Natural resource companies face unique, but not unsurmountable, pay challenges

www.conferenceboard.ca

TORONTO, Sept. 4, 2012 /CNW/ - Natural resource companies face unique challenges in recruiting, retaining, and motivating the key talent they need to be successful, because of volatile commodity prices and the long time between capital investments and shareholder returns. A study produced for The Conference Board of Canada, Compensation Challenges for Natural Resource Companies, outlines approaches that businesses can use to address the needs for employee retention, pay for performance and a long-term focus on the company's success.

"Retention issues exist during both high and low commodity price cycles. Paying for performance is challenging because volatile commodity prices can create misalignment between management pay and shareholder returns. And the long-term nature of the business makes it difficult to pay at an appropriate level in the short term," said Christina Medland, the study's principal author from Meridian Compensation Partners.

"Meeting these challenges requires advance planning, multiple strategies, clear communication with the shareholders, and discipline to hold a steady course through commodity pricing cycles."

Two characteristics in the natural resource sector pose specific challenges for firms. First, share value is strongly influenced by macroeconomic factors often beyond the direct control of management, most notably commodity price. Second, these capital-intensive businesses require substantial investment and it may be years before returns are generated for shareholders.

The report presents strategies to help organizations overcome these challenges in the areas of retention, pay for performance and creating a focus for employees on the company's long-term success.

Retention Strategies

• Ensure Sound Succession Planning - The cyclical nature of the market for talent makes succession planning vital to fill key positions as they are needed. A good succession plan positions the company to manage employee turnover when it becomes necessary.
• Make Long-Term, Share-Based Compensation a Substantial Part of Compensation -The cyclical movement of commodity prices and the length of time between a discovery of a reserve and production make long-term compensation crucially important.
• Balance Share-Based and Cash-Based Incentives - A "portfolio approach" - consisting of options, restricted share units, performance share units, and cash -mitigates the downside of any single method of compensation.

Pay for Performance Strategies

• Balance Absolute and Relative Performance - Compensation programs should have a mix of absolute and relative measures. Absolute measures reflect key drivers of shareholder value, while relative measures reward performance compared to other businesses that face similar external factors (such as commodity price fluctuation).
• Align Performance Metrics - Metrics need to be aligned with the company's long-term strategy, and the annual incentive plan should reflect specific measureable milestones tied to the strategic plan.
• Communicate with Shareholders- Natural resource companies need to communicate to shareholders how compensation programs support the business strategy and align pay with shareholder returns.

Strategies to Enhance Long-Term Focus

• Ensure Long-Term Incentives are Truly Long-Term - Long-term focus can be created through share-based awards that vest over time, share ownership requirements, and requirements to hold the shares received under incentive plans for a period of time.
• Create Employee-Owners - Share ownership is key to retention. Employees who
• have enough skin in the game are more likely to stay through the up and down cycles. Share ownership also creates and supports a culture of employees who act and think like owners for the long term.
• Pay for Avoiding Catastrophic Risks - The potentially catastrophic consequences of an error require significant employee focus on avoiding risks. A large part of a successful compensation program is creating a culture of prudent risk taking and anticipating and managing risks.

This briefing was prepared for The Conference Board of Canada by Meridian Compensation Partners, which is an independent firm of executive compensation consultants providing trusted counsel to boards and management at hundreds of large companies.

The report's principal author, Christina Medland, is a senior consultant with Meridian Compensation Partners. Tom McNeill, the report's co-author, is a senior consultant with Meridian Compensation Partners.

SOURCE: CONFERENCE BOARD OF CANADA

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Link to publication: http://www.conferenceboard.ca/e-library/abstract.aspx?did=5008

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