As the New Year rolls along, so does commentary on executive compensation. According to the Canadian Centre for Policy Alternatives, by 11:47 am on the first working day of 2017 (January 3^rd) Canada’s 100 highest paid CEOs on the TSX index had earned the equivalent of the average annual Canadian wage.

Shareholder votes on the executive compensation disclosed in management proxy circulars (“say on pay”) are not mandated in Canada. However, according to the Institute for Governance of Private and Public Organizations, 80% of the largest Canadian companies have adopted the practice voluntarily or as a result of pressure from investors.

Say on pay initiatives have been well under way in many jurisdictions for a number of years and the reviews are in.

International Say On Pay

In the US, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities Exchange Commission requires a mandatory advisory say on pay for top executives compensation for public companies. Under the compensation discussion and analysis section of the proxy statement, shareholders do not vote on bonuses, stock options, retirement pay or other specific elements of compensation, simply an “up” or “down” to compensation.

In the UK, companies with shares on the Financial Services Authority’s List require a binding (rather than advisory) annual say on pay vote by shareholders.

In Australia, Parliament has implemented a mandatory non-binding say on pay with a two-strike rule. The first strike occurs when a company receives 25% or more negative votes on the proposed compensation reports, in which case the board must explain their response and proposed action. The second consecutive occurrence triggers a “spill resolution” vote which determines whether the director’s will stand for re-election at a “spill meeting”.

In France, the Corporate Governance Code implements a “comply or explain” regime which requires public companies to either provide a say on pay vote or explain why they are not providing one. If there is a vote and it indicates a negative response to executive compensation, the board must deliberate the results at their next meeting and publish their intended actions.

The Reviews Are In

Critics of say on pay regimes argue that they may impact the competitiveness and ability of Canadian companies to retain top executives. They suggest that if say on pay were binding, shareholder votes would absolve directors of their responsibility and duty to shareholders which could undermine the authority of boards to make decisions.

Proponents of say on pay regimes suggest they deliver a cautionary message about compensation which cannot be delivered by boards since board members are often influenced by the executives who nominate them.

The Canadian Coalition for Good Governance’s 2016 Best Practices for Proxy Circular Disclosure advised that offering shareholders a say on pay vote is a useful tool to assess shareholders’ acceptance of the corporation’s approach to executive compensation.

ISS’s Canada Sees Shifts in Governance Landscape (2015) found that despite the progress in Canadian companies adopting say on pay proposals for shareholder vote, there remains much room for further improvements. Shareholders have concerns around the high overall levels of pay awarded, including special bonuses to executives, while company performance declines on both a relative and absolute basis.

The chairman of the Institute for Governance of Private and Public Organizations summarized the situation as “the sense of unfairness and the frustration with some patent cases of excessive compensation have generated a good deal of sympathy for more direct and vigorous measures to curb extravagant compensation practices. Nevertheless, board of directors are fully responsible and accountable for the governance of publicly traded corporations …. If corporate boards cannot be trusted to make the right decision on executive compensation, how can shareholders rely on their judgment for other equally important decisions?”