Two years after "say on pay" votes were introduced for shareholders in Canada, investors are signalling a growing willingness to use the new powers.

Ballots held at companies' annual meetings this year show a growing trend to cast "no" votes, opposing how much salary, bonus and stock options major companies are giving executives.

QLT Inc. became the first Canadian company to lose its non-binding advisory pay vote, reporting late last week that shareholders voted 58 per cent against its compensation program.

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Typically, packages of executives' salary, bonus, stock options and other benefits receive rubber stamps from shareholders. And though it has taken a couple of years, institutional investors are becoming more comfortable with their new strength.

"We're two years into it, and everybody I think is just getting accustomed to what this tool is from a shareholder's point of view," said David Denison, chief executive of the Canada Pension Plan Investment Board. "But if we look around the world where it's been in place a little longer – if we look at Europe right now – we are seeing some very powerful messages being delivered through say on pay votes."

An analysis by Vancouver-based advisory group Shareholder Association for Research & Education (SHARE) shows that as of late May, the proportion of companies facing significant protest votes – that is, pay votes falling below the 80-per-cent support level – climbed to 10.6 per cent this year from just 1.6 per cent last year. SHARE said 4.5 per cent of Canadian companies had scored less than 75-per-cent support for their pay votes this year, while no companies scored below that level in 2011.

The change is gradual, said SHARE policy director Laura O'Neill, "but the numbers do tell us that there are some increasingly disgruntled shareholders willing to use this vote."

Increasingly assertive

At QLT, investors appeared concerned about the pharmaceutical company's proposed expansion of its stock option plan, which was also defeated in a separate vote. The plan would have meant QLT's outstanding stock could be diluted by up to 23.6 per cent – a high dilution rate in an era when many large companies have a maximum 10-per-cent option dilution threshold. A QLT spokeswoman said the company had no comment Friday on the voting result.

Compensation experts say one reason QLT is the only company to have lost a pay ballot so far is the votes are still voluntary in Canada; many smaller companies or those with controversial pay practices can simply opt not to put the issue on their proxy ballots.

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As well, directors at many larger companies are meeting with investors long before they publish their annual proxy circulars to address pay concerns before they become major issues – a practice that is far less typical for boards in the United States.

"If there is a dampening [of pay] that's going on, it's going on because the shareholder activists are speaking earlier to whoever is concerned," says Christopher Chen, national director at compensation consultant Hay Group.

Say on pay votes give investors a non-binding vote on executive pay programs, but carry significant moral suasion with boards. They were first offered in 2010 at just 26 companies and have expanded to at least 96 Canadian firms.

While no other Canadian companies have lost say on pay votes yet, the discontent with how much executives pocket is growing. Canadian Pacific Railway Ltd. got 62-per-cent support for its compensation plan this year – down from 97 per cent in 2011 – while Agnico-Eagle Mines Ltd. recorded 64-per-cent support, Yamana Gold had 75-per-cent support and Encana Corp. had 76-per-cent support.

Montreal-based Astral Media Inc., meanwhile, was forced to withdraw a proposal in May to pay a $25-million bonus to outgoing CEO Ian Greenberg after failing to win shareholder support for the payout.

"Say on pay and shareholder activism are very real and very alive in Canada," says Paul Gryglewicz managing partner at Global Governance Advisors, which advises boards on pay.

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Cash vs. Equity

Compensation experts say this growing shareholder activism deserves credit for changing the design of CEO pay packages, shifting more compensation to share units and stock options. Those equity elements more often include additional performance features, requiring a company to meet financial targets before they pay out.

While Canadian CEO pay rose by 6 per cent on average in 2011, the cash portion of compensation – that is, salaries and bonuses – rose by a more modest 2 per cent, according to compensation data from Global Governance Advisors. The remainder of the increase came largely from grants of share units and stock options.

Median total pay was $5.2-million last year for CEOs at Canada's 100 top companies. Their 6-per-cent pay raise in 2011 comes on the heels of a 13-per-cent raise in 2010.

Drawing the highest pay in 2011 was Michael Pearson, chairman and chief executive of Valeant Pharmaceuticals International Inc., who earned $37-million (U.S.), including $18-million in stock and option awards and a $14-million dividend payment related to the company's 2010 merger with Biovail Corp.

Gary Hawton, president of Ocean Rock Investments Inc., which owns Meritas ethical mutual funds, says say on pay votes give all investors a way to signal their desire for change – not just huge investors who already had access to boards.

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"I think we're slowly seeing [board] compensation committees understand what some of the concerns of shareholders were," Mr. Hawton said. "And they're putting together compensation packages that really do link to long-term sustainable value creation."

Of the 46 companies in the S&P/TSX60 index that had held say on pay votes as of May 23, the average result in 2012 was 90.7 per cent in favour, down from 93.5 per cent in 2011, according to consulting firm Hay Group.

In Britain, where say on pay votes are mandatory for all public companies, shareholders have become more militant this year. The CEO of insurance giant Aviva resigned last month after investors voted 59 per cent against its pay report, and many other companies have faced larger protest votes, including banking giant Barclays.

Advisory votes on pay have been even more controversial in the United States, where 41 companies have "lost" their say on pay votes this year, including banking giant Citigroup Inc., according to an analysis last week by compensation firm Steven Hall & Partners.

Sleeping giants

Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents the country's largest institutional investors, says the "sleeping giants" of institutional shareholders are awakening and becoming more aggressive. The CCGG is meeting with at least 50 boards a year to discuss governance concerns, he said.

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"Companies are at least focusing for the first time on pay, and they're focusing on how compensation is disclosed, which is a big thing," Mr. Erlichman said. "Often it's so opaque you can't understand what they're doing."

But there are limits to what institutional investors can reasonably accomplish with the blunt tool of say on pay votes, argues Harvard University business lecturer Robert Pozen – a former director of BCE Inc.

Pay votes typically get high levels of support because institutional investors focus on the worst examples of poor pay practices, which means say on pay is unlikely to reduce overall pay levels for typical CEOs in the middle of the pack.

"I really don't think it's reasonable to ask institutional shareholders to do more than police the outer edges – the egregious things," Mr. Pozen said. "I don't think they can be in the [compensation] business. That's the role of the board."

Around the boardroom table, directors report say on pay has focused far more attention on compensation issues than before. Corporate director Mary Mogford, who sits on the boards of Potash Corp. of Saskatchewan Inc. and Nordion Inc., says the most important issue for investors appears to be that pay is aligned closely to increasing shareholder value.

At Potash Corp., the company asks investors to vote each year on its performance stock option plan, which Ms. Mogford says is a "real" say on pay vote because it is binding. The company also holds a standard advisory vote on compensation and allows investors to offer feedback on compensation on its web site.

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"Every year our shareholders can tell us if they think we have that performance and pay alignment right," she says.