Say on Pay in Canada 2016

Under US Securities and Exchange Commission (SEC) rules implementing the say-on-pay requirements, companies subject to such rules must hold a non-binding say-on-pay vote at least once every three years, in which shareholders can approve the compensation of their named executive officers as disclosed in the proxy statement, including the compensation disclosure and analysis (CD&A) section, the compensation tables and other narrative executive compensation disclosure. It is important to note that the shareholder vote does not cover approval of director compensation or disclosure of the relationship between risk and overall compensation policies (other than the relationship between risk and executive compensation, which should be discussed in the CD&A).

In addition, under the US say-on-pay rules, companies must allow shareholders to vote, at least once every six years, on how frequently to hold the say-on-pay vote. The frequency of say-on-pay votes is also a non-binding advisory vote. The shareholders must be given the choice of one of the following times for holding a say-on-pay vote:

Smaller reporting companies that do not provide CD&A disclosure must hold a vote to approve compensation of their named executive officers as disclosed in the proxy statement under Item 402(m)-(q) under Regulation S-K.

Companies that qualify as emerging growth companies (EGCs) do not need to hold say-on-pay votes for as long as they retain their EGC status. Once companies lose their EGC status, they must begin to hold say-on-pay votes no later than:

Under these rules, the say-on-when vote is essentially a straw poll. The SEC did not prescribe a standard to determine whether a particular frequency was adopted by shareholders. Like other non-binding advisory votes, the company is not required to follow shareholder opinion. However, the company must be prepared to defend its actions to shareholders afterwards. In addition, the rules encourage companies to adopt the frequency chosen by a majority of the shareholders, by permitting companies that do so to exclude future shareholder proposals on say-on-when voting.

Many companies incorporated in Canada are subject to the US rules and are, therefore, required to include the say-on-pay and say-on-when resolutions in the management information circular (circular) required to be sent to Canadian shareholders under Applicable Securities Laws in Canada. Canadian companies listed on a US stock exchange are typically required to comply with these US rules, but that determination is based on a number of factors. For more information on those factors, see Cross Border Public Company Toolkit and Practice Note, Rule 12g3-2(b) Filing Exemption: Why and How to Qualify.

Unlike in the US, Canadian law does not currently require public companies to give their shareholders an advisory (or non-binding) vote on say on pay.

On January 14, 2011, the Ontario Securities Commission (OSC) published OSC Staff Notice 54-70: Regulatory Developments Regarding Shareholder Democracy Issues. The OSC acknowledged that the United Kingdom, Australia and some European countries already required public companies to give shareholders a say on pay and that the US was expected to impose a similar obligation. It indicated that the OSC staff was monitoring international developments in respect of say on pay and are considering whether securities regulators should consider introducing mandatory say on pay.

Industry Canada commenced a consultation process, Consultation on the Canada Business Corporations Act, that ended on May 15, 2014, regarding potential amendments to the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (CBCA). Industry Canada specifically requested comments on the practice of say-on-pay shareholder votes and a proposal to make such votes mandatory.

On October 7, 2015, Mr. Harinder Takhar introduced a private members bill, Bill 128, An Act to amend the Business Corporations Act with respect to meetings of shareholders and the adoption of an executive compensation policy (Bill 128), to the Ontario Legislature. Mr. Takhar is the former Minister of Government Services and, before that, Minister of Small Business and Consumer Services. During his time in these roles, he was the Minister responsible for amendments to the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (OBCA). Bill 128 proposes to add a subsection to section 137 of the OBCA, stipulating that a corporation's directors must fix the remuneration of its directors and officers pursuant to any executive compensation policy authorized by the corporation's shareholders. The amendments would also add a new section 169.1 of the OBCA, which allows a registered or beneficial holder of voting shares to submit a proposal to adopt an executive compensation policy, including amending or repealing this policy.

Despite Canadian law not currently requiring public companies to give their shareholders an advisory (or non-binding) vote on say on pay, many companies voluntarily choose to do so. Such voluntary votes may be binding or non-binding, as determined by the board, and may be specified in an internal corporate policy.

According to Shareholder Association for Research & Education (SHARE), the following 156 Canadian publicly traded companies had included say-on-pay votes at their shareholder meetings to July 31, 2014. The companies on this list are all incorporated in a Canadian jurisdiction, and most are listed on a Canadian stock exchange with a head office in Canada. Although the information contained in this database has been compiled from sources SHARE believes to be reliable, information contained in it may contain errors or be incomplete.

In the 2015 article Canadian Companies Continue to Voluntarily Adopt Say on Pay, Meridian Compensation Partners, LLC indicated that 163 companies in Canada had an advisory resolution on executive compensation in 2015, so the number of Canadian companies holding say-on-pay votes was increasing. They also found that approximately 80% of the S&P/TSX 60 Index and 48% of the S&P/TSX Composite companies have adopted say on pay, and most of those companies that have not adopted say on pay are controlled or family-owned companies.

According to this May 4, 2016 article in the Globe and Mail, Investors vent over executive compensation with say-on-pay votes, an early review of 20 of Canada’s largest companies that have held their annual meetings so far this year showed a slight increase in “no” votes for pay in 2016.

At that date, Canadian Pacific Railway Ltd. (CP) recorded the only loss in 2016 with 50.1% of votes cast against the company’s executive compensation practices. In that circumstance, the Chief Executive Officer (CEO) earned $19.9 million last year, which was a 6% increase over the previous year that the company attributes to the changing exchange rate applicable to his compensation paid in US dollars. This resulting increase occurred while the company’s share price fell 21%. In its April 20, 2016 press release, CP announces results of Annual Meeting of Shareholders and director elections, CP stated that "although this Say-on-Pay vote is an advisory vote and the results are not binding upon the Board, the Board will take into account the results of this vote, together with other shareholder feedback and best practices in compensation and governance."

Goldcorp Inc. had 22.3% of votes cast against its executive pay practices this year, while Teck Resources Ltd. recorded that 25.3% of the votes cast were against.

On May 13, 2016, this press release, Crescent Point Energy Announces Annual General Meeting Voting Results and Approval of All Directors, and article in the Globe and Mail, Shareholder vote prompts Crescent Point to promise pay overhaul, discuss how shareholders of Crescent Point Energy Corp. (Crescent Point) voted the 69% of the shares against Crescent Points' approach to executive compensation. While noting that the same plan had 97% shareholder support at the 2015 meeting after making significant changes to address shareholder concerns expressed the year before, the Chair said, "We've already begun this process. We are committed to implementing changes this year that improve our plan in ways that align with shareholder interests while continuing to meet our corporate objectives of attracting and retaining a high-quality staff and fostering the entrepreneurial and innovative culture that is key to Crescent Point's success."

Crescent Point's share prices have decreased significantly due to low crude prices, which then led to a dividend cut. The CEO earned $8.8 million in 2015, including $1.1 million in salary, $6.7 million in share-based awards and $950,000 in an annual incentive. Overall pay was just under $9 million the year before. An investor expressed the belief that compensation should have decreased in line with the dividend cut.

In 2015, there were several high-profile no votes on executive compensation practices:

It is interesting to note that two of the three say-on-pay votes that failed in Canada in 2015 and two of those receiving significant no votes this year are in the gold mining industry (share prices in this sector have been significantly impacted by weaker gold prices in recent years).

In addition, following the no vote in 2015, each of the three companies (based on the disclosure contained in their respective circulars) reached out to their respective shareholders in order to understand the concerns of those shareholders who opposed the 2015 say-on-pay resolutions and made amendments to their compensation system and related disclosure practices in response to the feedback received.

In the case of Barrick (based on the disclosure contained in its circular), the total compensation paid in 2015 to its executive chairperson was reduced by approximately 76%, compared to 2014 levels (in part, because he forfeited his 2015 incentive compensation).

Each of these companies has now held its 2016 annual meeting of shareholders and, in each case, the say-on-pay resolution has been approved, clearly indicating that the changes implemented addressed the concerns of many shareholders. See each of the circulars linked below for details on the changes they made that resulted in the following approval votes in 2016:

Other than in the examples above, shareholder support for compensation practices at Canadian companies is generally strong, with no failed votes in 2014.

Canadian Coalition for Good Governance (CCGG) released its 2015 Best Practices for Proxy Circular Disclosure, setting out exemplary corporate governance and executive compensation disclosure found in issuers' management information circulars. In order to be considered, issuers must substantially comply with the principles contained in the CCGG January 2013 publication, Executive Compensation Principles. In those principles, CCGG recommends that:

Institutional Shareholder Services Inc. (ISS) has indicated that vote support under 70% should be taken as substantial shareholder dissatisfaction that requires a response from the board.

ISS had recommended voting no in CP’s say-on-pay vote this year, saying the CEO was paid 2.8 times more than his comparable peers, and his pay continued to be higher than normal despite the fact that CP’s share price declined in 2015 and underperformed against its industry peer group. ISS also criticized the personal use of company airplanes last year, because it is a perk not provided by most companies.

ISS criticized a “misalignment” between Crescent Point's CEO pay and shareholder returns over the past three years. ISS said that there has been a disconnect between pay and performance and that the cliff grant was overly complex and difficult for shareholders to track value. The intended retention of the executive may be achieved, but it also may lead to excessive compensation that is not performance-based and not easily tracked.

Glass Lewis & Co. (Glass Lewis) also recommended voting against CP’s say-on-pay resolution, because the CEO's high base salary causes other elements of his pay, including his annual bonus and long-term equity grants, to also become inflated because they are based on a multiple of his base salary.

Canadian issuers considering a say-on-pay vote must carefully consider their compensation practices and provide fulsome and convincing disclosure in their compensation discussion and analysis to support those practices. For more information, see: