In certain jurisdictions, advisory votes on executive compensation are mandated by law. In other jurisdictions, advisory votes are not mandatory but have been adopted by corporations voluntarily or through shareholder resolutions. In both cases, we will review these votes or proposals on a case-by-case basis.
The inclusion of an advisory vote on executive compensation policies or disclosure in a public company’s proxy information circular is also referred to as “say-on-pay.” We believe that a thorough review of pay practices is an important duty that boards of directors of corporations should exercise with diligence and care.
Although advisory votes on executive compensation have not been implemented by legislation in Canada, certain corporations have voluntarily agreed to these votes. The Canadian Coalition for Good Governance (CCGG) has recommended that boards voluntarily add to each annual meeting agenda an advisory shareholder resolution on the corporation’s report on executive compensation. Further, the CCGG has proposed a framework for “say-on-pay” advisory votes, which we support. It can be summarized as follows:
- shareholders be asked to consider an annual non-binding advisory vote;
- the resolution provides that the vote is not intended to diminish the role and responsibilities of the board of directors;
- the resolution provides that shareholders accept the approach to executive compensation disclosed in the company’s information circular;
- approval of the resolution requires an affirmative vote of a majority of the votes cast at the annual meeting of shareholders;
- the corporation will disclose the results of the advisory vote as part of its report on vote results for the meeting; and
- if a significant number of shareholders oppose the resolution, the board will consult with its shareholders and disclose a summary of the comments received in the engagement process and any planned changes to compensation plans.
We recognize that there are alternative methods available to shareholders that permit them to express concerns surrounding executive compensation, such as voting against directors, particularly Compensation Committee members. Shareholders also have the ability to consider certain compensation issues independently, such as votes relating to a corporation’s option plan.
We recognize that various jurisdictions approach advisory votes on executive compensation differently. In cases where corporations are required to hold, or have voluntarily adopted, an advisory vote on executive compensation, we will evaluate the executive compensation policy or report on a case-by-case basis taking into consideration the following compensation principles and practices:
- pay-for-performance alignment, with an emphasis on long-term shareholder value;
- presence of an independent and effective compensation committee;
- clear, comprehensive compensation disclosure; and
- avoidance of inappropriate pay to directors.
When an advisory vote is not required by legislation, but is being proposed by way of shareholder proposal or resolution, we will generally follow a case-by-case approach. In circumstances where a proposed advisory vote follows the suggested CCGG approach outlined above or when our compensation principles appear to be met, we generally will support an advisory vote on executive compensation.