Watching Executive Compensation

Benj Gallander and Ben Stadelmann
Wednesday August 5, 2015

In many parts of North America, the minimum wage is being pushed up. Detractors state that those at the bottom rung of the totem pole will put themselves out of work, largely due to mechanization and businesses that will have to cut back their labour or are forced out of business. Their renderings seem exaggerated, and it is obvious that the vast majority of the naysayers are not those who are trying to scrape together a living.

At the other end of the ladder are people like Miles Nadal, who Benj went to high school with and at one time they played on the same hockey team. Miles was a much better player. Mr. Nadal is the former head honcho at MDC Partners, who stepped down last month during an SEC investigation into the happenings at the corporation. He agreed to repay the company $12.5 million (US) and he will also dispense with compensation and severance of more than $27 million. That is quite the piece of change. However, given that he made $16.7 million in 2014 and touched even more in some previous years, it will not be necessary to hold a tag day for this gent. As an aside, while Miles took a huge payout, MDC was only profitable once in the last decade.

Meanwhile, over at Barrick Gold, there was a shareholder revolt given the compensation of John Thornton. He was paid $17 million in his first year at the corporation and his reward this year is set to exceed $13 million, thinner to be sure, but still nicely rotund. Certainly, John is being remunerated like a golden boy while the stock price has dropped by about half under his watch.

The list of Canadian execs who appear overpaid by our standards include Gerald Schwartz, who we certainly admire for his business acumen but takes a huge haul at Onex. Frank Stronach was once the pin-up boy for excessive compensation at Magna International. However, these men still pale relative to their American “brethren,” such as Mario Gabelli of Gamco Investors, who banked almost $89 million last year, a bit more than Blackstone Group LP CEO Stephen Schwarzman, who was just under $86 million. Evidently,the $22 million in 2013 was not nearly enough. The other lads making more than $60 million were the KKR & Co. L.P. duo of Henry Kravis and George Roberts.

Some people will argue that it does not matter how much the people at the top take, as long as the return to investors is reasonable. We disagree. The more they grab, the less that is left for investors. That means people like us. Plus, we have noted that often where the top brass rank high on lists of highest paid management, the board of directors also seems to be overly compensated. Barrick, for example, regularly paid directors over $200,000 last year. Former Prime Minister Brian Mulroney received almost $1.2 million. Stephen Harper might be visualizing potential paydays if his days as PM come to a conclusion this fall.

In the system that we use when rating companies to potentially purchase, a point is lost when we feel that management makes too much money. The question becomes whether the people at the top of the ladder have their interests aligned with peons like us who buy shares and hope for equitable returns.

Of the group of enterprises mentioned above, the only one on our Watch List for a possible buy is Barrick. However, the crushing debt load that accompanies the egregious compensation of management means that there are lots of better candidates to acquire these days.

We are great believers that the minimum wage is too low in many places and needs to be raised so that more people can make a decent living. Cutting back some of these fat cats at the top end and redistributing their intake would help. While recognizing that this is dreaming in Technicolor, sometimes imaginings can become reality or at least place grins on the faces for the fantasists. Yes, we are smiling. Perhaps one day, shareholders’ “Say On Pay” will become more effective.