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Are top mining executives still paid too much?

Industry Top Trends 2021: Metals and Mining

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020


Are top mining executives still paid too much?

The headsof some of the world's largest miners have come under fire in recent years oversupposed exorbitant salaries during a time of depressed commodity prices and everdeepening financial losses.

Despitethe continued decline of commodity prices globally, top executives still appearto be taking home million-dollar-plus pay packets.

WhileRio Tinto CEO Sam Walshtook a 12.4% pay cut in2015, he still pocketed A$9.1 million in a year the company posted a US$866 millionloss.

Meanwhile,the head of larger rival BHP BillitonGroup took a much larger pay cut in the 2015 financial year due to long-termincentives not vesting and a lower short-term incentive payment. CEO Andrew Mackenzie'stotal remuneration package declined by 42.6% to around US$4.6 million.

Althoughthe industry is seeing a decline in executive salaries, many still question whetherthese numbers are acceptable in the current market.

The continuedmisconception that top executives are earning inflated salaries could stem froma lack of understanding of what these remuneration packages are made up of, accordingto industry commentators.

JohnRevie, general manager — Europe for recruitment firm Swann Global, believes greatertransparency in the reporting of executive salaries will help shareholders see exactlywhat top executives are being paid for.

"Ithink you need to look at the different components of the salary," he toldSNL Metals & Mining. "You have base salary, you have short-term incentivesand long-term incentives."

"Duringa time of a downturn, you are still looking to have the best possible people incharge of these businesses in a globally competitive market. So if a base salaryaspect is increasing, that's very different to short-term incentive increases."

Oftenshareholders are not fully aware of what short-term or long-term incentives arepaid out for.

"Ifthe short-term incentive is to stabilize share price or to ship out more productor to resolve a particular geographical issue, if people see that as something thathas been achieved, they are more understanding of a short-term incentive being paidout," Revie noted.

A short-termincentive is usually paid out for targets met over a 12-month period, while typicallylong-term incentives vest between two and five years.

"Ithink more transparency can only ever be a good thing," Revie said. "Theway in which the metrics by which these people are deemed to be judged by the chairman,the board and the shareholders I think can be communicated to the marketplace moreeffectively and more consistently as well."

Companiesare answerable to shareholders over the salaries executives are paid, with variouslaws in place to hold them accountable.

UnderAustralia's "two strikes" rule, a company will receive a strike if 25%or more of its shareholder base votes no to its remuneration report. If shareholdersvote against the remuneration report at the subsequent annual general meeting, thecompany will receive a second strike and faces a potential board spill.

Shareholders push back

Australiangold major Newcrest Mining Ltd.received a first strikeat its 2014 annual general meeting after about 44.6% of shareholders voted againstits remuneration report. At the time, CEO and Managing Director Sandeep Biswas wasreportedly earning more than the heads of BHP Billiton and Rio Tinto.

The companyavoided a second strikeat its 2015 AGM after it made several changes to the way it pays its executives.

Meanwhile,John Thornton, chairman of Canada's BarrickGold Corp., was forced to giveup US$3.4 million worth of bonuses for 2015 to appease three pensionfunds that planned to vote against the re-election of the board because they believeddirectors' remuneration was not in line with the company's performance.

Thorntontook home US$3.1 million, or 76% less than what he earned in 2014.

LaurieWood, managing director for executive remuneration and consultancy firm HRascent,believes that higher scrutiny of remuneration reports is not necessarily what isrequired.

"Ithink there's a fair level of scrutiny," he told SNL. "I think organizationsare learning around transparency and engagement with shareholders and stakeholders.Any organization that's been through a first strike understands how much is involvedin managing that for the next year and would want to avoid it."

Woodadded that one of the challenges faced by companies is the level of complexity inreporting executives' remuneration packages.

"Ithink an element of simplification of some of the reporting would be great so thateveryone can understand it a bit better and really see what has happened over time,"he said. 

Therehave been calls for an executive's short-term incentive to be tied to NPAT or EBITfigures, but Wood cautions against this.

"Ican understand that logic, but I also say we have to be careful what we want therebecause you employ a chief executive officer to manage a company through good timesand bad times and you want them making the good decisions for next year and theyear after as well even in the short term," he said.

"Soit's one of those things of looking at in each case of the CEO and saying does thatlook like a fair outcome based on how they have managed in what has been a difficultenvironment and are they taking the actions in the interests of shareholders."

Wage growth on the decline

The AustralianMines and Metals Association recently analyzed the Australian Bureau of Statistics'latest wage price index figures, which show the mining industry's wage growth iscontinuing to subside.

Acrossall Australian industries, the wage price index rose by 2% over 2015, while in theresource industry the index only increased by 1.6%.

Accordingto the ABS, mining was one of four industries that witnessed the lowest annual growthin wages since the bureau started compiling wage growth statistics in 1998.

SwannGlobal and HRascent compile an annual REM Report, which analyzes the remunerationpackages of the top 100 mining companies listed on the TSX, NYSE, Nasdaq, LSE, JohannesburgStock Exchange and ASX.

Whilethe report for 2015 will not be out until September, the 2014 report shows thatthe average total package paid to CEOs in that year was 8.8% higher year over yearat US$2.2 million.

The 20highest paid CEOs were paid in excess of US$4.0 million. Admittedly, 2014 was ayear many miners were still making a profit, but the commodity price decline wastaking big chunks out of company margins. 

The medianfixed pay of CEOs in the leading 100 companies was US$768,000, up 1.2% on the previousyear.

At themedian, the short-term incentives paid to CEOs was 98% of the median base pay.

The CEOsof the companies in the diversified commodity sector were paid more in all categoriesof pay than those in other sectors.

The expectationgoing forward is that the industry is unlikely to see a decline in the fixed paycomponent of executive salaries.

"Youdo see some changes in new appointments, but you don't see a lot of people actuallytaking a cut," HRascent's Wood said. "It does happen but it's not a mainstreamaction and I haven't seen anything to think so far that we'll see more of that inthe current climate."

In themeantime, many in the industry will likely be eagerly anticipating news of the salarypackage for incoming Rio Tinto CEO Jean-Sébastien Jacques, who will Walsh at the start of July.