Proxy advisers recommend investors vote ‘no’ on Shopify executive pay

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Two major proxy advisers are recommending shareholders vote “no” on Shopify Inc.’s SHOP-T executive compensation programs and withhold votes from some members of the board who oversee the company’s pay practices.

Institutional Shareholder Services and Glass Lewis & Co. say there’s a disconnect between Shopify’s pay and the company’s performance. They cite a stock-option award the company gave chief operating officer Kaz Nejatian that made up nearly all of his US$76-million in total compensation in 2023. The two advisers also decry the lack of any performance measures tied to share awards made to Mr. Nejatian, founder and chief executive officer Tobias Lütke, and other executives.

They also say Shopify failed to meaningfully address shareholder concerns after relatively poor results in 2023 in its non-binding advisory vote on the board’s approach to executive compensation, known as “say on pay.” Shopify received support of only 77.5 per cent of votes cast – and just 54.9 per cent when excluding Mr. Lütke’s votes. The proxy advisers consider support levels below 80 per cent to be cause for concern. The average Canadian public company gets about 90 per cent support.

In addition to the “no” vote on say-on-pay, the two recommend withholding votes for Gail Goodman, who serves as the chair of the board’s compensation committee. Glass Lewis also recommends withholding votes for the remaining compensation committee members, Robert Ashe (who also serves as Shopify’s lead independent director) and Fidji Simo. (Shareholders are asked to vote “for” a director or to “withhold” their votes. At a majority of Canadian companies, there is no “against.”)

The two advisers also recommend “no” votes on changes to two long-term, stock-based incentive plans that require shareholder approval. They describe the costs of the plans and the number of shares Shopify may need to issue as “excessive.”

Shopify shares plunge nearly 19 per cent on lower-than-expected outlook for next quarter

Shopify did not reply to a request for comment. In its proxy circular to shareholders, it says it aligns the interests of its executives with shareholders by making a majority of compensation in the form of long-term, equity-based incentives. “The overall value of compensation paid to our executives is largely determined by our stock price performance,” Shopify said, adding that there has been “a strong correlation between the stock price … and the target and realized compensation levels our executives received.”

Shopify says its 2023 say-on-pay results “were not aligned with historical results,” as the company averaged 94 per cent support in the five years prior. As a result, Shopify says it “solicited additional engagements with shareholders to understand their feedback.”

ISS notes, however, there only seemed to be one minor change to the compensation program in the last year and Shopify did not disclose any specifics regarding shareholder feedback and what actions were taken in response to the feedback. ISS notes Mr. Nejatian’s award was made after the annual meeting, in December, 2023. (Shopify also gave Mr. Lütke stock awards in February of this year that it valued at US$150-million.)

In its management information circular, Shopify says the compensation committee of its board of directors made the stock awards “to ensure Mr. Nejatian is focused on fostering sustained performance and increasing shareholder value over an extended horizon.”

Glass Lewis described Shopify’s disclosure as “fairly boilerplate” and said it “does not provide meaningful rationale for his compensation arrangements.”

For many years, Shopify stock options were a money machine as the company’s shares rocketed ever higher. In the six-and-a-half-years from the May, 2015, initial public offering to its September, 2021, high, Shopify stock rose 6,268 per cent. Mr. Lütke, the company’s founder, was at one point one of the richest people in Canada. (Even today, the stock he holds in the company is worth US$4.8-billion.)

The company has retreated from those lofty heights. With Shopify’s 18-per-cent one-day plunge last week, after releasing weak financial guidance numbers, the shares are down 64 per cent from their all-time Toronto Stock Exchange high.

More than two-thirds of the options Mr. Nejatian has received from Shopify in his career, including the grant made in December, are out-of-the-money. Mr. Lütke’s February grant is also out-of-the-money. That means the exercise prices on the options are higher than the current market price and there is no money to be made by exercising them.

Their options expire over several years ending in 2033, however, giving them time for Shopify’s stock to recover.