Shareholder support for executive compensation declining

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Shareholder support for executive compensation plans continued its slow downward slide in 2015, especially in the mining sector, as investors opposed large pay gains while share prices plunged.

New data on say-on-pay votes this year show Canada's 100 largest companies saw support drop by 1.4 percentage points to an average of 91.4 per cent in 2015, down from 92.8 per cent last year, according to compensation consulting firm Global Governance Advisors.

The voting shifts are small, but follow a trend of slowly declining support by shareholders who are increasingly willing to use the votes to protest excessive compensation.

Companies in the materials sector – which includes mining and forestry firms – averaged 85.4-per-cent support in their say-on-pay votes this year, while energy companies reported 94.4-per-cent support and financial services firms averaged 89.7 per cent in their votes.

The average vote for materials companies was pulled down by two especially low results at gold miners Barrick Gold Corp. and Yamana Gold Inc., which faced shareholder opposition over large payments to their top executives in 2014. Barrick had just 27-per-cent shareholder support at its annual meeting this year, while Yamana received 37-per-cent support.

Canadian Imperial Bank of Commerce was the only other company to lose its say-on-pay vote this year, earning just 43-per-cent support, which lowered the average vote for the financial sector.

Canadian companies are not required to hold say-on-pay votes, which are advisory only. But companies face shareholder pressure to offer the votes, and typically feel compelled to respond to low results by making changes to compensation practices.

The review also showed adoption of say-on-pay votes is slowing in Canada after an initial flurry of acceptance.

In 2011, 35 of the 100 largest companies by market capitalization on the Toronto Stock Exchange held a say-on-pay vote, a number that rose to 60 by 2014. In 2015, however, only four more companies introduced say-on-pay votes, bringing the number of adopters to 64.

Paul Gryglewicz, senior partner at Global Governance Advisors, said he expects more companies to adopt say-on-pay votes over the next two years because they run the risk of having their shareholders reject directors for re-election, especially those board members who serve on the compensation committee.

Mr. Gryglewicz said boards have received letters from shareholder groups this year asking for say-on-pay votes, and warning that shareholders will withhold their support for directors when pay is not aligned with performance.

"It's clearly a hot topic again for the board, they're getting it from shareholder angle and I think here is some peer pressure as well among the directors' circles," Mr. Gryglewicz said.

He said he estimates the votes will become mandatory in Canada within the next three years, so companies should get ahead of the regulations and act sooner. Say-on-pay votes are already mandatory for companies in the United States.

"If you're going to be a follower, this is your time to follow in the next two years. This is your grace period. … But I think you don't necessarily want to be a laggard too much."

A report released last week by proxy advisory firm Kingsdale Shareholder Services said 20 directors from eight Canadian companies failed to win majority support for re-election this year, an increase from just four directors at two companies last year.

The boards accepted resignations from five of the 20 directors who failed to win support this year, Kingsdale said, but rejected resignation offers from nine others. Boards were still deliberating on the remaining cases, the firm reported.