Skip to main content
opinion

Paul Gryglewicz is a senior partner at Global Governance Advisors. Peter Landers is a partner.

When “say on pay” was first introduced in Canada near the start of the current decade, board members and organizations (primarily Canadian banks) that adopted the non-binding shareholder vote were viewed as leaders.

After all, places such as Britain and the United States had made mandatory the process of giving stakeholders an opportunity to illustrate approval or disapproval of a company’s executive compensation program. In Canada, it was a choice.

At Global Governance Advisors (GGA), we took daily calls from directors asking whether they should adopt a say-on-pay vote. We almost always said “yes.” They almost always listened.

Last week, in partnership with The Globe and Mail, GGA published our 7th annual study of chief executive compensation at Canada’s Top 100 companies. Over the years, say on pay has emerged as one of the biggest governance changes to find its way onto the proxy ballot of public companies across the country.

So, how do shareholders feel about executive pay packages? It depends.

Interestingly, the level of compensation provided to executives is not always the driving factor when shareholders vote “for” or “against” compensation plans, or “against” the directors serving on compensation committees.

Take, for example, Magna International in this year’s Top 100 study: Don Walker was the highest paid CEO on the list, earning total reported compensation of $26.4-million. Still, shareholders voted 97.25 per cent in favour of this compensation. One of the key influential factors in generating this result is linked to the compensation design and quality of the public disclosure provided in advance of the say on pay vote.

Magna has vastly improved its disclosure practices in recent years by providing additional details on how it pays its executives. The company has also increased the amount of CEO compensation that is deferred to 60 per cent, with the majority of deferred compensation being granted in the form of preferred share units tied to return on invested capital and relative total shareholder return performance. Further, Magna discloses a robust shareholder engagement process involving both its board chair and executive management team, and provides the board with quarterly updates on feedback received on executive compensation and governance.

Magna’s pay has also generally been viewed as aligning with performance. Over the past five years, Magna has achieved an annualized profit growth rate of 9 per cent a year. In the past year alone, profit is up 8.6 per cent. This performance has also corresponded with a total shareholder return of more than 216 per cent over the past five years, and 25 per cent over the past year. Magna has greatly outpaced the S&P/TSX Composite Index, which returned just more than 30 per cent over the past five years and 6 per cent in 2017.

In stark contrast, Hudson’s Bay Co. (which was not large enough, by market value, to make this year’s Top 100 list) elected to pay interim CEO and executive chairman Richard Baker $54.8-million this year. Shareholders were not as kind as those at Magna, with only 72.83 per cent supporting the package and several major pension funds voting the pay plan down.

In our view, this is because there were inherent shortcomings in the quality and robustness of HBC’s disclosure. Shareholders struggled to find the crucial link between long-term performance and executive pay at a company that is still working toward a turnaround. Total shareholder return was down 13.8 per cent in the 2017 calendar year, and almost 53 per cent in the past three calendar years. The fact that Mr. Baker is also a significant shareholder in HBC somewhat compounded shareholder dissatisfaction; did he really need a realignment program of $46.9-million in share and option-based awards to “keep him interested”?

The key takeaways from this year’s study reinforce that shareholders are most certainly interested in a company’s compensation practices. Communication of these practices is key. While shareholders have demonstrated time and again that they can support high-paying executive compensation pay programs, it is harder for them to get behind these plans when the degree of shareholder engagement between the board and shareholders lags, especially in situations where performance has lagged as well.

A message for directors on the compensation committee – always remember to get ahead of your shareholders and be prepared to rationalize the executive compensation decisions you are making, by:

  •  Regularly reviewing the alignment between executive pay and the performance of your company;
  • Regularly engaging with shareholders on company strategy, performance, compensation and governance;
  • Disclosing in your annual proxy circular the process that your board and executive team follow in engaging with shareholders;
  • Describing the feedback you have heard from shareholders on your compensation plans and governance and how you plan on incorporating that feedback moving forward.

Be sure to take a page from some of this year’s top earners that received great say on pay results – and to avoid the pitfalls faced by HBC.

Interact with The Globe