Peter Gillin is a Corporate Director who currently serves on the Boards of several public companies, including: Turquoise Hill Resources Ltd., Sherritt International Corporation, Dundee Precious Metals Inc., TD Mutual Funds Corporate Class Ltd. and Wheaton Precious Metals Inc. He was a Director of HudBay Minerals, Inc., and was Vice Chair of N.M. Rothschild & Sons Canada Limited, an investment bank. Peter was President and CEO of Zemex Corporation and Chairman and CEO of Tahera Diamond Corporation.
Peter holds an HBA degree from the Richard Ivey School of Business at Western University and is a Chartered Financial Analyst. He is also a graduate of the Institute of Corporate Directors – Director Education Program at the University of Toronto Rotman School of Management and has earned the designation of ICD.D from the Institute of Corporate Directors.
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David Boim: What are the key factors in developing incentive plans?
Peter Gillin: Boards focus on the motivation and attraction of new executives, but a key element is also the retention of existing executives. Boards need to have a clear idea of what they want to pay for – in other words, what is the job and what are the important elements of that job for which the candidate will get compensated. And that, of course, involves the specific goals and objectives for the executives and the time horizons for accomplishing them. In any package of compensation, you must mix and match the incentives, obviously salary, plus short-term bonus (typically in cash) and then various other equity related instruments. In order to motivate people in the proper way you must offer a diverse portfolio. It’s also important to start early. Incentive plans require careful consideration, and so much of the planning is driven by specific goals, objectives, and an element of subjectivity. There needs to be time for the executives to provide input – of what they think they’ve accomplished or not. Bench-marking for senior executives is a very widespread practice, but it’s inherently inflationary and sometimes people lose sight of that fact. All in all, you determine what you want to pay for, how you’re going to pay for it and then you compare that to the rest of the world to see if it’s fair.
Boim: What about the considerations needed when building effective incentive plans, specifically within the mining space?
Gillin: In my experience, the greatest single difficulty in formulating any of these plans, in the mining space, is the movement of commodity prices and whether that creates a financial windfall or financial penalty. Ideally you want to have your compensation system designed to operate exclusive of the performance of the company itself because the companies have absolutely no control over that. You cannot forget to factor in the alignment with the shareholders. They suffer when the commodity prices decline, and they are happy as clams when prices increase. What you want to avoid is generously awarding executives when things are bad – that doesn’t sit well with the shareholders. Usually, senior executives have substantial equity awards, and when you compensate them there is an expectation that they have done a first-class job – met all of their objectives and goals (in terms of production).
Boim: You mentioned equity awards. As of late, equity has become obviously more complicated. How do approach equity awards?
Gillin: Well. Cash is the really the easiest approach. As you know, equity participation incentives for executives are of utmost importance and performance share units around the ascendancy options are on the decline. Interestingly, there’s a difference between Canada and the United States and the utilization of those more so in Canada than the U.S. In fact, the mining industry tends to utilize them a great deal more than other industries, particularly smaller mining companies. But, as I said, when things get complicated cash becomes king.
Boim: What about technology? Do your boards use any when developing incentive plans?
Gillin: Absolutely. There is a new trend of incorporating board management software into the executive compensation planning process. One of my companies, in particular, installed a balanced scorecard system and it’s an outstanding piece of technology. It doesn’t do all of the work – determining what compensation is fair – but it works with the board’s subjective judgement to design incentive plans. The board is responsible for using the technology to generate some numbers and then deciding if those numbers feel right, under that circumstance. Ultimately, when it comes to consideration, it’s very valuable to have the combination of the board and the technology.
Boim: How has the role of directors changed (regarding compensation)?
Gillin: Well certainly from the general board perspective, the overall evolution of governance, the improvement of governance techniques, criteria and behaviors have evolved. It's just been a massive increase over the last 15 or 20 years, if not longer. I mean, I know the first board I ever went on, years and years ago, somebody suggested using a dartboard when determining how you compensated people. It wasn’t sophisticated. But that’s no longer the case. I mean, everything must be well designed, well-structured, very transparent and fully defensible. And that applies to compensation, but also board behavior - meaning board outreach. Specifically, shareholder outreach by the members of the board. I’ve done that in several companies and the agenda is always one of three topics: governance, compensation and strategy formulation. It's very often focused on compensation. And ordinarily, if the shareholder calls the company and wants to have a conversation, then you know you're already in trouble. So, if you do it proactively you get a much better response. That’s a relatively new development, but none of this is going to stop. It's just the way of the world these days.
Boim: What would be the key takeaway from what we’ve covered today. If readers were to walk away with only one piece of information, what should it be?
Gillin: That’s hard. We’ve covered a lot of important information. Compensation is a very important element in this discussion, the main focus, and how companies work to determine it. It’s often the trigger for activism, and all of the other elements flow from it, together with stock price performance.