Major shareholders are becoming more sophisticated in their use of say-on-pay votes, increasingly casting their ballots with a close eye on the alignment between a company's executive pay and its stock market performance, a new review has found.
A survey of say-on-pay voting results at Canada's 100 largest companies shows many of the companies with the lowest votes for their executive compensation plans in 2014 were those that also had the weakest alignment between pay and performance in recent years, according to data from executive compensation consulting firm Global Governance Advisors.
The results suggest the alignment between pay and total shareholder return has become one of the key metrics – even the primary factor – being used by many shareholders when deciding how to vote on executive compensation practices in corporate Canada.
Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents most of Canada's largest institutional shareholders, said it is easy for investors to focus on the link between pay and total shareholder returns when casting their say-on-pay votes because companies are required to include a chart in their annual proxy circulars showing their returns over the prior five years.
He said CCGG members assess not only share price returns, however, but focus on more relevant performance metrics depending on the industry sector.
"Performance is important – that's what they're looking at as a key thing when they're casting their votes," he said.
Say-on-pay votes are not mandatory in Canada, but have been voluntarily adopted by a majority of major companies to give shareholders a non-binding advisory vote on their executive pay practices.
The review found 64 per cent of companies held a say-on-pay vote this year, up from 57 per cent in 2013.
Michelle de Cordova, director of corporate engagement at mutual fund company NEI Investments, said her firm wants to see alignment between pay and total shareholder return, but also looks for alignment with other financial ratios and factors related to corporate social responsibility.
"We think performance should definitely take into account the share price – we are investors so that is really important to us – but it should also take into account operations indicators that build value over the long term," she said.
NEI has become one of Canada's most consistent critics of executive pay practices, voting "no" last year in 83 per cent of say-on-pay votes.
Ms. de Cordova said NEI has voted against pay practices even when a company has performed well if the executive pay structure does not have features that will align pay closely to performance, especially in bad times. While pay and performance may not have been misaligned because it was a good year, she said NEI is concerned about what would happen in a downturn.
Support remained strong for pay practices at most companies in 2014. Canada's 100 largest companies by market capitalization averaged 92 per cent support overall in their say-on-pay votes this year, an increase from 90 per cent last year.
Paul Gryglewicz, managing partner at Global Governance Advisors, said the increase this year is likely due companies making changes to their pay practices in recent years to conform with shareholder demands.
He said many companies with the lowest scores last year posted far better results this year as they made changes to respond to shareholder demands. Barrick Gold Corp. earned just 15 per cent support for its pay practices in 2013 as shareholder staged a revolt against high pay levels for new executives, but earned 80 per cent support this year after introducing reforms.
"It looks like there was a lot of [company] reaction, so say on pay seems to be creating a change of compensation plans, which it was intended to do," Mr. Gryglewicz said.
The results continue to show a growing variation in the voting results. More companies have recorded say-on-pay votes below 90 per cent in each year since the votes became popular in 2010, even if the overall average remains above 90 per cent.
Mining companies, for example, earned average support of 93 per cent overall on their say on pay votes, but the bottom quartile of mining companies averaged just 81 per cent support.
Canadian gold producers posted some of the lowest say-on-pay votes due to a tradition of hefty executive compensation clashing with a prolonged slump in share prices – a formula likely to raise the ire of investors who see little connection between pay and company performance.
Kinross Gold Corp. garnered 75 per cent support for its pay practices this year, while Goldcorp Inc. also had 75 per cent support, and Yamana Gold Inc. recorded 83 per cent support, slightly above Barrick's 80 per cent support level.
Financial services companies, by comparison, recorded an average of 95 per cent support for their say-on-pay votes this year. Even the bottom 25 per cent of financial companies averaged 94 per cent support, suggesting consistent satisfaction with pay practices across the sector.
None of Canada's 100 largest companies lost their say-on-pay votes in 2014.
The lowest result among major companies was a 57 per cent vote for Calgary-based Crescent Point Energy Corp., which faced a protest from shareholders after pay levels for its top executives rose sharply in 2013. Proxy advisory firm Institutional Shareholder Services Inc. said Crescent Point's executive pay was far higher than the median of its peers, and recommended investors vote "no" on its say-on-pay resolution. Crescent Point's board later said it would consider the vote in structuring future compensation plans.
Peter Chapman, executive director of the Shareholder Association for Research and Education, which advises institutional investors on responsible proxy voting, said he still does not believe CEO compensation is adequately linked to factors important to shareholders.
Mr. Chapman said SHARE does not favour compensation elements that link payouts to stock market returns because stock prices are not necessarily under the control of executives and can be influenced by outside factors like commodity prices. He said SHARE prefers to support pay structures that reward the performance of the company itself by using other metrics.
"Pay for performance is a major factor in determining how we vote on ballot issues related to executive pay," he said.