Thursday, 5 January 2012

Top-100 Canadian CEOs: Who is The Most Over-paid?

The recent release of Canada's CEO Elite 100 , an examination of Canadian CEO pay in 2010 by Hugh Mackenzie of the Canadian Centre for Policy Alternatives, attracted much media coverage and comment from a public policy and societal fairness perspective - e.g. in the Vancouver Sun, the Toronto Star and the CBC. From the investor perspective, the question of who is over-paid is different. The question is whether company profits and shareholder stock and dividend returns match the high pay.

We've sifted through the Elite 100 list to identify the CEOs who in our opinion do not seem to merit their rewards and those who do to give us a clue for bad or good potential investments. This week we first address the under-performers, then next week the good performers.

The Unlucky (for Investors) 13
The table below that we built from GlobeInvestor's Watchlist shows many red negative numbers for investors in contrast to the large CEO compensation packages reported in the Elite 100.

Top, or bottom of the list, depending how you like to view it, the worst shareholder reward for the highest CEO pay, clearly is Yellow Media (TSX: YLO). How CEO Marc Tellier merited $8.9 million, 35th spot in the top 100, in the face of continually declining profits and stock price (see TMX Money chart image below), is a mystery. No wonder analysts have rated the company a Sell.

Next in line would have to be Magna International Inc (TSX: MG), a stock with negative total returns over the past 1-year and 5-year periods. Meanwhile its CEO Frank Stronach pulled down an amazing $61.8 million in 2010, top pay in Canada by several orders of magnitude. Two other Magna executives occupied second and third spots in the pay table. The stock chart below from Google Finance for Magna is interesting. At the end of 2010, the stock price was sky high perhaps leading some to think the pay was possibly justified. But then the price plummeted in 2011, probably prompting investors to think the executives "took the money and ran". Now, analysts have a Buy rating on the company. Caveat emptor would appear to be a pertinent comment.

Air Canada (TSX: AC.B) CEO Calvin Rovinescu got very well paid, number 88 at $4.5 million, for producing occasional small profits and more frequent large losses in recent years. Negative investor returns have been commensurate. Air Canada has given investors the worst five-year return amongst the Elite CEO list at a horrible -43.5%.

It is a mystery why Nordion (TSX: NDN) CEO at the time (he has since been replaced) Stephen DeFalco merited pay of $13.1 million - good for 8th position! The small company under his leadership made large losses and shrunk considerably taking investors on a steep downhill ride.

The Niko Resources Ltd (TSX: NKO) stock chart from Google Finance looks like a roller coaster over the past five years and is currently at a low. Profits have been similarly volatile. The big investor question is whether this is a cyclical bottom or a continuing low. CEO Sampson's gigantic (4th overall in the list), mainly stock option, compensation of $13.1 million fell to March financial year-end 2011 and no doubt would have gone down yet more since, but investors have incurred net losses over five years, not just variations in income.

Other companies and stocks in our table of disappointments have similar stories - generous CEO compensation and investor negative returns over both one and five years. The past results are clear - these CEOs have not earned their pay. Others too which we have not listed have fallen short.

Such divergence of CEO pay and stock returns is certainly a warning sign to the investor to exercise extra caution. A key question for investors is the future outlook. Which of these CEOs are truly over-paid because the company earnings, which in many cases have been depressed, will recover from merely cyclical economic conditions? Or will earnings be revived from structural industry changes through the efforts and leadership of the high-paid CEOs, in which case their high pay could be justified?

In which of the two categories fall the remainder of our list - Nexen Inc (TSX: NXT), Sherritt International (TSX: S), Sun Life Financial (TSX: SLF), Rona Inc (TSX: RON), Cameco Corp (TSX: CCO), Cott Corp (TSX: BCB), Manulife Financial (TSX: MFC) and Uranium One (TSX: UUU)? We do not attempt an answer here but the investor's task is two-fold: first, to get angry and lobby for more reasonable pay, but also second, to get even by making investments according to the true worth of the stocks, which requires the usual due diligence investigation of company basics. High CEO pay without results is certainly a negative factor worth noting.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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