The views of the Canadian Coalition for Good Governance (CCGG) on executive compensation have evolved and advanced with the release in April 2009 of the CCGG’s Shareholder Engagement and ‘Say-on-Pay’ Policy and in June 2009 of the CCGG’s Executive Compensation Principles.
In the Policy, the CCGG states its belief that institutional shareholders should have regular, constructive engagement with the boards and board compensation committees of public companies on governance, compensation and disclosure practices, and that ‘Say-on-Pay’ shareholder advisory resolutions are an important part of this ongoing engagement process. The CCGG recommends that all boards follow the practice of voluntarily adding to each annual meeting agenda an advisory shareholder resolution on the report of their human resources or similar committee, their compensation plan, and the prior year’s awards. Further, the CCGG states that it intends to publish a model form of board ‘Say-on-Pay’ policy and shareholder resolution for boards to consider using for their next annual meetings.
The Executive Compensation Principles replace the Good Governance Guidelines for Principled Executive Compensation, which had been issued by the CCGG in 2005. The Principles are intended to provide guidance to compensation committees in developing executive remuneration packages that create a linkage between pay and performance and directly link risk management with the compensation program structure.
The six principles of compensation developed and enunciated by the CCGG are as follows:
- Pay for performance should be a large component of executive compensation.
- Performance should be based on measurable risk adjusted criteria, matched to the time horizon needed to ensure the criteria have been met.
- Compensation should be simplified to focus on key measures of corporate performance.
- Executives should build equity in their company to align their interests with shareholders.
- Companies should limit pensions, benefits, and severance and change of control entitlements.
- Effective succession planning reduces paying for retention.
McCarthy Tétrault Notes:
The thoughtful development and evolution of the Policy and the Principles reflects a workable approach that will be helpful to Canadian reporting issuers as they develop practices that are suitable to their respective circumstances.