– Implement objective measures to govern the exercise of discretion (e.g., materiality thresholds for variances or caps on payouts) and ensure discretion is applied consistently. – Consider public perception. – Publicly disclose the rationales for the amounts paid, as well as the need to depart from the company’s pre- established incentive formulas (if applicable).
See Chapter 8, ESG and Climate Change in the Shadow of COVID-19: “E,” “S” & G Are Here to Stay for our discussion of ESG trends and developments more generally. The Future of Say-on-Pay UPDATED PROXY VOTING GUIDELINES Prior to the spread of COVID-19 in Canada, Glass Lewis modified its proxy voting guidelines relating to say-on- pay in ways that are increasingly relevant in the context of any significant disruption, including COVID-19. The two main changes were: 124 – the inclusion of the following three additional problematic pay practices: > targeting – without adequate justification – overall levels of compensation at higher than the median level relative to the issuer’s peer group; > payment of discretionary bonuses when short- or long-term incentive plan targets were not met; and > insufficient response to low shareholder support; and – a requirement that boards demonstrate engagement and responsiveness to concerns of shareholders in the event that a say-on-pay vote receives at least 20% of shareholder opposition. Worldwide, just 9% of FTSE All World companies have incorporated ESG criteria into their incentive scorecards and, as in Canada, those criteria focus on occupational health and safety concerns.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE METRICS
There is increasing pressure in some quarters, which predated the COVID-19 outbreak, for boards and compensation committees to consider the addition of environmental, social and governance (ESG) benchmarks for incentive awards, particularly criteria relating to the “social” prong of ESG. Reports show that 65% of TSX 60 issuers have in some way linked executive pay to ESG criteria, the majority of which are related to occupational health and safety in the oil and gas sector. 121 Worldwide, just 9% of FTSE All World companies have incorporated ESG criteria into their incentive scorecards and, as in Canada, those criteria focus on occupational health and safety concerns. 122 We have begun to see heightened scrutiny from institutional investors that are demanding a greater focus on ESG as it relates to executive compensation, including short- and long-term incentives. We expect that COVID-19 will accelerate this trend, given the confluence of layoffs, government-driven or other publicly backed support packages for businesses, and the general disruption and increased risks in many employees’ day-to-day working environment. 123
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Governance Insights 2020
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