In general, total CEO compensation at Canada’s S&P/TSX Composite Index listed companies has trended upward. Median total compensation for CEOs increased by approximately 11 percent in the most recent fiscal year. Certain sectors, such as Energy and Consumer Discretionary, had more significant increases in median total compensation paid to the CEO. Other sectors, such as Information Technology and Materials, had negative growth in median total compensation paid to the CEO. In the case of Materials, this decrease is likely tied to the lower than average returns experienced over the past few years.

During the first half of 2014, median option value and share-based award value increased by 12 percent and 20 percent, respectively. In general, companies appear to be increasing their reliance on security-based compensation. At a sector level, it appears that the Energy sector, which had a 23 percent increase in median total compensation, has seen a much larger increase in the use of share-based equity awards compared to option-based equity awards. Conversely, the Industrials sector appears to be increasing the use of options while subsequently reducing the value of share-based awards granted.

Overall was characterized by a shift in compensation structure across the S&P/TSX Composite Index, with issuers moving toward a greater percentage of CEO total compensation delivered in share-based awards. While the use of options remains a common practice, it appears that the banks, utilities, and telecommunication services industries are making drastic reductions to the value of options granted to the CEO. On average, the structure of CEO compensation is changing to increase the value of Short Term Incentives (“STI-Cash”) or annual bonus and the value of share-based awards. We expect that this trend will continue as more companies move to either include share-based awards or increase their proportion in total compensation.

Meanwhile, the number of Canadian companies that have adopted a non-binding Management Say-on-Pay (MSOP) proposal has increased by 17 percent during the first half of the year. As of June 30, a total of 120 companies (approximately 9 percent of TSX-listed issuers) have adopted non-binding MSOP resolutions. Of these, 100 companies are also listed on the S&P/TSX Composite Index, representing 43 percent of the index. These figures do not include Canadian issuers that file DEF-14A proxy statements as these companies are considered U.S.-domestic reporting issuers.

In general, support for say-on-pay proposals was higher in 2014 than 2013. Some sectors, however, such as Consumer Staples, Information Technology, Utilities, and Telecommunication services, had lower support in 2014. In fact, average support for say-on-pay proposals in the Information Technology sector has declined year over year since 2012.

While average support within the Materials sector increased in 2014, this increase is driven by the low support received by Barrick Gold Corporation in 2013, which drove down the overall average support for 2013. After excluding Barrick Gold from the calculation, the average support for the Materials industry was 91 percent in 2013 and is 89.6 percent so far in 2014. Hence, excluding Barrick Gold, the average support for say-on-pay proposals also decreased in the Materials industry year over year.

In contrast to 2013, which saw a failed say-on-pay resolution at Barrick Gold, no MSOP resolutions received less than majority support in 2014. The number of companies that received support levels below 70 percent, however, was higher than in any previous year (2014: 4 companies; 2013: 2 companies; 2012: 2 companies). Given that the average support received by such proposals in the Canadian market is in the 90 percent range, any support level below the 70 percent threshold may signal shareholder concerns with the issuer’s current compensation programs and/or practices. —ISS Canadian Research Team

The foregoing is an excerpt from ISS’ 2014 Canada Postseason Report. To read the full article, download the report on Governance Exchange