almost always claim that stock
market pressure made them do it.
The reality is that the shareholder value principle has
not failed management; rather, it is management that has
betrayed the principle. In the 1990s, for example, many
companies introduced stock options as a major compo-
nent of executive compensation. The idea was to align the
interests of management with those of shareholders. But
the generous distribution of options largely failed to mo-
tivate value-friendly behavior because their design almost
guaranteed that they would produce the opposite result.
To start with, relatively short vesting periods, combined
with a belief that short-term earnings fuel stock prices, en-
couraged executives to manage earnings, exercise their
options early, and cash out opportunistically. The com-
mon practice of accelerating the vesting date for a CEO’s
Companies profess devotion to shareholder value but rarely follow the practices
that maximize it. What will it take to make your company a level 10 value creator?
by Alfred Rappaport
I
S
IM
O
N
P
E
M
B
E
R
T
O
N
Ways to Create
Shareholder Value
Y
E
L
M
A
G
C
Y
A
N
B
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A
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K
september 2006 67
Te n Wa y s t o C r e a t e S h a r e h o l d e r Va l u e
options at retirement added yet another incentive to
focus on short-term performance.
Of course, these shortcomings were obscured during
much of that decade, and corporate governance took a
backseat as investors watched stock prices rise at a double-
digit clip. The climate changed dramatically in the new
millennium, however, as accounting scandals and a steep
stock market decline triggered a rash of corporate col-
lapses. The ensuing erosion of public trust prompted a
swift regulatory response–most notably, the 2002 passage
of the Sarbanes-Oxley Act (SOX), which requires compa-
nies to institute elaborate internal controls and makes cor-
porate executives directly accountable for the accuracy of
financial statements. Nonetheless, despite SOX and other
measures, the focus on short-term performance persists.
In their defense, some executives contend that they
have no choice but to adopt a short-term orientation,
given that the average holding period for stocks in profes-
sionally managed funds has dropped from about seven
years in the 1960s to less than one year today. Why con-
sider the interests of long-term shareholders when there
are none? This reasoning is deeply flawed. What matters
is not investor holding periods but rather the market’s val-
uation horizon – the number of years of expec.
Elevate your enterprise cfo role reportCor Ranzijn
Companies in virtually every industry are undergoing a secular change to new, platform- based businesses. To thrive, organizations need to digitally reinvent their enterprise business
and operating models. CFO"s continue to be instrumental in providing the analytical insights to help the enterprise invest capital into new opportunities. Essential to this process is a highly collaborative, in-synch C-suite. The CFO’s newest mandate – to help steer the strategic direction
of the enterprise and do so iteratively – requires changes to their finance organizations. Startlingly, nearly half of CFOs report their own finance organizations fall short of what’s required.
COVID-19 — Managing executive pay and incentives in unceCruzIbarra161
COVID-19 —
Managing executive
pay and incentives
in uncertain times
COVID-19 — Managing executive pay and incentives in uncertain times 2
In a matter of three months, COVID-19
has rapidly transformed from a local
virus outbreak to a global pandemic.
While the stress it has put on society
at large and healthcare systems
around the world is unprecedented,
it has also almost brought the global
economy to a grinding halt.
This slowdown is likely to be prolonged, and given the
scale and severity, businesses need to adapt quickly. In the
short term, organizations will need to adopt some cost-
containment measures, and rethink their cash flows and
working capital requirements.
An important piece of the jigsaw for organizations from
this perspective is remuneration. Often constituting one
of the largest “controllable” costs, organizations need to
undertake careful planning to retain, reward and motivate
employees through this crisis.
Extraordinary times demand extraordinary measures
In response to the COVID-19 crisis, several companies
in Singapore, and around the globe, are already
implementing executive pay reductions in the form of
salary freezes and voluntary pay cuts or reduction and
deferral of bonuses. These include Marriott, Lyft, BT,
Santader, Singtel, SATS, SP Group, Singapore Airlines and
Temasek Holdings, among others.
While the overall financial impact of executive pay cuts on
the company’s bottom line is likely to be limited, such cuts
are critical from a leadership, perception and messaging
perspective. At a time when share prices are plunging and
as companies may need to consider headcount reductions,
executives cannot be seen as financially insulated.
From a remuneration standpoint, however, most senior
executives are paid significant proportions of their total
compensation through performance-linked variable pay
awards — both cash and equity. These awards are bound to
be dramatically affected by the slowdown.
To put this in perspective, senior executives in Singapore
typically receive between 40% and 70% of their total pay in
performance-linked incentives, up to half of which could be
in long-term, equity-based vehicles. In comparison, most
other employees only receive between 10% and 20% of their
total pay in incentives — usually as annual cash bonuses.
It ’s now become critical for organizations to effectively
navigate and manage variable pay components by trying
to balance the affordability aspects with fairness to ensure
that motivation and productivity levels do not drop —
which can arguably have a major enduring impact on
business performance.
COVID-19 — Managing executive pay and incentives in uncertain times 3
What can boards and remuneration committees do?
In Mercer’s discussions with multiple boards and
management teams over the past few weeks, we’ve
seen that a number of alternative approaches are being
considered with respect to variable compensation for ...
The financial metrics and their influence on behavioursOlimjon Suleymanov
Performance measures have been known to affect behaviour. If employees know that they are being judged according to how their performance meets certain standards, they will strive to uphold those
standards in order to be rewarded. Ideally, performance measures should be designed to reward positive behaviour that maximises the corporate goal. However, in the modern business climate, shareholder value maximisation has become a central tenet of the way that most companies are run, usually at the expense of other important criteria. This paper will aim to explore the negative side-effects of an over-fixation with modern performance metrics on employee behaviour.
Some executives who accumulate a substantial ownership position in the company hedge or pledge their shares to limit their financial risk. Should the board of directors allow this to occur?
Making compensation pay: Increasing the ROI from monetary investments spent o...Bhupesh Chaurasia
Recent transformations in performance management and compensation practices are making it possible for companies to rethink traditional compensation approaches and reward employees in more meaningful ways. This paper shares insights from business leaders, compensation professionals, managers and front-line employees regarding the current and future state of monetary and non-monetary rewards. #hr #hrtechnology #hrm #humanresources #hrtech #hrms #humancapital #hrblogs #HCM #HRIS
1. AUTHORIZED
REPRINT
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SEPTEMBER 6-12, 2010 VOL. 96, NO. 29 • SINCE 1915
C O M M E N TA RY
Are stock options
still ideal for mining execs?
BY PAUL PITTMAN or even hype about the future value of Stock options were initially widely fa-
SPECIAL TO THE NORTHERN MINER the company, leaving shareholders hold- voured as there was no cost to the com-
In the smoking ruins of the global finan- ing the bag when the lack of sustainable pany in terms of funding, as there was no
cial crisis, renewed attention has been earnings became apparent. requirement to expense the cost, and the
focused on executive incentives and The Enron and WorldCom accounting market funded any unlimited upside gain.
whether efforts to earn higher compen- debacles resulted in the Sarbanes-Oxley However, the expensing shortfall has
sation promoted executive behaviour Act in the U.S. and forced corporate now been addressed with companies re-
that created excessive, and in some cases, boards to address weaknesses in financial quired to capture the cost of granting
enterprise-jeopardizing risk. controls. stock options in annual financial
This focus has led to new regulatory The more recent Toxic Asset Relief statements.
initiatives intended to limit risk and af- Program controls in the U.S. and the Pro- When expensing rules were first intro-
fecting executive compensation in a mul- ductivity Commissions’ proposals in Aus- duced, the software industry lobbied
titude of jurisdictions and industries. But tralia and punitive incentive tax in the against them on the basis that in start-up
what does this mean for the mining U.K. attempted further expansion of con- mode, there were no other affordable
sector? trols on executive compensation. choices for them to both reward and re-
To answer that question, first we have Indeed, risk is now required to be ad- tain creative designers working on a value
to ask: what is risk? dressed in the “compensation discussion proposition that would not emerge for
In compensation terms, there has tra- and analysis” portion of proxy statements. some time.
ditionally been far more concern with the
downside perspective of risk — i.e., the
failure of an executive to achieve corpo-
rate goals and the resulting impact on Junior mining companies continue to depend
competitive compensation.
As is now glaringly apparent, little con-
heavily on stock options as a cash-effective way of
sideration was given to limiting the up- incentivizing their senior teams for the long term.
side potential of variable compensation
programs. In the financial services sector,
overly leveraged pay programs led to in-
stitutions being destroyed or losing inde- Risk that can damage an enterprise in- The mining industry was no different
pendence. The Economist Intelligence cludes: exposure to criticism or damage in this respect, but was and continues to
Unit found about 70% of financial com- of image with shareholders and custom- be largely silent on the matter. Junior min-
panies surveyed viewed “risk manage- ers; difficulty with proxy voting on pro- ing companies continue to depend heav-
ment failures” as a leading cause of the posals regarding executive compensa- ily on stock options as a cash-effective
world’s current economic problems. tion; board embarrassment; and risk of way of incentivizing their senior teams
Compensation systems without a limit unintended payments. for the long term.
on total potential earnings from variable The consequence of this controlling Should we expect more executive-
pay encouraged executives to pursue movement has been a fall from grace of compensation regulation? Perhaps, but
strategies at the expense of shareholders. stock options as an incentive for there will also be changes to customary
These strategies increased expectations executives.
1
2. AUTHORIZED
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SEPTEMBER 6-12, 2010 VOL. 96, NO. 29 • SINCE 1915
best practice. Longer time horizons will units (PSUs) and/or restricted share units greater use of business-modeling tools so
impact the design of executive compen- (RSUs), stock options remain an effective that compensation committees can better
sation programs and the use of longer instrument that rewards both sharehold- see the potential impact of compensation
holding periods for exercised or granted ers and executives consistent with the decisions (e.g. “what if” scenarios and the
stock will focus on sustainable real long- company’s long-term goals. anticipated result of the proverbial
term value rather than short-term folly. Boards or their compensation com- “home run,” and the question of whether
Expect also more “bonus banks” or mittees will be under scrutiny for com- severance, change-in-control or incen-
claw-backs to enable recovery of incen- pliance with both best practice and tives would motivate actions that trigger
tive pay if a longer time horizon shows commercial trends. Not just stock op- large payouts at the expense of share-
performance results require a tions but any compensation instrument holder value).
restatement. should be accompanied with enhanced Generally, it’s best to avoid compen-
Elements of compensation design internal controls and insights into their sation programs that reward executives
today that are broadly considered to be use as a compensation instrument. as highly as successful entrepreneurs if
high-risk in nature, and therefore suspect, To ensure that total compensation is they do not take board-approved entre-
include: low salaries relative to potential aligned with strategy, we need to consider preneurial risks.
incentives; annual rather than multi-year the mix of short- and long-term compen- We also need to understand how pay-
performance incentives; uncapped up- sation. Long-term is intended to retain for-performance or “say-on-pay” initia-
side incentives; and excessive use of stock and reward. Short-term annual incentives tives may shape the junior and mid-tier
options as a short-term incentive. are usually cash awards for achievement company space, and how independent is
Wait a minute — this looks very much of metrics that are milestones to strategic the compensation consultant to the com-
like the typical compensation plan at most objectives. Cash is usually in short supply pensation committee if their compensa-
junior and many mid-size miners. So how for junior and mid-tier companies and tion is reliant upon a favourable relation-
should companies respond? RSUs and PSUs with long-term vesting ship with the CEO.
Stock options are falling out of favour could be an additional or alternative in- — The author is managing director of The
because they have no real downside. centive tool. Human Well (www.thehumanwell.com),
However, in companies where there is as We need to use a balanced scorecard a collaborative human capital consulting
yet no sustainable value, they continue to when assessing the performance of the group assisting companies in transition
be the optimal choice to align executives top team with respect to attaining mul- with a special focus on the resource sector.
and shareholders on the long run for ju- tiple objectives such as growth, manag- Paul Pittman has 25 years of experience
nior and mid-size mining companies de- ing the board, succession, coaching and working with boards and leading human
pendent upon a single or limited number mentoring. capital teams with global companies
of orebodies. Understanding all potential scenarios is including Alcan, Varity Corp. (Massey-
If combined with performance share also crucial. We can do this through Ferguson), and Laidlaw.
2