Bombardier outcry highlights challenges of executive compensation

‘This is every director’s worst nightmare’
By Marcel Vander Wier
|Canadian HR Reporter|Last Updated: 05/02/2017
Alain Bellemare
Alain Bellemare, CEO of Bombardier, in Mirabel, Que., in November. Credit: Christinne Muschii (Reuters)

Canadian aerospace and transportation giant Bombardier officially delayed a portion of its executive compensation in April, following two weeks of public outrage.

The outcry came after a pay hike for Bombardier’s top six executives, on the heels of a US$1-billion bailout in 2016 — courtesy of the Quebec government in exchange for a 49.5 per cent stake in the company — and an additional $372.5 million loan from the federal government in February. The money was intended to uplift the company’s struggling CSeries and Global 7000 aircraft programs.

Public relations foible aside, providing the controversial bonuses was a necessary play for Bombardier, according to Jeffrey Gandz, professor emeritus at Western University’s Ivey Business School in London, Ont.

“They’re on a lifeline and looking for a turnaround,” he said. “They need executives of the (Alain) Bellemare quality. I feel for the board of directors, who are in that position saying, ‘Geez, we have to have a top-notch executive team, otherwise we have no future. These are the people that are going to lead us out of the wilderness.’ But the shareholders sure aren’t going to see much until the turnaround is done.”

“This is every director’s worst nightmare. What do you do when you have to attract and retain top-class people — and, one could argue, never is that more important than when you’re trying to turn a company around — when the results to shareholders are not going to look good for quite a while, if at all?”

Background

The announced $32.6 million in executive compensation was nearly 50 per cent more than what the employees had earned in 2015, though many of them had just started with Bombardier and hadn’t worked a full year when awarded their initial bonuses.

Bombardier is in the midst of a five-year turnaround plan that is projected to eliminate 14,500 company jobs around the world by the end of 2018.

The news of increased compensation sparked protests in front of Bombardier’s headquarters in Montreal, as well as at Premier Philippe Couillard’s office. Prime Minister Justin Trudeau also faced criticism in the House of Commons.

On April 10, Bombardier’s board of directors approved changes to the compensation packages for its top executives, delaying more than half of last year’s scheduled bonuses until 2020 — provided the company meets its objectives.

Executive chairman Pierre Beaudoin’s total compensation was cut by US$1.4 million to match the $3.85 million he collected in 2015. CEO Bellemare received US$9.5 million in 2015.

Work in progress

The move to defer compensation awards until 2020 is less a “full commitment to rescind pay” and more an “admission to a public relations gaffe than any sense of wrongdoing,” said Gandz.

“The challenge is not easy,” he said. “They have to pay key people competitively to hope to turn around the company, but they have to be very discerning as to who those key people are, and ensure that others, especially controlling shareholders, are not just coat-tailing on their compensation formula.”

Such a situation calls for “clear-minded, highly independent directors,” said Gandz.

More progressive boards will reach out to their shareholders and stakeholders to seek input on general direction regarding compensation, said Ken Hugessen, a compensation consultant in Toronto. By discussing direction in advance, the board would be able to modify some of its initial directions to reflect the input, resulting in a reduced risk of surprise to shareholders when the proxy is released.

“It comes as a surprise, and a little bit of a disappointment, that when the two governments involved put money in, there was no mechanism for the monitoring, oversight and control (put in place),” he said.

A detailed letter of explanation posted on the company’s website by Jean Monty, chair of Bombardier’s human resources and compensation committee, offered some reasoning behind the board’s decision, but was too little too late, according to Hugessen.

“The problem is once you’ve shocked someone, they don’t hear that stuff,” he said. “A little more anticipation may have greatly reduced what ultimately happened.”

“We have a much broader issue that we have a free-market environment. These people were all hired within the last two years. You don’t really have a lot of choice. Most people there don’t really wear the problems the company’s had. They just weren’t there and were kind of brought in to try and fix it,” said Hugessen.

“But I think it’s fair to say the fix is a work in progress, so maybe we’ll save the prize money for a little later, which is the deferral.”

Justifying the compensation

As the largest industrial company in Canada, Bombardier requires a world-class leadership team in order to compete in the market, said Monty in his public statement.

“We benchmark our executive pay structure against other public companies of a similar size and scope — the companies that we compete with for the best talent.”

The company also aligns pay with performance, with 75 per cent of compensation not guaranteed. Instead, it is linked to 22 per cent and 53 per cent in short- and long-term goals, respectively, said Monty.

While such a structure isn’t out of the ordinary, Bombardier may have erred in continuing to rely on traditional compensation packages, rather than back-loading its executive contracts with larger, long-term, performance-based bonuses, said Bob Levasseur, managing director of Gallagher McDowall Associates, an HR consultant firm in Toronto.

Typical formulas see companies examining the market for comparable organizations’ pay structure, and then aligning their annual compensation packages of base, bonus and incentives accordingly, he said.

“I’m very much for ensuring you have pay at risk, and real risk,” said Levasseur. “Using the typical in this case was a problem because the organizations that do have those kinds of programs are those who are doing well.”

“It really is a difficult situation… The public has a real problem with all of this because (Bombardier) has been garnering significant amounts of subsidies. When you are accumulating government subsidies, you’re no longer accountable only to your shareholders and the people who are lending you money, but you’re also accountable to the public.

“I think there wasn’t enough reaction to the sensitivity that the public would have.”

Attracting top talent

The public will always struggle with corporations awarding massive amounts of compensation to executives, while simultaneously laying off lower-level employees. But such outrage should instead be directed towards the roots of capitalism itself, said Gandz.

But it will be hard to convince laypeople of that, said Levasseur.

“Everybody feels that (executives) are always making too much money. But under normal circumstances, you’re accountable only to the shareholders and the debtholders.”

Poor timing and communication between the company and shareholders didn’t help Bombardier’s situation, said Levasseur.

“They’re between a rock and a hard place and from a public relations perspective, they didn’t handle it well at all,” he said. “They’re caught with a dilemma of hiring some high-priced help who have huge challenges and they want to reward them. (But) they could have positioned things differently.”

It’s always difficult in hard times because that’s usually when employers need the most talent, said Gandz.

“The periods where organizations are doing the best are usually when they’re the easiest to manage. You don’t have hard decisions to make, often times the stock market is just humming along, and the economy’s strong… It’s when you’ve had some difficulties and you have to make changes that you need to bring in the heavy-duty talent.”

It is common for companies to structure contracts with individual elements of base salary, plus short- and long-term incentives. For struggling companies, this is even more important if they have any hope of attracting top talent, said Hugessen.

“Any reasonable person is going to say, ‘I want a contract and I want some reasonable assurances here,’” he said.

“You’ve got one time in the sun and you better make the best of it. You don’t want to be spending it with someone who ends up not paying you.”

But the furor surrounding the company’s pay structure isn’t likely to spur fundamental change to executive compensation formulas, according to Levasseur.

“Other companies are likely to think their own plans and compensation magnitudes are appropriate,” he said. “They view Bombardier as an exception because of the government subsidies.”

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