Thought Capital

A board’s best defence in the say-on-pay era? Conduct an independent pay-for-performance assessment, then communicate it to your shareholders.

The frequency of shareholder proposals and their levels of support are gradually gaining steam in Canada. Directors are wise to pay heed. If your board isn’t a target today, it might be tomorrow.

With the 2014 proxy season now behind us, compensation committees may be feeling the pressure to respond to below-par Say-on-Pay results and/or director support levels and other criticism received from shareholders and their advisors. Adding to this pressure is the lack of a clear process for gathering the views of the shareholder community in order to inform the board’s review and decision- making process.

With most of the large issuers in Canada having completed their annual general meetings, Hugessen has summarized our high-level observations of key executive compensation and governance trends from the 2014 proxy season.

Directors need to acknowledge the increasingly active role of shareholders and their advisers in executive compensation decision making—and then engage shareholders directly to hold sway over the agenda.

Prior to each proxy season, proxy advisory firm Institutional Shareholders Services (“ISS”) releases updates to its Corporate Governance Policies, specific to each market (e.g., Canada, United States). In addition to this year’s policy updates (released November 21, 2013), ISS has also announced an extended consultation period to receive comments on a number of additional subjects.

The SEC in the U.S. recently announced that it is moving ahead with the CEO pay-ratio rule contained in the Dodd- Frank bill. That rule requires public companies to calculate and disclose the ratio of the CEO’s pay to that of the median pay employee (the employee who has the same number of people earning more and earning less than him/her).

Strong board leadership is required to ensure a new CEO’s contract is effective, defensible, and sets the right standard for the whole organization

With the 2013 proxy season now behind us, it is worth pausing to consider the evolution in CEO compensation levels, mix and incentive design over the past few years. The trends observed—including moderate increases in pay opportunity, bonus payouts at or near target, continued focus on multiple measures for short-term incentives, shifts in weighting toward long-term incentives, and decreases in the weighting of stock options—all reflect a general attitude by today’s boards to proceed with care given the still modest pace of recovery, actively manage risk, and take the long view.

In the same way that performance among companies in the TSX 60 Index (“TSX 60”) is considered a bellwether of the overall Canadian economy, the compensation and governance practices of the TSX 60 provide an important frame of reference for Canadian companies generally. Since the end of the most recent Canadian proxy season, Hugessen Consulting has compiled data on the executive compensation practices at TSX 60 companies, with the aim of uncovering recent trends in pay levels and design.