Shareholders at 13 Canadian corporations will get to vote on executive compensation next year, marking the first widespread say-on-pay effort in this country’s history. Say-on-pay policies are already common in other countries, but Canadian execs worried about losing fat bonuses should relax: such procedures are merely advisory. The board of directors isn’t actually bound to alter compensation packages should shareholders disapprove. That doesn’t mean say-on-pay is a mere token gesture. Indeed, they can be an important way of improving communication between management and investors.
Typically, executives will work hard at soliciting shareholder opinions beforehand to ensure a positive outcome. That’s why negative votes have been rare historically in countries such as the United Kingdom and the Netherlands, where say-on-pay is mandatory. “The level of engagement on executive pay issues far surpasses any kind of shareholder communication on such matters that we see here,” says Lisa Slipp, a worldwide partner with consulting firm Mercer in Toronto.
Some execs may fear that shareholders could become too involved in a matter that is best handled by a company’s board, or that they will demand to be consulted on more issues in the future. But Slipp says many of her corporate director clients are indicating that even though they may not agree with say-on-pay, they’re not likely going to fight it. “We have a general desire as Canadians to want to be perceived as doing the right thing,” she says.
The Canadian Coalition for Good Governance, which represents 41 institutional shareholders, approved say-on-pay policies this spring, although it initially opposed them last year. “There is quite a bit of value in a say-on-pay vote, as long as it is accompanied by regular discussions between boards and shareholders,” says executive director Stephen Griggs. The coalition is working on a model policy for boards to implement, and expects to complete it by September. One important element to work out is the wording of the actual resolution put to shareholders.
Slipp says it’s best to keep the question fairly broad since shareholders may ignore the specifics and vote based on their overall feelings about executive pay. “They’re signalling their level of content or discontent with the executive pay in general, and it almost wouldn’t matter how the question was asked,” she says.
Say-on-pay resolutions might force compensation committees to focus more on their jobs, but they aren’t a panacea for inflated executive compensation, warns Neil Brisley, an assistant professor of finance at the University of Waterloo.
“If the threat of getting turned down on a say-on-pay vote makes compensation committees concentrate a bit more on their job, then fine,” he says. “But what you really need are independent compensation committees educated enough to understand the complexities of the packages they’re agreeing to.”