Companies should "gradually eliminate" stock options in favor of performance-based awards with criteria other than stock price, according to Montreal-based shareholder group MÉDAC (Le Mouvement d’éducation et de défense des actionnaires). MÉDAC, an organization well known in Canada for its frequent shareholder proposals on a number of governance issues, has filed a proposal with at least seven companies including Canada's top five banks asking them to phase out options in favor of compensation "based on solid performance criteria over which [executives] can exert some control and which favour the creation of long-term added value for the organization." The proposal, which was included in Royal Bank of Canada's most recent proxy, cites a Canadian academic paper asserting that less than 10% of the change in stock price of Canada's top five banks was attributable to individual company performance.
MÉDAC's viewpoint echoes those expressed by several investors in the UK that stock price-based metrics, including TSR, are not the most appropriate or effective measures by which to set performance targets. The MÉDAC proposal has now been endorsed by the Shareholder Association for Research and Education (SHARE), whose model proxy voting guidelines explicitly state that performance goals should be "within the control or influence of the employee being evaluated" and exclude goals "such as increases in stock price, which are not necessarily within the control of an individual employee." Given the increasingly intense reliance on TSR as a performance metric in the U.S. market, it will be interesting to see whether this return to financial or operational performance metrics takes hold in Canada. If so, it could be a precursor of changes ultimately sought by some shareholders here as well.