A study of mining industry Chief Executive remuneration reveals that pay is not much at risk due to performance.
We identified 30 ASX 300 Chief Executives from the mining industry, with market capitalisation ranging from $367 million to $5 billion.
Reflecting the fact that salaries are not evenly distributed across the industry, our analysis found that the average fixed remuneration for Mining CEOs of $AUD773,516 was greater than the median rate of $AUD592,147.
The distribution of Mining CEO total pay was also skewed, with the average of $AUD1,153,524 exceeding the median rate of $AUD883,187.
Guerdon Associates’ analysis included:
• fixed pay
• short term incentives (STI)
• long term incentives (LTI), and
• total remuneration
Table 1 below shows the pay distribution across all these major remuneration elements. Note that rows do not add up because each item is analysed independently. That is, an individual receiving median fixed pay may not be the same person receiving median STI.
For mining company CEOs, fixed pay makes up two-thirds of total pay, so that only one-third of their pay is ‘at-risk’. This is low in comparison to CEOs in the energy sector. A Guerdon Associates’ study of 23 CEOs from ASX 300 listed energy sector companies reflected that on average half of the pay of CEOs in this industry is ‘at risk’. Mining company CEO remuneration is also very different in structure from CEOs in the real estate sector, where another Guerdon Associates’ study of 12 CEOs from ASX 300 listed real estate companies showed that two-thirds of total CEO pay is ‘at risk’.
What’s more, long-term company performance does not have any effect on the pay of the two-thirds of mining CEOs who have no long term incentive plan. Most, it would appear, are more focussed on short term results, with two-thirds participating in short-term performance-based pay plans.
As can be seen in the figure below, our analysis also showed that CEO pay in the mining industry is directly and positively related to company market capitalisation. This means that for larger companies, the CEO will likely receive more pay irrespective of company performance.
Should mining company CEO pay be tied to just company size and not company performance?
While there is bound to be debate, setting pay levels based on company size in lieu of pay for performance is completely understandable for this industry.
For the great majority of mining companies, shareholder returns are at the mercy of commodity prices. So revenue, earnings and return results are largely outside of the CEO’s direct influence. Given this, it is difficult to provide and justify performance pay, especially long-term incentives based on total shareholder return.
Short-term incentives can still be provided based on production figures, safety or exploration results. Long-term incentives, where provided, could be based on relative TSR, but only if a peer group can be developed comprised of companies with much the same commodity and asset development profiles. This may be a tough task for some mining companies.
Alternatively, it is not uncommon to provide share options for smaller, rapidly growing mining company CEOs with vesting based on achievement of milestones, such as the first shipment of ore, or independent confirmation of major new asset reserves. While this may be anathema to governance guardians who prefer relative TSR, these types of LTIs make sense, given the major contribution such milestones make to shareholder value.
Otherwise, investors and governance groups may need to accept that companies in this industry may be justified in providing a CEO with share options not contingent on performance, or any other form of LTI plan.© Guerdon Associates 2022 Back to all articles