For a company that has helped create climate change through being the world’s largest thermal coal exporter, there’s some justice in appointing Glencore’s former head of coal as its next chief executive. The group has promised to reduce its greenhouse gas emissions to net zero by 2050, and to achieve that, Gary Nagle will have to spin off coal or manage it down, and also rationalise the group’s sprawling assets.
That would shift the group’s focus to producing copper, cobalt and zinc. Meanwhile, he has to get up to speed on Glencore’s trading arm, where he has little experience, and address regulators’ probes into allegations concerning corruption and money laundering in Nigeria, Venezuela and the DRC. Not an easy job, then. What should he be paid? Ivan Glasenberg, who’d lined up Nagle to succeed him as chief executive, received a flat $1.5m a year and waived all performance-related pay because he owns 9 per cent of the company. When there’s no precedent like this, the normal approach for deciding pay levels involves pay triangulation – a compromise between:
· expectation – what does the person expect to get paid?
· pay differentials – how does the proposed pay fit with others within the organisation?
· peer group – if candidates can earn more elsewhere, it will add to the risk of recruiting or retaining them.
John Mack, who chairs Glencore’s remuneration committee, seized on the last one when he said in the annual report that Nagle’s package must be “both competitive and aligned with our shareholders’ interests”. But he added that Glencore’s “current policy positions for variable pay are not in line with the practices of our peers…” so change was needed: future share awards would not depend on performance goals. How he reached that conclusion is not obvious. The group recognises five peers: Anglo American (AAL), BHP (BHP), and Rio Tinto (RIO) as the mining companies closest to its industrial business; and BP (BP.) and Shell (RDSB) because they too combined industrial and marketing activities – and all five of them have awards that require performance thresholds to be met before their shares are released to participants.
The idea, Mack suggested, was to avoid windfall gains or losses from “short-term commodity price movements”. Yet here, Glencore has a unique advantage: it mines a large proportion of the commodities that it trades, and its trading arm aims to smooth out volatilities in its mining activities by hedging and arbitraging commodity prices. You might be forgiven for thinking that managing such price movements was an integral part of Glencore’s business.
Nagle’s annual awards will release shares to him three years later – but the committee reserves the right to reduce them. That sounds a bit vague, so it says that any decision will depend on three criteria: the first, according to the annual report is “Failure to pay the minimum distribution required under the Company’s stated divided policy” (a Freudian slip, perhaps, because surely what’s meant is “dividend policy”?). The second is a subjective catch-all on performance and outcomes: the committee can cut the number of shares if, in its view, he should have done better. And the third relates to his progress in delivering environmental (and particularly climate), governance and social objectives.
But, realistically, how often are the members of the remuneration committee likely to confiscate any of Nagle’s shares? Over at Rio Tinto, the destruction of Juukan Gorge led to the cancellation of its chief executive’s bonus and £1m was docked from his LTIP, yet he still ended up receiving £7.2m in 2020. Assuming Glencore avoids an equivalent failing, the only realistic constraint is that Nagle will be blocked from selling his shares until two years after he leaves the group’s employment.
The other controversy is the scale of his pay. His salary is towards the top end of those of his peers, and since his share award and bonus are multiples of this, that pushes up those as well. Every year, Nagle will receive shares worth 225 per cent times his salary, plus a bonus (which does depend on his performance) worth up to 250 per cent. That means that of the $10.4m he could receive each year, he’s almost guaranteed to receive $5.9m.
Mack said that in developing the new policy, the main shareholders and proxy advisers were consulted, and their feedback was taken on board. But many thought that the amount that Nagle is bound to receive every year is excessive, especially since he has no experience of running a publicly listed company – and experience of internal succession in other companies has been mixed. Others questioned why a greater proportion of pay is not being based on how well he performs.
At Glencore’s recent annual meeting, there was a protest vote. A quarter of the votes were cast against the new policy and a fifth opposed Nagle’s proposed pay package. So, three-quarters backed the new policy. Time will tell whether they’ll regret not having more safeguards built into Glencore’s executive pay.
Supported by Paul Jackson
