Getting Back on the Horse – Part 2: An Update on Board Pay in Mining

Getting Back on the Horse Part 1 – Executive compensation – can be found here

Compensation for Board members was not excluded from change as the industry experienced and recovered from the recent severe downturn. In this extended blog we discuss the trends amongst industry clients and contacts, in director pay.

Emerging from an extended period where compensation and pay philosophy remained unchanged this is a perfect time to review director remuneration. Many companies that you used to compare with will have disappeared and your own company likely has a different profile from when the compensation committee last looked at board pay.

Boards generally think about their own compensation when looking at pay levels and practices of competitors for setting executive pay. The group of companies with whom the company compares for executive pay benchmarking will usually be the same for Board pay and most often the philosophical perspective will remain the same. Collecting peer group compensation for board members involves minimal extra work when collecting executive data whereas undertaking this exercise separately typically doubles the cost.

Compensation for Board directors of mining companies has followed the trend in other industries and has increased in recent years (in contrast some might say to industry executive pay), to reflect the expanding work beyond board meetings and the AGM into committee meetings, additional calls and video conferences which all make demands on director time. There is however, little correlation between the quality of the work of a director (the quantity of which may vary from year to year) and the level of compensation. Pay is driven by competitive practice rather than performance which is the case for executives.

Comparison of board pay can be more complex than executive pay because of the elements to be compared and their definition:

1. Retainer – a cash fee paid monthly or quarterly generally reflecting the median amount paid by the comparator group modified by cash availability.
2. Meeting Fees – amounts paid for attendance at board or committee meetings. Difficulty defining what constitutes “a meeting” has encouraged many companies to roll meeting fees into the annual retainer and abandon the practice of paying for attendance at meetings.
3. Committee Premiums – paid to recognise the additional work of the chair of the board or a major committee (e.g. Audit or Compensation). Some companies although this is a declining practice, pay a fee for committee attendance.
4. Long Term Incentive – typically paid in stock, stock units or options often with  payout deferred until the director steps down from the board. Companies often require directors to own an amount of stock which the long term incentive is designed to help achieve.

Other than a premium for being a committee chair directors tend to be paid uniformly irrespective of their role or expertise other than when they chair a major committee.

The purpose of examining competitive practice for executives is to ensure that pay falls within the range offered by peers in order to prevent executives from being enticed away by another employer. This “ballpark” amount is then customized to reflect the company’s circumstances, incentive philosophy, views on proportional split between long and short term pay and retention considerations.

Board directors are not generally going to be influenced by pay and certainly not attracted away to another company. Pay that is too low will not attract a qualified candidate to join the board (especially if low pay is accompanied by inadequate insurances). They may step down from the board if they can no longer commit the time or if they believe the board to be heading in a direction that is in conflict with their views or that may impact their personal reputation but rarely will directors leave a company for higher compensation as an executive might do.

While boards assess their own performance and will ask a director who is not contributing at the required level to consider retirement there is an unwritten obligation to see the job or their tenure through once they have committed to the board position. Especially amongst smaller organizations, directors suffer sacrifices more than the executive team. For example a number of our client boards took  pay cuts or deferrals during the downturn. Setting Board compensation is therefore not subject to quite the same considerations as executive pay.

Director pay should first and foremost be aligned with that of similar companies. Stakeholders will want to know that their board is paid comparatively the same – not significantly more or less. Strictly speaking the “comparator group” should be organizations of similar size and complexity rather than organizations with which the company competes for talent as is the case with executives.

Boards are naturally conflicted when setting their pay and the work of the Compensation Committee is crucial in meeting board expectations. Some of our clients for example survey the entire board in determining the makeup of the comparator group. Changing one or two companies in a list of 15 is going to make little difference but does ensure board consensus.

While director compensation doesn’t fill the same function as with executives, pay for even for the most intellectually demanding projects needs to be reasonable for the expected workload. The level and depth of director experience available is governed by the level of board compensation on offer.

We have worked with companies who believed their profile to be so attractive that the very best directors would be attracted by the opportunity alone and therefore they could justify fees below the market. This invariably fails as no matter how good the opportunity better directors only have limited time and need to be compensated accordingly. Unlike executives they are not generally building their resume but expect a reasonable fee for their time.

The mining industry comprises many different profiles of organization with their own individual approach to compensation. The stage of the company is an important consideration and influences compensation arrangements. Our experience suggests companies fall into one of four groups which will dictate comparators and philosophical approach:

1. The Established Producer – has several active mines in different geographies with a seasoned executive team and a board of professional directors. Typically there is a strong governance ethic and schedule for comparing compensation with a strict set of comparator criteria and policy for mirroring median practice.
2. The Evolving Producer – mostly has a single location with a project somewhere between discovery and production with often some other minor projects (e.g. JV or royalty arrangement). Public scrutiny or a major shareholder demand high levels of governance but the evolving board has not yet reached the sophistication or the discipline of an established producer. Board members often have a financial interest other than pay in the project. Some board members may be founding owners.
3. The Post Exploration Company – almost exclusively focussed on one location with external funding necessitating an independent board that may comprise one or more original owners who may continue to provide executive services. Minority shareholders may include a major producer who ultimately anticipates taking over the company.
4. The Exploration Company – generally comprises a group of entrepreneurs who have formed a company to indulge their passion for discovery. Funded with external money the company is focussed on finding major deposits that will be purchased by major producers.

Consensus on a comparator list and philosophy before any survey work is commissioned is a vital part of a Compensation Committee’s role in saving time and expense. The Committee’s written philosophy and policy (approved by the board) will assist in this endeavour and avoid reinvention every time an update is undertaken.

To reinforce objectivity and separation from the interests of executives we encourage clients to adopt board long term incentives that are differently structured from those of the executive team such as type of instrument or if employed, performance criteria. Retention is less of consideration for board directors than it is for executives.

The unique circumstances of each company will dictate where director pay is positioned competitively against the comparator group but generally, as the primary purpose is to satisfy shareholders that pay is positioned an appropriate level to attract competent directors this will be at the median (or mid-market).

Starting at total compensation each element will be examined (fees, premiums, meeting fees and long term payments) excluding any fees paid to a director for executive work and adjusted to reflect the circumstances of the company. For example a company may elect to increase the total to reflect a lower retainer than paid by the comparator group i.e. a premium because of a higher component of the total carries risk.

Company policy may dictate that to recognise extra committee work a premium be paid for chairing the board or a committee or that additional fees are paid for attending meetings. A company with overseas directors may consider paying for travel time as a reflection of the additional time commitment. All of these elements are compared and refreshes as appropriate.

The Compensation Committee calendar, review process and business rationale should be written into its compensation policy and regularly reviewed and confirmed with the full board. The Compensation Policy should be written in an easy-to-read format that serves as a reference for Committee members and an aide to improving the efficiency of meetings.