Say On Pay
For over 20 years, Canadian publicy-traded companies have been required to disclose the compensation paid to their top five executives. US and UK companies were subject to similar disclosure requirements long before they were implemented in Canada.
Commencing in the late 1990s publicly-traded UK companies were encouraged to provide shareholders with a “Say On Pay”, wherein shareholders could provide a non-binding, advisory vote (for or against) the compensation reported for the executives. Say On Pay (“SOP”) became mandatory in the UK in 2003 and mandatory votes have since been adopted by a number of other countries, including the US.
A number of major Canadian banks extended advisory SOP votes to shareholders in 2010. There are now well over 100 Canadian public companies (including about 80% of Canada’s largest companies) which have voluntarily adopted non-binding SOP voting by their shareholders. Although almost all of these companies received the support of a majority of their voting shareholders this was not so for a few companies. The media coverage other reporting on the non-approvals have accelerated companies’ desire to utilize compensation governance best practices and to engage shareholders in the process.
It is important to recognize that engaging shareholders through SOP does not mean that boards of directors are abrogating their responsibilities with respect to executive compensation. On the contrary, SOP simply puts greater onus on boards to use best practices when establishing and verifying appropriate policies, setting performance standards and assessing executive performance. Soliciting shareholder approval provides shareholder input which can be appropriately considered for future compensation changes, as well as helping determine whether there is a need to increase the board’s engagement with shareholders on compensation matters. If there is a significant proportion of shareholders which vote negatively, this permits the board to consult with the disapproving shareholders to discuss and hopefully resolve their concerns.
So, has SOP influenced anything other than the compensation arrangements for the top executives in publicly-traded companies?
The answer is “yes”. SOP has been a catalyst for raising the bar on compensation governance. Publicly-traded companies (particularly those which have adopted a voluntary shareholder SOP vote) have increased their due diligence on compensation structure, the process for compensation decision-making, and the reporting and other communications with shareholders. The awareness created through shareholder reporting and media coverage has had an influence on the compensation governance practices of privately-owned companies, public sector entities and even not-for-profit organizations. Decision-makers in many of these organizations have increasingly become aware of and embraced the principles underlying good compensation governance and are actively applying this knowledge to their compensation programs and practices. Employers should anticipate that compensation governance best practices will continue to evolve, and it will be important to ensure that their policies and programs address the needs of their stakeholders.