April 3, 2014

Two cheers for Barrick Gold

Yvan Allaire | IGOPP

After the bruising treatment that Barrick had to endure last year for its indefensible pay packages, the company got the message. The compensation plan it has made public on March 31st goes a long way towards the kind of pay system that all companies should adopt.

Having published a policy paper on executive compensation in 2012 («Cutting the Gordian knot», IGOPP, May 2012) that proposed the kind of changes now put forth by Barrick, we applaud the company for this bold, innovative step in the right direction.

The new reward system has several key features:

  • The elimination of stock options, the prime culprit for short-term thinking in business management;
  • Variable compensation based on performance measures that are both quantitative and qualitative; excellent performance is not measured only by the achievement of financial ratios but equally by more subtle but critical variables such as «Reputation and license to operate», «People development», and «Strategic execution»;
  • None of the quantitative measures are linked to stock-price performance; while the actual amount of financial rewards will, in the long run, be influenced by the stock price, the quantitative measures are tied to performance largely under the control of management: Return on invested capital, Free cash flows, Dividends to shareholders, Strong capital structure, Capital project performance;
  • The performance units are earned each year on the basis of targeted performance goals. These units vest after three years and are then converted in shares of the company; these shares are bought in the open market so that there is no dilution effect for shareholders;
  • Abandoning, for all intents and purposes, the flawed practice of benchmarking compensation against a supposedly comparable set of companies, the weakest link of current ways of setting compensation;
  • The company has adopted a claw-back provision in case of re-statement of past performance; it has also adopted a policy prohibiting hedging of the economic exposure to share ownership;
  • The company has raised substantially the required value of the share ownership by all executives;
  • The executives cannot cash the shares they have earned until they retire or leave the company.

Overall, this new compensation system represents a huge improvement over previous reward systems at Barrick and at most Canadian and American corporations for that matter.

I have one serious reservation: the concept of restricting the cashing of all earned shares until retirement or departure from the company may well prove counter-productive.A forty-five year old executive with a substantial paper worth in accumulated shares at risk of general stock market melt-down at a most inopportune time may find that an early leave from the company is an attractive option. Waiting until retirement to cash in any part of this vulnerable paper wealth may prove counter-productive.

It may be more appropriate to allow the cashing of earned shares over and above the threshold value set for executive share ownership. As long as executives keep a substantial part of their wealth in shares of the company, the convergence between their interest and the long-term interest of the company is assured.