Solid Compensation at the Maple Nine Despite Lower Returns
Chief executive officers at Canada’s largest pension funds saw their pay change marginally last year even though some of their public-market investments suffered losses owing to rising inflation and higher interest rates.
The modest changes at most of the biggest pension funds are a result of compensation philosophies that emphasize long-term performance of the funds, which is typically measured over five-year horizons.
Consequently, some funds did not meet their benchmark targets for fiscal 2022 but still increased the pay of their top executives, while others reported single-digit drops in compensation.
Of the Maple Eight group of Canadian public pensions, seven break down their senior executive compensation policies in their annual reports, despite not being legally required to do so. Most disclose compensation for the CEO and three to five additional executives, while highly paid investment managers below the executive level are not included in the disclosures.
British Columbia Investment Management Corp. (BCI), with $233-billion in assets, reported the highest pay increase for its CEO, with Gordon Fyfe receiving $5.04-million in the latest fiscal year, up 23 per cent from $4.1-million a year earlier. Mr. Fyfe’s long-term incentive payment was increased to $2.14-million in 2022 from $1.43-million in 2021, and he received an annual bonus of $1.92-million, up from $1.77-million in 2021.
BCI posted returns of 3.5 per cent in the fiscal year ended March 31, beating its internal benchmark of 0.3 per cent.
BCI says it recently updated its compensation policy so executives with “excellent performance” would be around the top 25 per cent in the industry in terms of pay.
Its long-term incentive plan is based on five- and 10-year returns. The pension manager reported a 10-year annualized return of 8.5 per cent, against a benchmark of 7.2 per cent.
John Graham, the CEO of the Canada Pension Plan Investment Board (CPPIB) – the biggest fund in Canada, with $570-billion in assets – saw his total compensation increase by a modest 0.5 per cent, to $5.38-million in the fund’s last fiscal year. Of that, $670,822 was salary.
CPPIB delivered returns of 1.3 per cent in the fiscal year, which beat its internal benchmark.
CPPIB bases incentive pay on five-year returns, looking at both the absolute number and the amount by which it beat its benchmark.
CPPIB’s board further increased Mr. Graham’s incentive pay, saying the decision “reflects recognition of his high achievements.”
The Ontario Municipal Employees Retirement System, or OMERS, with $124-billion in assets, paid CEO Blake Hutcheson $5.16-million last year, up 0.4 per cent from $5.14-million in 2021. OMERS recorded returns of 4.2 per cent in 2022, below its benchmark of 7.2 per cent.
OMERS also uses five-year average performance for compensation. Mr. Hutcheson’s annual and long-term incentive pay dipped slightly to just over $4.4-million. Most of his pay raise can be attributed to an increase in his base salary, to $600,000 in 2022 from $565,000 in 2021.
Compensation for the CEOs of public pensions is unquestionably large but still less than the pay packages of their private-sector peers. The median pay package for CEOs at 100 of the largest Canadian companies listed on the Toronto Stock Exchange, reviewed by The Globe and Mail and consulting company Global Governance Advisors, was $8.6-million in 2022.
Some pension fund CEOs faced small cuts to their paycheques last year.
The Ontario Teachers’ Pension Plan, which manages $247-billion in assets, reduced CEO Jo Taylor’s total compensation by 8 per cent in 2022, to $5.16-million from $5.6-million in 2021.
Caisse de dépôt et placement du Québec, which manages $402-billion in assets, cut CEO Charles Emond’s compensation to $4.21-million, a 4.9-per-cent reduction, after recording a loss of 5.6 per cent in the fund’s latest fiscal year.
Meanwhile, executives who were new to the job saw robust paycheques in their first year of work.
The Public Sector Pension Investment Board, with $244-billion in assets under management, paid new CEO Deborah Orida $8.63-million in the latest fiscal year. She assumed leadership on Sept. 1, 2022, almost halfway through the plan’s fiscal year.
The pay package included a special incentive plan grant, valued at $4-million, that will pay out over time based on the performance of the fund; a $1.5-million “special cash grant”; and a relocation allowance of $150,000.
Alberta Investment Management Corp. (AIMCo), which manages $158-billion in assets, paid CEO Evan Siddall $4.96-million. He joined AIMCo as CEO in July, 2021, and made $1.33-million in his first, partial year of work.
The Healthcare of Ontario Pension Plan does not disclose compensation for its executives.
I literally read this article late this afternoon and clicked on it because I saw Gordon Fyfe smiling ear to ear and was wondering why he's so happy.
Compensation, aka "Show me the money!!" is a touchy subject especially when it comes to CEOs because let's face it, they all want to earn more and compare themselves to "industry standard" which keeps creeping up every year.
I've been covering Canada's large pension investment managers since the GFC erupted in 2008 and let me be frank, I've rarely seen executive compensation go down (OMERS during the COVID outbreak comes to mind because of writedowns on a couple of bad investments and AIMCo after the vol blowup around the same time).
There are rules and formulas governing compensation and there is a detailed compensation discussion at the back end of their annual report discussing how they compensate their staff.
[Note: Except for HOOPP which is a private trust, it doesn't disclose anything on compensation but in my humble opinion, it should as a matter of transparency and reflecting the fact they manage pension assets of healthcare workers in the pubic system.]
Typically, the way compensation works is they need to beat some benchmark over a four or five year period but you never get a detailed independent report every year from government agencies (like auditor generals) or an independent firm that certifies the benchmarks they're using actually reflect the risks of the underlying portfolios.
Still, since most of Canada's Maple Eight (Nine if you include IMCO) have now all adopted the same strategy -- ie. investing 40-50% of their assets in private markets, co-investing with top private equity funds to lower fee drag -- they are all delivering significant dollar value added relative to their benchmarks over the long run and that's how they're justifying their compensation to their board members.
Like Derek Murphy ("Murph"), the former head of Private Equity at PSP Investments, kept telling me when I was working closely with him back in 2005: "It's a great gig".
You bet it is, that's why people are killing themselves to get into these large pension investment managers and then battling it out to make it the senior executive team where they can reap millions in compensation every year.
Over a ten year period, it adds up, and the longer you hold on to power, the more you make based on the formula.
For example, since joining PSP in August 2003 and BCI in June 2014, I reckon Gordon Fyfe has amassed a fortune (well over $50M before taxes) as CEO of these two organizations and that doesn't include other perks, like a gold-plated pension plan.
Good for him. I was telling a friend of mine of yesterday that Gordon managed to convince British Columbia's minister of finance that BCI is a "special" Crown corporation and it shouldn't have to report the compensation of its employees publicly like all other public sector corporations do.
To be brutally honest, you're not going to attract talent to Victoria, British Columbia unless you pay up.
My friend who worked in Vancouver loves it out there, tells me "the weather is great and unlike Vancouver, Victoria has the most sunny days in Canada all year long" but to move out of Montreal or Toronto to the other side of the country, it takes more than good weather: it takes money, lifestyle and culture.
The same goes for AIMCo, nobody is heading to Edmonton unless you pay them properly.
But AIMCo is smart in that it opened up an office in Calgary and has an office in Toronto too.
Its CEO, Evan Siddall, is a big believer in flexibility, adaptability and treating employees like adults, meaning they can work from anywhere as long as they're responsible, perform and are team players.
If I was the CEO of any of these large shops, I would sit down with the head of HR and tell them straight out: "Find me the best talent across Canada and I do not care if they're not able to physically relocate to our city."
Being a stickler for diversity, I'd add: "Make sure there are women, visible minorities, people of all ethnic backgrounds and people with mental and physical disabilities too."
Sure, it's not always easy to hire people working remotely but I just don't buy this nonsense that we all have to be in the same office to "build culture and mentor junior staff" (if you're a good leader, you can build culture and mentor juniors via new technologies, the telephone and meet them once in a while face to face to talk to them in person).
Anyway, my point is the pandemic shattered a lot of preconceptions that you have to be in the office five days a week and only the people that come in at 7 a.m. are the hardest workers (sheer nonsense).
I used to invest with the best hedge funds and let me tell you, in the brutal world of delivering alpha, they search for talent across the world, pay them extremely well, and offer them the flexibility to work from wherever they want.
But in order to get paid millions at a hedge fund, you need to perform every month and quarter -- none of this beating a benchmark over a 5-year period.
The same goes for me, I can write blogs every day but the truth is I need to perform in my personal account because if I don't, I don't have money to cover my expenses.
There's no paid sick leave, no vacation pay, no free dental and physiotherapists, or DB pension for me --none of those perks most people take for granted.
I risk my money to earn returns.
And let me tell you, I take huge risks and my portfolios swing, but I always manage to sleep well at night (you have to detach mentally when managing money, especially your money, or else emotions will take the best of you).
Anyway, back to CEOs and how much they get paid.
Below, I share executive compensation tables from their latest annual reports and instead of HOOPP, I added IMCO as it discloses its executive compensation and is part of the Maple Nine:
CPP Investments (fiscal year ends at end of March):
PSP Investments (fiscal year ends at end of March):
As you can see, OTPP's CEO Jo Taylor took in the highest compensation last year, earning $6.35 million in 2022, a notch below the $6.9 million he earned in 2021.
OTPP has provided stellar returns over the long run and Jo joined the organization back in 2012 from a top private equity fund.
But all of Canada's Maple Nine CEOs are paid extremely well as are their senior executive managers.
They manage most of the assets internally and need to compete for talent with the private sector to manage these assets properly across public and private markets all over the world.
They are entrusted with managing pension assets but they're not running a hedge fund or private equity fund and they manage assets from captive clients (IMCO will argue it has to perform to get new clients which is true but its two main clients are anchor investors).
In this regard, they cannot justify being paid like private sector assets managers that have to compete for assets.
But they need to attract talent to their organization or else they will not be be able to manage assets internally to lower fees and outperform over the long run.
So, to a certain extent, the market dictates compensation and as we all know, compensation across the finance world is extremely generous (some would argue outrageously generous).
I'm not here to make normative calls on whether Canadian pension CEOs are overpaid.
Sometimes I see things in those compensation tables that raise my eyebrows and don't hold back.
But I can tell you that even though I believe in capitalism and free markets, in general, I believe many CEOs at large private corporations are paid way too much for what they deliver.
For example, Canadian banks are essentially an oligopoly and these CEOs enjoy extremely high compensation.
Yes, it's the private sector but it's an oligopoly protected by the federal government, just like insurance, airlines and other industries where CEOs pull in millions.
And it's still a White Anglo-Saxon all boys club so in that regard, Deb Orida is a welcome edition to this exclusive club of male CEOs.
Not to mention, she's of Japanese descent and has many vowels in her last name.
In all seriousness, we need to diversify all levels of all public and private organizations.
Don't tell me there aren't enough qualified people. The truth is HR departments are too lazy to search for talent or too conservative to hire people who think outside the box.
Lastly, this morning my wife and I were watching Good Morning America where they interviewed the head of the UAW Shawn Fain who discussed the union's demands and where negotiations stand with GM, Ford and Stellantis.
The UAW wants wages to increase by 40% over the next four years, a solid pension and a four-day workweek.
At one point, I turned to my wife and said: "If they get what they want, this could be the beginning of a wage spiral and complicate the Fed's job down the road."
My wife who is a teacher turned to me: "I don't get you economists, your models don't make sense. It's alright for the CEOs of these companies to make millions but the workers producing these cars don't get to demand solid wage increases and a pension? That is good for the economy over the long run."
She makes a great point but the paradox of capitalism is there's always a struggle between capital and labor and the only way you can really justify higher wages is when productivity is rising so costs are absorbed and profits rise despite the increase in wages.
In short, capitalism's success thus far has been because of greater inequality but this cannot last forever.
Alright, that's a topic for another time but it reminds me of something a friend of mine once told me: "All annual reports from all organizations should publicly disclose the ratio of the CEO's compensation relative to the median at their organization and if it's above 40 or 50, they need to justify it."
Not sure that will ever happen as we both noted the compensation game is fixed and biased so CEOs always take in the lion’s share of the compensation pool.
Some more food for thought:
Did all CEOs become geniuses in 1990s? pic.twitter.com/qFHqZh00CD— Michael A. Arouet (@MichaelAArouet) September 29, 2023
Below, as Thursday's deadline draws near, United Auto Workers President Shawn Fain discusses the union's demands and where negotiations stand with GM, Ford and Stellantis.
Update: With the passing of Thursday night’s deadline, the United Auto Workers (UAW) union said it will strike across all Big Three automakers on Friday using a new “stand up” strike strategy.
This is the first time the union will strike against the Big Three since its six-week strike against GM back in 2019.
On Friday morning, GM CEO Mary Barra, arguably the most powerful lady in Corporate America, appeared on Good Morning America to discuss the strike and workers' demands.
See her interview below as she does raise excellent points.