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
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
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
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;
better disclosure and justification of post-retirement
benefits and change of control provisions for
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
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
Canadian issuers and their advisors will need to monitor
continuing developments on say-on-pay votes.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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