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Say on pay doesn't guarantee smaller pay packets

Workers walk through Canary Wharf in London. Despite a collapse in stock prices, executive pay still rose in 2008.

Daniel Berehulak/Getty Images

While Canadian stockholders will get their first widespread look at "say on pay" measures in next spring's proxy season, investors in Britain have had six years of experience in giving an annual thumbs-up - or down - to corporate compensation practices.

So it's perhaps instructive to look to a report from two British shareholder advocacy groups on what has transpired since the measures were introduced there. There's lots of talk of enriched dialogue, transparency and good governance. "But pay has continued to go up," notes institutional investor Railpen Investments and governance consultant PIRC Ltd. in their report on "the U.K. experience."

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Canadians, increasingly upset about executives' fat pay packets, are expecting better disclosure, better engagement between shareholders and companies, and perhaps even better pay practices. But, as the British experience demonstrates, there is no assurance that ever-increasing executive compensation will abate.

"The goal isn't necessarily to rein in compensation, but more effectively tie compensation to long-term performance," said Gary Hawton, the chief executive officer of Meritas Mutual Funds.





Mr. Hawton's funds, which base their investing on socially responsible Mennonite principles, were an early proponent of say-on-pay measures, which aim to give shareholders a simple "yes" or "no" vote on a company's compensation report. Such a vote is advisory, rather than binding; in many cases, the pay will already have been awarded by the time the vote occurs. Still, many companies have been unenthused about turning over even that much power.

This year, a number of Canadian companies yielded to pressure from Meritas (a shareholder in some of the country's largest companies); the Shareholder Association for Research and Education (Share); and the Canadian Coalition for Good Governance, and said they will place say-on-pay resolutions on their 2010 proxy statements. The count is now up to 13, including most of Canada's major financial companies.

Canada seems headed down a path of voluntary compliance. While Stephen Griggs, director of the CCGG, says "I think the best process is what we're going through," Laura O'Neill of Share "would like to see it mandatory."

For Ms. O'Neill, the purpose of say on pay is to "cut off ridiculous practices - performance pay that doesn't seem to be connected in any way to performance." She said that after Canadian securities regulators revised compensation-disclosure rules, her group saw "an awful lot of instances where companies would insist pay was performance-based when it really wasn't at all."

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If pay is better tied to performance, and performance is down, pay should theoretically decline. Still, the authors of the British report noted that "perhaps the most striking performance-pay misalignment" came in 2008 among companies in the FTSE mid-cap index. In a year where stock prices collapsed to year 2000 levels, long-term incentive plan gains rose about 150 per cent, bonus awards remained at 2007 levels and base salaries increased.

That points to the biggest problem in Canada's voluntary system. While other large companies may soon join the say-on-pay movement - Mr. Griggs believes another 15 to 20 companies will announce they're adopting it for next year's proxy season - many more small or mid-sized companies may wait a long time before adopting it, if they ever do.

Ms. O'Neill estimates that 30 per cent to 40 per cent of the S&P/TSX composite index are controlled or dual-share companies in which public stockholders are easily outvoted; are income trusts, which do not allow shareholder proposals; or are in provinces whose securities laws erect other barriers to shareholders.

"That beckons the regulator into the equation," she said.

Although voices in opposition to any sort of say-on-pay shareholder power have quieted, some still express concern about a "one-size-fits-all" treatment. As John LeBoutillier, chairman of Industrial Alliance Insurance and Financial Services Inc., which volunteered to join the say-on-pay movement, puts it: "There are a number of publicly listed companies in Canada where it wouldn't be very relevant."

With files from Susan Krashinsky

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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