By Rhiannon Hoyle and Robb M. Stewart
Global mining companies are re-examining how they pay their
chief executives, aiming to diminish the impact of external
factors--like swings in commodity prices--that can mask a leader's
At issue are big bonuses linked to total shareholder returns
that can swell or shrink depending on how a company's share price
performs. Miners--like companies in other sectors--say pay deals
that rely too heavily on these bonuses can encourage risky behavior
such as taking on big expansion projects or employing severe
cost-cutting initiatives that, in some cases, take years to clean
Instead, mining companies argue pay should be linked more
closely with strategic targets, because that would better reflect
what an individual executive can influence. A number of big miners
including BHP Group Ltd., Rio Tinto PLC and South32 Ltd. are
seeking to make changes to their executive pay plans, some starting
from next year.
"Mining companies' profitability, and therefore executive
remuneration, is highly cyclical and strongly driven by market
factors that are outside of their control," said Bill Hartnett,
stewardship director at Aberdeen Standard Investments, which holds
about 3.2% of BHP's London-listed stock for clients.
BHP already has seen the pay for its CEO decrease in recent
years. Marius Kloppers, who stepped down as CEO in 2013, earned as
much as $16 million a year during a tenure that coincided with a
China-led boom in prices for some of BHP's top commodities
including coal and iron ore.
His successor, Andrew Mackenzie, who took home a total of $3.5
million for fiscal 2019, has operated the company during a period
of falling commodity prices as the world digests increasing amounts
of supply from natural gas to iron ore.
Messrs. Kloppers and Mackenzie declined to comment.
Forecasting the cycle of commodity prices is a hazardous
business. Bad weather sometimes disrupts supply, while demand for
metals and minerals can rise or fall on political edicts,
especially in China.
Another big weakness in the current system: Building a mine or
bringing an oil field into production can take longer than the time
horizon for determining bonuses. That is especially the case when
permits are needed from regulators or new infrastructure such as
pipelines or railroads must be built.
BHP's directors say linking more pay to a performance scorecard
could be the answer. New stock awards would be held back for five
years so that directors can be sure that management took decisions
proven to create value. Those proposals were overwhelmingly
accepted in final voting on the company's revamped policy at a
meeting of Australian shareholders Thursday, with about 94% of
holders of the U.K. and Australia listed shares agreeing to the
Had this policy been in place for Mr. Kloppers, he would have
earned $19 million, or about 25%, less during the roughly five
years through mid-2013, BHP said. Mr. Mackenzie would have earned
only 2%, or $1 million, more than he has in the years since
succeeding Mr. Kloppers.
It might not be the last changes made by the company. Directors
also plan next year to clarify and strengthen the link between
performance on climate-change goals and pay, BHP said.
"We are at the early stages of engagement with other major
miners on their remuneration plans," said Mr. Hartnett, the fund
manager, who supports BHP's proposal.
Still, finding a balance that satisfies investors in different
parts of the world isn't easy.
Two years ago, Rio Tinto proposed replacing long-term
performance share awards with restricted stock, while at the same
time lowering the contribution of those long-run bonuses to the
CEO's total pay packet.
The proposal "was well-received in London. It was less
well-received in Australia," Chairman Simon Thompson said at a
shareholder meeting earlier this year. It was set aside.
Rio Tinto says it is talking to investors and could try again,
noting its remuneration policy must be reviewed every three years
under U.K. law. "The board remains of the view that restricted
stock has considerable merits in a long-term cyclical industry such
as mining," the miner said.
South32, which is also reviewing its pay structure, said it is
hard to strike a balance that ensures it is still attractive to
executives who might otherwise give the base-metals miner a
South32 Chief Executive Graham Kerr this year relinquished 4.7
million Australian dollars (US$3.2 million) in long-term bonuses
that were part of a deal agreed when BHP spun off the business. The
bonus in big part reflected a more than 40% rise in South32's share
price since it began trading in 2015.
"I don't think any of us expected to see South32 perform as
strongly as it did over the first four years of its long-term
plan," South32 Chairman Karen Wood said at an investor meeting
recently. "We all felt--and by all, I'm including Graham very much
in this assessment--that it would deliver an amount of money that
we thought was not appropriate."
Mr. Kerr was unavailable for comment.
Write to Rhiannon Hoyle at email@example.com and Robb M.
Stewart at firstname.lastname@example.org
(END) Dow Jones Newswires
November 07, 2019 08:14 ET (13:14 GMT)
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