Preparing For Proxy Season: Compensation Matters – Corporate/Commercial Law – Digitalmunition

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Published on March 9th, 2020 📆 | 2170 Views ⚑


Preparing For Proxy Season: Compensation Matters – Corporate/Commercial Law

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Having completed our annual deep dive into the past
year’s corporate governance developments and trends, we have
developed a four-part series on what you need to know to prepare
for the 2020 proxy season. In this third post in the series, we
look at compensation matters.

The Overview

The first two posts in the series focused on
board accountability
(including the
increasingly important “ESG” factors: environmental,
social and governance) and
board composition

Looking ahead, the final post in the series will focus on
proxy developments and reporting

Compensation Matters

Trends and best practices

Growing numbers of Canadian companies held Say-on-Pay (SOP)
votes at their annual meetings – over 200 in 2019, up from 183 in
2018. The average support for SOP votes was 90.9%, down slightly
from 91.9% support in 2018) (as reported in Laurel Hill Advisory
Group’s 2019 Trends in Corporate Governance
). This is well-aligned with the amendments to the
Canada Business Corporations Act (CBCA) adopted by the
Federal Government through Bill C-97, Budget Implementation
Act, 2019, No.1
discussed in our
previous post
, which, once in force, will make it mandatory for
“prescribed corporations” to hold a SOP vote (this
provision is not expected to come into effect until after the 2020
proxy season).

Investment managers have noted that institutional investors
appear to be increasingly exercising independent judgment relating
to SOP, with 20 companies receiving less than 80% support where 12
of those companies had favourable proxy advisor recommendations (as
reported in Gryphon Advisors’ 2019 Proxy Season in Review). Reasons
for the opposition (as noted in Laurel Hill’s Report)

  • Chief Executive Officer (CEO) and
    named executive officer (NEO) pay has been increased faster than
    total shareholder return (TSR).
  • CEO and NEO pay has been viewed as
    misaligned with the size and stage of the business.

Generally, the tipping point for when it is expected that
management will engage with shareholders opposing a SOP vote is 80%
for Glass Lewis and 70% for ISS’, however, since SOP
resolutions are assessed on a case-by-case basis, other factors may
be taken into consideration, such as support for SOP.

Greater executive pay transparency and director pay

The Canadian Coalition for Good Governance’s annual Best Practices for Proxy Circular Disclosure
publications consistently recommend that boards enhance disclosure
of any adjustments made to financial performance measures within
the issuer’s executive compensation structures, including the
board’s role and level of scrutiny applied to determine the
adjustment used.

For director pay, of note for 2020 is the ISS Policy revision
relating to the past approach taken by boards in setting and
approving director compensation, where ISS will recommend a
“withhold” vote in the event of two consecutive years of
high director pay (relative to ISS-determined Canadian peer company
boards) unless satisfactory reasons for this are provided in the
company’s disclosure.  It may be useful for directors to
monitor director pay among peer company boards and consider where
their pay levels fall, as well as whether additional detail is
appropriate in their disclosure relating to the determination of
and changes to annual director compensation.

Pay for performance metrics – EVA vs. TSR

Beginning in 2019, ISS’ research reports for Canada began
including additional information on company performance using
Economic Value Added (EVA) metrics in response to
ISS client feedback asking ISS to consider using additional metrics
beyond Total Shareholder Return (TSR).

EVA = Net Operating Profit after Taxes – (Cost of Capital
* Capital)

EVA involves the application of uniform, rules-based adjustments
to financial statement accounting data which aims to measure a
company’s underlying economic profit and capital productivity.
In contrast, TSR focuses on the growth of shareholder return on
invested capital over time (accounting for dividends and market
value gains). The impact of this will see ISS incorporate EVA
metrics into its quantitative Pay-for-Performance models. This will
be interesting to monitor as ISS reported in the results of its
Global Benchmark Policy Survey for 20201 (“ISS Policy
“) that when asked about EVA and the display of
prior used GAAP-based metrics, many investors and non-investors
(84% and 71%, respectively) indicated that prior-used GAAP metrics
should be displayed below the EVA as a point of comparison.

The Takeaway

We encourage you to consider what these trends and developments
mean for your organization, specifically how they impact
your annual meeting preparation
and on-going corporate
governance matters. For many issuers, this means a
strategic review of stakeholder-focused communication
including continuous disclosure materials, board
and committee charters, company policies and underlying frameworks
with a view to:

  • Identifying gaps in
    current disclosure, policies and materials, and determining options
    for your organization to address;
  • Reviewing the frameworks and
    that support disclosure, charters and policies
    (especially as they relate to risk management);
  • Simplifying
    disclosure to focus on quality of disclosure
    specific to the organization, its business and its risks; and
  • Aligning policies and/or
    public filings
    with regulatory and best practice updates
    and changes made this year and in past years, while taking a
    fresh look to eliminate redundancies or

Up Next

Stay tuned for the fourth and final update in this series, in
which we’ll be discussing trends in shareholder activism,
shareholder engagement and virtual meetings, in addition to
providing a handy breakdown of proxy advisory firm updates for


1. ISS 2019 Global Policy Survey:
Summary of Results (September 11, 2019). Available at:

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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