Preparing for Proxy Season: Compensation Matters

February 26, 2020

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 updates.

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 Report). 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) include:

  • 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 scrutiny

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 2020[1] (“ISS Policy Survey”) 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 processes 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 inconsistencies.

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 2020.


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

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at

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