S32 South32 Limited

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 true performance.

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 up.

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 changes.

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 pass.

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 rhiannon.hoyle@wsj.com and Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

November 07, 2019 08:14 ET (13:14 GMT)

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