A top CEO can be as valuable to a company as a star hockey player is to his team – both are able to read the game better than others, inspire and motivate team members, and can execute with clinical efficiency.
The question of how much either of these should be paid is contentious – however, for shareholders the result of the performance of the CEO is directly measurable in terms of their company and share price performance over time.
Earlier this year, the Canadian Centre for Policy Alternatives published the rankings of the 100 best paid CEOs of TSX-listed companies for 2012. The average CEO in this group had a total compensation, including base salary, cash bonuses, grants of company shares, and stock options of around $8 million.
While this compensation sounds high, a top performing CEO can add substantial value for shareholders. From a shareholder perspective, “value add” could be measured from a total return perspective (share price gain plus dividends), compared to general market or the peer group. As a secondary measure, it is also instructive to measure the change in the return on total assets – how effectively did the CEO use the capital at his disposal?
The table below indicates the performance of the top paid CEOs in 2012.
|Total return: 1 Jan 2013–2 April 2014*||EBITDA/Total Assets, 2012-2013 change*|
|E. Hunter Harrison||$49.2 million||70%||21%|
|Thomson Reuters Corporation||James C. Smith||$18.9 million||41%||1%|
|Talisman Energy||John A. Manzoni||$18.7 million||4%||-38%|
|Eldorado Gold Corp||Paul N. Wright||$18.7 million||-50%||-31%|
|Magna International||Donald J. Walker||$16.9 million||124%||13%|
*Source: Thomson Reuters
The best value add in terms of returns delivered to investors came from automotive component supplier Magna International (TSX: MG)(NYSE: MGA) where shareholders had an excellent 124% total return over the 15-month period. The EBITDA return on total assets also improved substantially during 2013.
A strong recovery in the North American vehicle market helped it along, but the company performed better than the overall industry in most regions and categories. Mr. Walker is a long-standing CEO of the company and has guided the business well through difficult and good times.
Canadian Pacific Railway (TSX: CP)(NYSE: CP) was another outstanding performer in this table with a 70% return to shareholders over the past 15 months. Most market observers would ascribe this performance to the decisive actions taken by Mr. Harrison since his appointment in mid-2012. Many will argue with the cost involved to get him on board and the total compensation package, but shareholders have much to be pleased with.
Thomson Reuters (TSX: TRI)(NYSE: TRI) has been struggling for a number of years and the 2013 results did not impress but the company has set a course of internal change and reorganisation that has started to deliver some modest results. The recovery in the financial markets also helped the business over the past two years and shareholders were well rewarded. Mr. Smith has been with the company for a long time and investors will expect the pace of improvement to accelerate to justify the CEO reward.
Talisman Energy (TSX: TLM)(NYSE: TLM) did not do well for its shareholders in 2013 or for that matter in 2012 or 2011 despite elevated crude oil prices. Additionally, management has developed a reputation for missing production guidance figures and timelines for new development projects. Perhaps unsurprisingly, the previous CEO left the company in 2012 and was replaced by Hal Kvisle, previously from TransCanada.
Eldorado Gold (TSX: ELD) turned in the worst performance of the companies listed above. The company has not done well for shareholders since the start of 2013, but it did better than many other gold producers. Its relatively low production costs helped to protect its position in a declining gold price environment. Since assuming his current position as CEO in 1999, Mr. Wright has guided Eldorado from a junior gold producer to a mid-tier gold producer, all while maintaining a cost structure that is among the lowest in the industry.
Foolish bottom line
Great CEOs can add substantial value from a shareholder perspective. They have the ability to design and implement appropriate strategies, allocate capital optimally, inspire and motivate staff, and make and execute tough decisions when required. However, shareholders could do well to regularly test the CEO’s reward against the performance of their investment.