& OTHER TOPICS Hugessen Breakfast Seminar | June 15 & 20 - - PowerPoint PPT Presentation

2017 PROXY SEASON REVIEW & OTHER TOPICS

Hugessen Breakfast Seminar | June 15 & 20 2017

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Agenda for Today’s Event

Welcome Highlights from 2017 Proxy Season Comments from Guests Open Discussion Closing Remarks

Highlights from 2017 Proxy Season

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Highlights from 2017 Proxy Season

Performance and Pay Pay Mix and Plan Design Say on Pay Results

Emerging Topics and U.S.

Scope of study:

• Companies in the TSX 60 Index
• 2017 proxies filed by May 31, 2017 (n = 56)
• Say on Pay results as of May 31, 2017 (n = 44)

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2016 Performance Context

• 10%
• 5%

0% 5% 10% 15% 20% 25% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016 TSX 60 Index Total Return

21.4%

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2016 Performance Context

• 75%
• 50%
• 25%

0% 25% 50% 75%

TSX 60 Index Constituents - 2015 Total Shareholder Return

• 100%
• 50%

0% 50% 100% 150% 200%

TSX60 Index Constituents - 2016 Total Shareholder Return

406%

2015 2016

38% 95%

Resource Non-Resource Resource Non-Resource

• 24%
• 27%

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2016 CEO Pay Trends

$7,594 $2,771 $1,124 $7,446 $2,709 $1,113

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000

TDC TCC Salary

CAD '00 000s

Year-Over-Year Change in Median TSX 60 CEO Actual Compensation

2016 2015

(1.0%) (2.2%) (2.0%)

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2016 CEO Pay Trends

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2016 CEO Pay Trends

3 9 6 7 5 8 6 6 7

1 2 3 4 5 6 7 8 9 10

<-50%

• 25% to -

50%

• 10% to -

25%

• 5% to -

10% 0% to -5% 0% to 5% 5% to 10% 10% to 25% 25% to 50% >50% Number of Companies

Year-over-Year Change in Same Incumbent Actual Total Direct Compensation

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Is CEO Pay Being “Ratcheted” Up?

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Canadian and U.S. Dollar Exchange Rate

$0.74 USD per $1.00 CAD $10.6M CAD $13.4M CAD

$9 $10 $11 $12 $13 $14 $15 $0.65 $0.70 $0.75 $0.80 $0.85 $0.90 $0.95 $1.00 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16

Value of $10M USD in CAD

$USD per $1.00 CAD

CAD/USD Exchange Rate

CAD/USD FX Rate Value of $10M USD in CAD

Issuer TSR (Dec. 31 2013 to Dec. 31, 2016) Factor CAD Return (TSX) USD Return (NYSE) TD Bank 47.8% 16.9% 1.2644 Bank of America 85.8%* 47.0% 1.2644 Exchange Rate FX Rate Dec. 31, 2013 FX Rate Dec. 31, 2016 Factor CAD/USD FX $0.9418 $0.7445 1.2644

*Synthetic CAD return

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STIP Design

A handful of TSX 60 issuers undertook significant structural change to their STIP in 2016 Several issuers made notable cutbacks to the number of STIP scorecard metrics (e.g., CIBC from 6 - 3; Crescent Point 7 - 3; Manulife 7 - 4)

• Some added a formal discretionary component (e.g., Sun Life added a +/-

20% discretionary modifier for 2017) Notable Topic: the use of Discretion – 3 types 1. Adjusting the performance measure or standard

2. Overriding the bonus result 3. Formalizing discretion within the incentive structure

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Notable Topics: Formalized Discretion in AIP

Note: n=58

Competing Pressures

• Have focused measures to help demonstrate alignment with performance
• Ensure all important measures and categories are considered
• Examples: relative performance, financial strength, one-time items, ESG/risk

A combined approach that formalizes judgement in the incentive Most recent changes:

Critical Financial / Operational Measures Subjective adjustment based

• n more comprehensive

assessment of performance

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Notable Topics: Use of Discretion Outside Plan

Reduced 2016 STIP to match 2016 TDC with 2015 TDC due to TSR performance below median of peers Reduced CEO’s 2016 STIP to 60% of target from calculated result of 88% due to 3-year TSR performance below median of peers Reduced CEO’s compensation by 50% YoY and reduced 2016 STIP scorecard from 119% to 100% Board applied discretion to reduce the 2016 scorecard performance factor from 175% to 150% due to lower than expected revenue and earnings growth

Note: n=58

Options 35% RSUs 18% PSUs 47%

2015

Options 35% RSUs 16% PSUs 49%

2016

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Long-term incentive plan mix generally consistent year over year

CEO Pay Mix and Plan Design: LTI Mix

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Pay Mix and Plan Design: PSU Framework

2015 2015 2016 2016 Use of relative TSR metric Use of return metric (e.g. ROE) Use of operational metric (e.g. safety) # of performance metrics on average

70% 70% 35% 35% 25% 25% 2.1 2.1 81% 81% 43% 43% 21% 21% 1.7 1.7

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 90% or Above 80% - 90% 70% - 80% 50% - 70% Less than 50% Percent of Total Companies with SOP Say-on-Pay Approval Rating

Canada Say-on-Pay Voting Results 2017 vs. 2016

Say-on-Pay Results 2017

Overall, voting results are in line with last year

• 2017
• 2016

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Say on Pay Results: Influence of ISS and Glass Lewis

n=4 n=4 n=4 n=31 94% 83% 69% 63%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2017 Average SOP Score

Influence of ISS and Glass Lewis on SOP Results 2017

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Companies Responding to Low Say-on-Pay

Co Company Key Issue Resp espon

• nse

So SoP P Resu esult Poor overall plan design

• Engaged with shareholders
• Redesign of incentive plan

74% → 99%

Pay and performance disconnect

• Engaged with shareholders
• Redesign of incentive plan

78% → 94%

Pay and performance disconnect

• Engaged with shareholders
• Reduced bonus and LTIP
• Redesign of incentive plan

75% → 97% Substantial changes in pay practice and decisions led to notable improvements in 2017 Say-on-Pay approval rating

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Case Study: Bombardier

[Feb. 2017] BBD receives C$373M loan from Ottawa on top of US$1B from Quebec [March 2017] BBD files plan with regulators to increase pay for senior execs nearly 50% [March 2017] Exec Chairman sends news release offering to renounce pay increase [April 2017] Chair of Comp. Committee defends pay levels in letter, calling them “fully and appropriately aligned with value creation” [April 2017] Disclosure in public filings sparks protests – BBD responds by saying 50% of total pay would be deferred until 2020 [May 2017] Exec Chair resigns from executive role, remains Chairman of the Board

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Disclosure Trends

Use of Visual Aid Plain Language Disclosure Board & Mgmt Diversity Shareholder Engagement “Narrative” Style Disclosure Realized / Realizable Pay Analysis

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Director Compensation Trends

Median TSX 60 director pay (total annual retainer) increased from $192K to $199K YoY 60% of TSX 60 issuers use a flat fee structure (no meeting fees) Median TSX Board Chair retainer remains at $400K

Director Compensation Trends

Emerging Topics & U.S.

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One-time Awards

Outside of Plan Awards 2016 Report

• US$5.0B in outside of plan awards in 2016 ($4.8B in U.S. and $0.2B in Canada)
• 48% increase year-over-year in Canada and 11% increase in U.S.
• Repeat users of one-time awards represent over half of total awards
• Executive succession (sign-on + severance) the most common reason

Conclusion: Important for Board to provide clear rationale on how structure and quantum were determined

Increasingly attracting attention from shareholder community

“One-time [awards] are generally not supported, but will be assessed case-by- case on the basis of: grant terms, size, any future service or performance conditions, and the rationale for why one-time awards are needed in addition to the regular compensation program.”

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US Snapshot: CEO Pay Levels

• CEO pay among largest companies in the US continues to rise

$9.6 $7.3 $10.6 $7.6 $1 $11.5 $7 $7.6 2 4 6 8 10 12 14 S&P 500 TSX 60

Median CEO Pay – Same Incumbents

2012 2015 2016

1-Yr: +8.5% 5-Yr (CAGR): +3.7% 1-Yr: -0.8% 5-Yr (CAGR): +0.7%

All currencies in nominal dollars. Source: S&P 500 Associated Press & Equilar. TSX60 Hugessen Consulting.

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• Shareholder support looks fairly strong in 2017 proxy season with only (9)

companies of 1,457 having failed SOP as of May 19, 2017

US Snapshot: Solid SOP Support

92% 93% 92% 89% 90% 90% 88% 89% 85% 86% 87% 88% 89% 90% 91% 92% 93% 94% All Companies Finance Energy & Materials IT & Telecom

Average Support on SOP

2017 YTD 2016 77% 72% 77% 71% 71% 68% 68% 67% 62% 64% 66% 68% 70% 72% 74% 76% 78% All Companies Finance Energy & Materials IT & Telecom

% of Company with 90%+ Support

2017 YTD 2016

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• Strengthening economy and pay direction in 2017
• Reconsideration of payout curves with targets set as

range rather than point

• Shorter performance periods
• Use of relative measures
• Increase in number of metrics utilized
• Many problematic pay practices and irritants mostly

eliminated

US Snapshot: Pay and Design

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• Deregulation philosophy but massive uncertainty –

Dodd Frank, Choice Act 2.0

• Possible personal and corporate income tax changes

and implications for executive pay

• Fate of CEO pay ratio disclosure in 2018 proxies, as

well as disclosure proposals (pay for performance, clawback and pledging / hedging) that have not been finalized

• Companies focusing on calculation of ratio and related

disclosure

US Snapshot: Regulatory & Related Governance

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• Recent corporate scandals and media reports (including in Canada) have

highlighted the importance / risk of corporate culture

• Discussion in board rooms on the appropriate role of the directors in
• verseeing corporate culture
• A number of major financial institutions undertaking extensive reviews of

code of conducts, alignment of incentives, etc.

• Financial Reporting Council (“FRC”) published their report "Corporate

Culture And The Role Of Boards“ - collaboration of several UK groups and included interviews with more than 250 chairmen, CEOs and leading industry experts

• ICD Directors Journal - Is Corporate Culture on your Agenda?

Culture & Risk Management

Discussion

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