Say-on-pay votes not tied to corporate performance

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The first round of "say on pay" votes in Canada shows an unexpected result: Shareholders are not tying their support for executive compensation packages to actual corporate performance.

While disgruntled investors were expected to vote against high pay packets at companies that posted poor results, a review this year by Hay Group Canada shows very little evidence of that.

Companies that had the highest level of voting support for their compensation plans this spring were not necessarily the top performers in their fields, while other companies with lower say-on-pay support had better performance in 2010, the review found.

Hay Group compensation consultant Christopher Chen said he had expected investors would use say-on-pay votes to express their displeasure with companies whose performance doesn't match pay levels.

"We're finding there is no real correlation between heavily positive say-on-pay votes and the actual performance of the organization," he said. "So what exactly are shareholders voting on? If they're just voting on the quantum of pay in absolute terms, then that perhaps is not what they should be reflecting on."

While many companies pledged last year to adopt say-on-pay votes, most held their first votes in Canada this spring, giving investors an opportunity to express non-binding views on their executive pay practices.

Say-on-pay resolutions garnered an average of 94 per cent support at 67 Canadian companies holding the votes this year, similar to 94.6 per cent support in 2010, Hay Group found.

The management consulting group reviewed say-on-pay support compared with companies' total shareholder returns, returns on equity and earnings-per-share growth. All showed a weak correlation with say-on-pay votes across the board, the report says.

One of Canada's strongest supporters of say-on-pay votes says the findings show performance is just one of many factors investors are considering when casting these votes.

Laura O'Neill, director of research at the Vancouver-based Shareholder Association for Research and Education, said the institutional investors her firm advises are focusing on the design of compensation packages when casting their votes. They are looking for features such as performance criteria, appropriate stock option designs and limits on golden parachutes for departing executives.

"The structural aspects of the policies and plans are really important for investors who take say on pay seriously," Ms. O'Neill said.

Mr. Chen said there seems to be more correlation between say-on-pay votes and the quality of disclosure in the company's annual proxy circular. One unidentified Canadian company that got a below-average say-on-pay vote this spring told Hay Group it faced criticisms about the format of its compensation-disclosure information, even though its financial performance was strong in 2010.

U.S. technical services company Jacobs Engineering Group Inc. lost its say-on-pay vote this year after major proxy advisory firm ISS recommended voting against the say-on-pay resolution because of the poor disclosure provided in the shareholder circular. Mr. Chen said it appears the company could have won the vote with the same compensation system had it explained the process better.

He said it is also possible many investors are using say-on-pay votes as a way of expressing displeasure with issues beyond compensation, such as unhappiness with management, corporate strategy or environmental practices.

But Ms. O'Neill said investors unhappy with other aspects of corporate behaviour typically vote against members of the board to express their displeasure, rather than using their say-on-pay votes. She said director voting results are far harder to interpret than say-on-pay votes as a result.

"That's why we wanted to get pay out of that and get it on its own," she said. "It's so key, and so important. We wanted a separate [voting]category for pay because we felt it was getting muddled with other board concerns about the company."

Despite the lack of clarity, Mr. Chen said he would still advise companies to adopt say-on-pay votes for investors, given the strong push from the shareholder community for the policy, and the low risk to companies that introduce it. He said the overwhelming message from the 2011 voting results is that investors are generally content with pay programs at major companies.