Canadian companies set a record for failed say-on-pay votes in 2021, as shareholders became more critical of high executive pay that did not match financial performance after they showed leniency on compensation practices in 2020.
In the second year of the COVID-19 pandemic, shareholders and proxy advisory firms took a tougher approach to say-on-pay resolutions, which are non-binding votes that allow shareholders to show approval, or lack thereof, for how corporate boards pay top executives. Six TSX-listed companies recorded less than 50-per-cent support for their pay practices this year after none had failed votes in 2020. The figure is a new record, beating four failed say-on-pay votes in 2017.
The six companies say they’ve gone back to talk with some of their shareholders to get feedback, and some of the six have already made changes to their governance and pay plans in response.
It’s unusual to fail to get 50-per-cent support. A report from Kingsdale Advisors, a Toronto-based proxy advisory firm, shows that the average say-on-pay resolution at 229 companies it studied received 91.2-per-cent voting support at shareholder meetings in 2021. That was down from 93 per cent in 2020, and 24 companies received support below 80 per cent, double the 2020 proxy season figure.
U.S. proxy advisory firm Glass Lewis & Co. views say-on-pay votes that garner less than 80-per-cent support as a cause for concern, and a signal that corporate boards should engage with shareholders to improve executive pay practices.
Institutional Shareholder Services Inc. (ISS), another major proxy advisory firm, sets its threshold for concern at 70 per cent. It will align with Glass Lewis at 80 per cent starting in 2022.
While some economic impacts of the pandemic lingered in 2021, proxy advisers found that more boards were not aligning pay with performance. Before voting on say-on-pay resolutions, many shareholders consider recommendations from Glass Lewis and ISS to vote for or against them. In 2021, Glass Lewis made 27 “against” recommendations, compared with 22 in 2020. ISS made 14 “against” recommendations, compared to two in 2020.
Kelly Gorman, the executive vice-president of governance advisory at Kingsdale, told The Globe and Mail that corporate boards were given more forbearance on executive pay in 2020 because of pandemic uncertainty, and the need to retain talent in a challenging environment.
“Decisions were taken by boards and compensation committees where executives were granted one-time payments or discretionary payments in light of continuing underperformance,” Ms. Gorman said. “That’s just considered a problematic pay practice. I’d say the forbearance had come to an end at that point and that’s why you can see a lot of … recommendations that were against say on pay.”
The TSX companies that won less than 50-per-cent support this year were RioCan Real Estate Investment Trust , CI Financial Corp. , Chemtrade Logistics Income Fund , Gildan Activewear Inc. , Vermilion Energy Inc. and Precision Drilling Corp. All received between 38-per-cent and 43-per-cent support for their approach to compensation, except for RioCan, which mustered just 24.1 per cent.
Both ISS and Glass Lewis recommended “against” votes at CI Financial, Gildan, Precision Drilling and RioCan. ISS recommended “against” at Chemtrade and Vermilion, but Glass Lewis entered “for” recommendations for those two companies’ say-on-pay votes.
Contacted by The Globe, all six companies said they have conducted meetings with shareholders to get feedback after they flunked the vote. Most say they’ll reveal more about the shareholder feedback, and any changes they plan to make, in their next proxy circular.
Gildan spokeswoman Geneviève Gosselin says the company’s board “stands by its decisions on executive compensation made in 2020,” but it has conducted a series of engagement meetings and will reveal what it heard in its next proxy circular. Gildan gave its chief executive a $16.6-million pay package in 2021, well above $10.8-million, the average S&P/TSX 60 CEO compensation, according to a Glass Lewis report.
Similarly, Vermilion Energy said in a statement that “we were not satisfied with the response we received” in 2021, and the company’s response, including any changes to pay plans, will be revealed in its 2022 proxy.
Murray Oxby, spokesman for CI Financial, said his company’s compensation “must be seen in the context of a transition in leadership at the company, which saw the recruitment of a new CEO in September, 2019, and the start of a strategic transformation of the company in November, 2019.” Mr. Oxby said CI hired a new compensation consultant in early 2021 to address shareholder desires for better-quantified metrics in its incentive plans.
Precision Drilling chief financial officer Carey Ford said the company was “very disappointed with the outcome” and disagrees with ISS’s decision to use only Canadian companies as its peer group to evaluate compensation, since the company generates the majority of its revenue outside of Canada and its executive team is based in Houston. “Therefore, we use utilize a mix of both Canadian and U.S. companies for our peer group.”
Other companies that failed their 2021 say-on-pay votes, however, are ready to describe the actions they’re taking.
RioCan saw the largest drop in support, plummeting 55 percentage points, from 79 per cent in 2020 to 24 per cent in 2021. That is the second-lowest Canadian say-on-pay figure in a decade, according to a Glass Lewis report on the 2021 proxy season. In 2013, Barrick Gold received 15-per-cent support on its say-on-pay motion.
RioCan said in a statement in October that after the failed vote, it reached out to its 30 largest unitholders, representing about 25.5 per cent of RioCan’s outstanding units, and had held 16 meetings.
Based on the feedback, the company decided to stop awarding unit options, the REIT equivalent of stock options, and stop making special unit awards to executives outside of normal timeframes, because investors told the company it was a sign that compensation programs weren’t working effectively.
RioCan is also revising performance metrics in its various compensation plans to eliminate overlap, measure certain things over longer periods and increase share ownership requirements for executives.
Chemtrade chief financial officer Rohit Bhardwaj said the company replaced the chair of its compensation committee and hired a new outside compensation consultant (something RioCan also did). It is revising the peer group of companies it uses to benchmark its CEO pay; adding performance share awards to its long-term incentive plan so they make up 60 per cent of awards; tweaking its severance packages in the event of a takeover; and introducing ESG targets in its incentive plans.
John Vizikas, head of Canadian research at ISS, told The Globe that companies that adjusted payout performance metrics because of the pandemic without proper disclosure were more likely to see their resolutions receive an “against” recommendation.
“Investors expected additional disclosure to evaluate incentive program changes or discretionary awards,” he said. “Some of the companies lacked this additional disclosure, which made it difficult to gauge the appropriateness of these changes and the rigour of performance metrics.”
Kingsdale’s Ms. Gorman said shareholders can accept executive pay that appears misaligned with performance if they are given a strategic rationale.
“Your shareholders could actually understand the reason why you’ve done that one-time or discretionary payment in order to keep that very specific individual that is critical to executing the company’s strategy, and that’s what’s in line with shareholders’ interest,” she said.
She said boards should be prepared for serious scrutiny in the 2022 proxy season, and ensure interests of executives and shareholders align.
“Boards are going to have to provide full and transparent disclosure in the proxy circulars on the decisions that they have made around compensation and also talk about specifically why certain performance measures were set,” Ms. Gorman said.
“Without this kind of context, and if awards seem to be just lowering a performance bar, I think the company’s going to face criticism from the proxy advisers and the shareholders.”
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Jaren Kerr
David Milstead