CPPIB pay doesn’t mirror returns

Call me naive, but I thought there was supposed to be a relationship between executive compensation and corporate performance. If corporate profits soar, so could the CEO’s bonus. But if returns plummet by 65 per cent, that is not the time for payouts to increase — not even modestly, particularly at a crown corporation like the Canada Pension Plan Investment Board (CPPIB), which manages $410 billion for Canadian pensioners. At the very least, a modicum of empathetic restraint would be appropriate during a pandemic, with three million jobs lost in the past two months and many companies going bankrupt.

Such considerations apparently were not paramount at the CPPIB. Although return on investments decreased year-overyear from 8.95 per cent to 3.09 per cent, CEO Mark Machin received almost $5.4 million in compensation. This was up marginally from last year but, curiously, was 37 per cent higher than target compensation. By way of contrast, in 2015, the fund achieved an extraordinary 18.3 per cent net return that earned then CEO Mark Wiseman a relatively modest $3.7 million. Incentive compensation is calculated by an intricate formula that includes subjective input and takes into account performance over five years. Still, how should the federal and provincial governments and the public react to those numbers when a mandated economic closure has just caused the worst economic downturn since the Great Depression and an unprecedented fiscal stimulus is driving public debt up to a crushing $1 trillion? At a minimum, the optics are poor.

A relevant teachable moment occurred a couple of years ago in Ontario. Ratepayers were worried and angry about skyrocketing hydro rates and a populist provincial party was about to be elected. Yet Hydro One’s board of directors, operating in a silo and tonedeaf to the wider social, economic and political environment, decided that CEO Mayo Schmidt merited a 38 per cent raise. As he had promised he would during the campaign, incoming Premier Doug Ford fired the “six-million-dollar man” and replaced the entire board.

Comparable action is definitely not warranted at the CPPIB, which has a history of sound governance and where past compensation has not been out of line. If the CEO’s pandemic-proof pay does put the crown corporation under a spotlight, however, public interest may extend to a broader inquiry, including performance in general, and investment and operating costs in particular. The latter totalled $3.6 billion last year, up from $2.3 billion just five years ago.

As to performance, the fund apparently lost $1.1 billion in a single investment in Royal Caribbean Cruises in March. It also paid $304 million for a minority interest in Smart Fit, a Latin American fitness chain that must be hard hit by COVID-19 closures. Management may attribute that to bad luck. After all, how could anyone have anticipated a global pandemic? On the other hand, during a wild bull market you will never hear money managers telling their clients, “We decided to forgo performance pay this quarter because, frankly, we just got lucky.” They would be boasting about their investment savvy all the way to the bank.

A major difficulty in measuring CPPIB performance is that 48.5 per cent of its portfolio is in private investments and real assets, which cannot be marked to market in real time. Evaluation entails judgment, including the timing of possible impairment of capital, which is especially relevant this year, in light of a 19 per cent market decline in March. Aside from the obvious conflict of interest, valuation lag impacts directly on the reported return and on “dollar value-added,” which are both elements in compensation.

Pay obviously needs to be competitive. Organizations have to be able to attract and retain quality professionals. Yet Quebec’s Caisse de Dépôt et Placement has frozen senior management salaries for 2020 and postponed compensation to the third quarter, in solidarity with workers. Mark Machin appears to be among the highest paid public-sector pension fund CEOs in the world. Maybe he is the best, but a 3.1 per cent return on assets is not conclusive proof.

The CPPIB operates at arm’s length from federal and provincial governments, although accountability is, theoretically, to the federal finance minister and the finance ministers of participating provinces, who represent Canadian pensioners. In practice, the board is self-perpetuating and appoints the CEO without government approval. Political meddling does need to be avoided, but some real accountability or broad oversight is appropriate. I realize that under the current government that could open the board up to even more environmental, social and corporate governance (ESG) and “sustainable finance” pressure than it has already internalized. Still, its pension assets are projected to increase to $1.5 trillion by 2050. Is it healthy to have that amount of public money controlled by a dozen people who are responsible to everyone but accountable to no one? The CPPIB board may have opened itself up to a discussion it does not want to have but which is in the public interest.

SOME REAL ACCOUNTABILITY OR BROAD OVERSIGHT IS APPROPRIATE.