Executive Compensation: Say-on-Pay Votes
February 28, 2008
Philip C. Moore
Richard A. Shaw
Lorna J. Telfer
A say-on-pay vote or an advisory shareholder vote is a non-binding resolution at an annual meeting of shareholders that allows shareholders to comment upon executive compensation, either positively or negatively. The United Kingdom and Australia have had regulations in place since 2002 requiring such a non-binding vote on a company’s remuneration report. A large number of shareholder resolutions have called for the adoption of an advisory vote on executive compensation in the United States. Of more than 60 such votes in the United States in 2007, eight received majority support.
It is expected that a number of say-on-pay shareholder proposals will be included in the proxies of Canadian companies during the 2008 proxy season. Meritas Financial Inc., an ethical mutual fund company, has submitted a proposal to each of Canada’s five largest banks for a non-binding shareholder advisory vote on the bank’s executive compensation plan.
In its position paper on this subject released December 12, 2007, the Canadian Coalition for Good Governance (CCGG) stated that at this time it would not propose or support recommendations for regulatory change to mandate advisory shareholder votes on compensation reports for Canadian issuers nor recommend support for say-on-pay resolutions that may be brought forward in the 2008 proxy season. In taking this policy decision, the CCGG notes its ongoing monitoring of:
- the continued adoption of majority voting for director elections, allowing shareholders to express their concerns over issues such as executive compensation by withholding votes;
- the introduction of new Canadian Securities Administrators requirements for compensation disclosure that will affect linking pay to performance;
- an overall improvement in compensation disclosure practices since the last proxy season; and
- the increasing role of independent executive compensation advisors in the compensation process.
The CCGG also noted a number of areas where Canadian companies should focus their efforts to improve their compensation and disclosure programs, including:
- clear explanations of overall compensation programs and the link between pay and performance;
- executive compensation packages that are less complex and show a direct alignment with the interests of shareholders; and
- better disclosure and justification of post-retirement benefits and change of control provisions for executives.
The CCGG stated that it might, in future, support the universal implementation of a mandatory say-on-pay advisory vote if progress on its focus areas slows or stops.
In the United States, a bill entitled Shareholder Vote on Executive Compensation Act was passed in the House of Representatives in early 2007, and was introduced in the Senate by Senator Barack Obama on April 20, 2007. The bill, which has since been referred to the Senate Committee on Banking, Housing, and Urban Affairs, allows shareholders to participate in non-binding votes regarding executive compensation.
In 2007, Aflac Inc., a company that was facing a shareholder proposal, agreed to give investors a non-binding vote on executive compensation beginning in 2009. A proposal to give Verizon Communications’ shareholders a voice in its executive pay practices passed with a vote of 50.18 per cent at its 2007 annual meeting. A similar proposal was passed at a meeting of shareholders of Blockbuster Inc. on a vote supported by 57 per cent of the votes cast. Similar votes at Morgan Stanley and the Bank of New York did not pass.
What is driving shareholders in seeking such a vote? In an editorial on this subject, The New York Times noted:
Many factors are driving compensation upward, including the frantic hunt for talent accelerated by increasingly rapid turnover of chief executives. Most investors are less concerned with absolute pay levels than the sense that raises, bonuses and stock grants arrive as a matter of course rather than as a reward for success.
The real value of say-on-pay is not to slash executive salaries as a matter of principle, but to force corporate boards and their compensation committees to better explain their decisions. That explanation should include the extent of financial relationships with the consultants making recommendations on executive pay.
Boards of companies, in explaining their opposition to the say-on-pay proposals, note that the boards already provide an effective process to enhance the ability of shareholders and other interested parties to communicate directly with non-management directors as a group, the entire board or individual directors. Shareholders may always communicate their views on any number of topics, including executive compensation programs. In addition, such a non-binding vote on the executive compensation disclosure would not provide the board with any meaningful information about a shareholder’s views on complex executive compensation matters. The complexity and breadth of information that boards of directors and compensation committees consider and evaluate in connection with executive compensation decisions is at odds with the suggestion of annually requesting a "for or against" ratification on executive compensation disclosure. Such a vote may send an inaccurate or incomplete message to the board rather than communicate the actual and numerous viewpoints of shareholders on particular aspects of executive compensation.
Canadian issuers and their advisors will need to monitor continuing developments on say-on-pay votes.