Shareholders speak, Canadian Pacific listens

Railway trims executive pay and perks as focus shifts from cost-cutting to growth
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keithcreel
CP CEO Keith Creel
Canadian Pacific website
CALGARY, Alberta — Canadian Pacific has made what it calls “significant changes” to its executive compensation after shareholders last year raised objections to the pay and perks that then-CEO E. Hunter Harrison received.

At CP’s annual meeting last year, Harrison’s outsized pay caused a stir. By the slimmest of majorities — 50.1 percent to 49.9 percent — shareholders rejected CP’s executive compensation packages. Companies only rarely lose these say-on-pay votes, which are non-binding resolutions that give investors a voice in how top executives are paid.

“That vote made it clear that we had work to do to establish the proper course on executive compensation,” CP Chairman Andrew Reardon wrote to shareholders in the railroad’s annual proxy statement, which company officers filed on Wednesday.

In response to investor concerns, CP aligned executive pay with long-term performance, made changes to short-term performance measures, limited awards to departing executives, and capped the CEO’s bonus and use of the corporate jet.

CEO Keith Creel’s compensation package was set at the median of what Class I railroad chief executives earn. In 2015, the Class I CEOs made between $7.7 million and $10 million – with the exception of Harrison, whose compensation totaled $15.4 million in U.S. dollars.

The new short-term incentive plan reflects a shift in CP’s strategy. Instead of rewarding cost-cutting, the bonus targets now encourage revenue growth. The new targets reduce the importance of the operating ratio and more heavily weight profits. They also, for the first time, include safety and an operating metric: average train speed.

Operating ratio — a key Harrison metric — was removed from the long-term incentives. It was replaced with return on invested capital, which aims to focus executives on effective growth, and total shareholder return.

“We believe that the changes are appropriate for CP at this stage of its evolution and that executive compensation is now more closely aligned with the long-term interests of CP shareholders,” Reardon wrote.

CP officials said the previous incentives were appropriate when executives needed to focus on turning the railroad around. CP’s operating ratio lagged the rest of the industry when Harrison was installed as CEO in mid-2012 after a proxy contest ousted several board members and CEO Fred Green.

“In 2016, we can see the results of that strategy: we’ve gone from the clear industry laggard to an industry leader, and are now transitioning towards a period focused on revenue growth,” wrote Isabelle Courville, who chairs the board’s management and compensation committee.

“Starting in 2017, the corporate performance factor is based on improving revenue growth in a cost-effective manner,” she added.

Courville also wrote that ensuring appropriate compensation for Harrison during his nearly five years at the railway was a “unique challenge.”

Harrison’s total compensation from 2012 through 2016 was $55.7 million, CP officials said, a figure that reflects $58.6 million of the compensation and benefits Harrison forfeited by leaving the company five months early.

“No matter how you look at his compensation over his tenure, Hunter Harrison’s time at CP was incredibly positive for shareholders,” Courville wrote, noting that Harrison hit the company’s four-year turnaround targets in just two years.

In Harrison’s tenure, total shareholder return was 192 percent and the company’s value increased by more than $15 billion.

Harrison left CP to partner with activist investor Mantle Ridge. They successfully pursued a management shakeup at CSX Transportation, where Harrison became CEO this month.

NEWSWIRETrains News Wire

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