In Canada, holding a shareholder advisory vote on a publicly traded company’s executive compensation program is “optional” … in theory.
Known as “say on pay,” these votes are intended to ensure shareholders have a forum to express their support or concerns about a company’s executive compensation plan.
Most companies pass the vote with a wide margin of support. However, there have been some high-profile failures in recent years, and only a handful of repeat failures.
This year, that dubious distinction went to beleaguered Crescent Point Energy.
Having failed a second say-on-pay vote, faced down a proxy fight for control of its board and seen CEO Scott Saxberg and two other officers step down, the company has certainly been under scrutiny in 2018.
Much of this turmoil can be traced back to the declining fortunes of crude oil and its impact on Crescent Point’s share price. But there are other lessons to be taken from this situation.
Crescent Point’s say-on-pay issues started to surface in 2014, when fewer than 57 per cent of shareholders supported its executive compensation program. The company had reported paying Saxberg more than $12 million for fiscal 2013. While Crescent Point had produced solid share returns during fiscal 2013, the executive share-based awards were complicated, with much shorter vesting periods when compared to industry norms.
During fiscal 2014, Crescent Point reached out to its major shareholders to gain their views on improving the company’s executive pay program. Changes were made, including a 30 per cent reduction in the CEO’s total pay, longer vesting periods for share-based awards, and more clarity on how actual award levels would be determined.
Shareholders responded by supporting the new pay plan with more than 97 per cent support.
The victory was short-lived, however. In 2015, Crescent Point’s share price suffered, producing a 30 per cent decrease in total shareholder return. During the same period, Saxberg’s total reported compensation dropped by less than two per cent.
This signalled to investors that the pay-performance link in the executive compensation plan was weak at best. While longer vesting periods had been adopted, the company’s share-based awards still lacked a performance-based vesting element. Shareholders responded with a resounding No say-on-pay vote (with only 31 per cent support).
During fiscal 2016, after further shareholder outreach, Crescent Point made further changes, including simplifying the short-term incentive plan, adding performance-based vesting (using PSUs) and rolling back the CEO’s salary. Shareholders were clearly pleased, with over 86 per cent in support.
In fiscal 2017, as Crescent Point continued to evolve its executive compensation program, the company’s share price plummeted with total shareholder return falling 42.7 per cent. Once again, there was a large disconnect between the fates of shareholders and executive compensation. The CEO’s pay remained flat, while other executives received slight increases. This resulted in another resounding No on their most recent say-on-pay vote (only 38.5 per cent support).
Like its peers in Alberta’s energy sector, Crescent Point has had a challenging last few years. Its board (through the compensation committee) obviously worked to respond to shareholders’ concerns and yet the company still failed a second say-on-pay vote. What could they have done differently (besides buying flak jackets!)?
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While shareholder returns are strongly correlated to say-on-pay voting (i.e. negative returns = negative votes), there are strong governance practice boards can use to try to avoid a failed say-on-pay vote. These include:
• Know your shareholders. Who’s the most active among them? Which proxy advisory firm, if any, do they follow? Do they have published policies on executive compensation design preferences?
• Proactively engage shareholders rather than waiting for negative say-on-pay votes before reacting. Invest in straight-forward, plain-language communication of compensation plans and proposed changes and listen to what they’re saying.
• Stress test the strength of your pay-performance linkages and what potential message they’re sending. Monitor the CEO scorecard so there are no surprises for shareholders at year end.
The overall downturn in the energy industry has hurt the performance of all companies in the space, but certain companies, such as Crescent Point, have witnessed greater backlash than others during this time. Learning from their experience can ultimately help all companies weather the storm and get to Yes.
Arden Dalik is managing partner, Western Canada, with Global Governance Advisors. Peter Landers is a partner with Global Governance Advisors.
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