& OTHER TOPICS Hugessen Breakfast Seminar | June 13, 14 & 20 - - PowerPoint PPT Presentation

2018 PROXY SEASON REVIEW & OTHER TOPICS

Hugessen Breakfast Seminar | June 13, 14 & 20 2018

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Agenda for Today’s Event

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

Highlights from 2018 Proxy Season

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Highlights from 2018 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 ▪ 2018 proxies commenting on Fiscal 2017 (n = 59) ▪ Say on Pay results among the TSX Composite as of June 11, 2018 (n = 155)

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2017 Sector Performance – solid year following a strong 2016

5.23% 5.74%

• 13.22%

3.89% 8.53%

• 30%
• 25%
• 20%
• 15%
• 10%
• 5%

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

S&P/TSX Composite Index S&P/TSX 60 Index S&P/TSX Capped Energy Index S&P/TSX Capped Materials Index S&P/TSX Capped Financials Index

• 50%
• 25%

0% 25% 50% 75%

TSX60 Index Constituents - 2017 Total Shareholder Return

• 100%
• 50%

0% 50% 100% 150% 200%

TSX60 Index Constituents - 2016 Total Shareholder Return

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2017 Growth – resource sector underperforms non- resources

2016 2017

• 9%

12%

Resource Non-Resource Resource Non-Resource

37% 95%

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Is CEO Pay Being “Ratcheted” Up?

$0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 All TSX60 (n=59) Same Constituent (n=51) Same Incumbent 5 Years (n=30)

5 Year Trend in Median TSX 60 CEO TDC

2% CAGR 3% CAGR 3% CAGR 2013 2014 2015 2016 2017

12% 10% 15%

2013 2014 2015 2016 2017 2013 2014 2015 2016 2017

$7,447 $2,680 $1,116 $8,368 $3,257 $1,200 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 TDC TCC Salary CAD '000s

TSX60: : Year ar-Over-Year ar Chan anges in Actual Compensat ation 2016 & 2017

2017 2017 2016 2016

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2017 CEO Pay Trends – material increase in STIP

8%

22% 12%

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2017 Industry Pay – a strong year for materials and financials

Other (n=27)

• 3%

Energy (n=13)

• 3%

Financials (n=10) 9% TSX60 (n=60) 13% Materials (n=10) 21%

• 30%
• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25%

Year-over-Year Change in Median TSX 60 CEO TDC

Median Average

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2017 Same Incumbent YOY Actual Pay

1 2 5 4 9 6 9 10 3 2

2 4 6 8 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 (n=51) More instances of companies increasing YOY same incumbent pay – mostly in the 5-25% range

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TSX60 Incentive Design – No significant change in STIP design

57% have an individual component Average number of types of metrics used: 2.8

2016 STIP Metrics

60% have an individual component Average number of types of metrics used: 2.6

2017 STIP Metrics

Financial al 55% 55% Ope peratio ional 17% 17% Strategic 8% 8% Oth ther 20% 20%

2016 Average STIP Scorecard Weight

Financial al 61% 61% Ope peratio ional 15% 15% Strategic 7% 7% Oth ther 17% 17%

2017 Average STIP Scorecard Weight

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Lower prevalence of “override” discretion in 2017

Adjustment to metrics in light of acquisition timing Decrease of CEO salary and STIP Downward adjustment to corporate performance score Downward discretion to offset favourable impact of US operations sale Increase to qualitative adjustment for CEO and top 4 NEOs

Note: n=59

13% of the TSX60 applied discretion in 2017 2017, representing a decrease in use of discretion from 2016 2016 (29%)

Applied Discretion 13.3% Did not Apply Discretion 86.7%

Options 34% RSUs 15% PSUs 48% DS DSUs 3% 3%

Options 34% RSUs 18% PSUs 46% DSUs 2%

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Long-term incentive plan mix generally consistent year over year

CEO Pay Mix and Plan Design: LTI Mix

2016 2016 2017 2017

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Pay Mix and Plan Design: PSU Framework

2016 2016 2017 2017 Use of relative TSR metric Use of return metric (e.g. ROE) Use of operational metric (e.g. safety) # of performance metrics on average

63% 63% 33% 33% 17% 17% 2.0 2.0 63% 63% 30% 30% 10% 10% 1.7 1.7

Little change in PSU performance design

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% >90% 80-90% 70-80% 60-70% 50-60% <50%

Canada Say-on-Pay Voting Results 2018 vs. 2017

2018 2017

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Say-on-Pay results of TSX listed companies in 2018

Overall, we see a similar pattern in voting results as 2017

Results as of June 20th, 2018

94% 54% 91% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

20188 Average SOP Score

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Say on Pay Results: Influence of ISS and Glass Lewis

• n TSX60 Companies

n=2 n=40 n=1

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2018 Say-on-Pay Poor Results

▪ Two Say-on-Pay failures so far in 2018. Misalignment between pay and performance continues to be a key factor behind recommendations “against” by proxy advisors

Company “AGAINST” Recommendation from Proxy Advisor Key Issue 2018 SoP Result

Pay and performance disconnect

37%

Pay and performance disconnect

47%

Pay and performance disconnect

70%

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Companies Responding to Low Say-on-Pay in 2017

Co Company Key Issue Resp espon

• nse

So SoP Resu esult lt Pay and performance disconnect

• Engaged with shareholders
• Coal negotiation and transition

metric added to STIP

• Reduce option weighting by 5%
• Increase PSU weighting by 5%
• Removed Enbridge as a peer
• No discretionary awards considered

47% → 89%

Pay and performance disconnect

• Engaged with shareholders
• Cancelled CEO’s front-loaded sign-on

PSU grant

• STIP payouts purely formulaic
• CEO LTIP mix change from pure PSUs

to mix of PSUs, RSUs, Stock Options

68% → 95% Substantial changes in pay practice and decisions led to notable improvements in 2017 Say-on-Pay approval rating

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Companies Responding to Low Say-on-Pay in 2017

Co Company Key Issue Resp espon

• nse

So SoP Resu esult lt Misalignment of value distribution between shareholders and executives

• Engaged with shareholders
• Removal of Working Capital and

Cost/Oz metrics, addition of Strategic Initiatives metric

• 2-Year relative TSR replaced with

50/50 split between 1-Year and 3- Year relative TSR

• Clarified equity award metrics

68% → 95%

Poor overall design

• Adoption of clawback
• Improved disclosure of STIP metrics

and discretionary bonuses

• STIP scorecard reweighting (50%

discretionary to 25% discretionary)

• Introduction of PSU plan

73% → 96% Substantial changes in pay practice and decisions led to notable improvements in 2018 Say-on-Pay approval rating

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Best Practices in Proxy Disclosure (CCGG)

Shareholder Engagement Executive Succession Use of Visual Aid Executive Compensation and Risk Management Director Nominee Profiles Diversity Policy

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On-going Themes

Long Longer-Term Long Long-Term Inc ncentiv ives Introduction of instruments with terms of 5+ years Use e of

• f Op

Optio ions 2 companies introducing/re- introducing options in 2017 De Decrease in n the the sole

• le use

use of

• f

Rela elativ ive TSR SR Movement towards absolute metrics Sim Simplify ifyin ing Plans Focusing management on true value-add drivers, easing communication and understanding of plans Nort North-Americ icaniz izatio ion of

• f

Can Canadia ian Co Companie ies Adoption of US or North American pay philosophy

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Case Studies – Crescent Point and Hydro One

• Minority shareholder, Cation Capital,

launches a proxy contest in April 2018

• Cation puts forward 4 nominees, of

which ISS supported two

• Shareholders voted down the proposal

and voted to re-elect all Crescent Point directors

• Key Takeaways: Board quickly engaged

shareholders in response to the dissident proposal

• Average Management Nominee director

support: 83%

• 2018 Say-on-Pay support: 38.5%
• Hydro One’s executive and director

compensation and related governance provisions drew criticism from Ontario politicians

• Province of Ontario (47% owner)

abstained from voting on Say-on-Pay. Balance of shareholders voted 92% in favor on SoP

• Key Takeaways: importance of

effectively communicating the rationale for pay framework (Canadian growth, expansion to the US, financial performance)

• Yet not immune from politicization

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Director Compensation Trends

Median TSX 60 director pay (total annual retainer) decreased to $194,852 from $199,110 58% of TSX 60 issuers use a flat fee structure (no meeting fees) Median TSX Board Chair retainer is $420,000

Director Compensation Trends

Emerging Topics

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Rewarding Growth vs Returns

ISS SS Up Updates – Return Me Metrics

• Updated pay-for-

performance methodology in 2017 to include ROE, ROA and ROIC relative to peers Boa Board Co Considerations OTPP recommendations:

• STIP metrics per share and debt adjusted
• Focus management on ROE and ROCE
• Supplement Relative TSR with Absolute

Add Addition of

• f Return Me

Metrics

• Crescent Point
• Magna
• TD

Shar Shareholder Co Community Co Concern

• Shareholders have become increasingly vocal on
• ver-emphasis of growth (v. returns) in

compensation design, particularly in extractive industries

• Ontario Teachers’ Pension Plan article, Sailing

Stone, Paulson & Co have all commented on lack

• f management and shareholder alignment

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Gender Diversity & Pay Transparency

Proxy Adv Advisors

• ISS

SS will withhold voting if no diversity policy and no females on the Board

• Gl

Glass Le Lewis will recommend against Chair

• f Nominating committee
• f Boards with no females

and no policy Pub ublic Sc Scrutiny

• UK requirement to disclose pay difference

between male and female employees; US CEO pay ratio

• Canadian banks called out for significant

gender pay gaps Ge Gender Div iversity Quo uotas

• As of 2017, 53% of companies

in the TSX60 had adopted formal gender diversity quotas Ins nstitutional Shar Shareholders

• Public Sector Investment Board (PSP)
• Ontario Teachers’ Pension Plan (OTPP)
• Caisse de Dépôt et Placement du Quebec

(CDPQ)

• State Street Global Advisors
• Blackrock

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ESG Trends

Shar Shareholder Co Community

• Increased proposals in

2018 focused on ESG factors

• OTPP recommends the use
• f a GHG emissions target

in compensation design (where relevant) ESG SG & & Co Compensation Des esign

• 77% of the TSX60 use ESG metrics (e.g.,

CNRL’s scorecard, CN Rail) Proxy Adv Advisors

• ISS

SS: : Effective 2018, includes ISS E&S QuickScore in reporting Gla Glass Le Lewis: Effective 2017, incorporates ESG risk profile into reporting Shar Shareholder En Engagement

• Larry Fink letter to CEOs, emphasis on social and

environmental impact of operations

• Focus solely on short term financial gain no

longer sufficient

U.S. Compensation

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Pay packages increased 8.5% to $11.7 million in 2017

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2018 early proxy filer data – median 1 year change in CEO total compensation

7. 7.9% 2. 2.5% 5. 5.7% 14 14.1% 5. 5.9% 7. 7.6% 6. 6.7% 11 11.0% 27 27.5% 9. 9.8% Total Sample (n=100) Consumer Discretionary (n=14) Consumer Staples (n=5) Energy (n=5) Financials (n=12) Health Care (n=10) Industrials (n=26) Information Technology (n=16) Materials (n=8) Utilities (n=4)

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2018 US Say-on-Pay Votes reveals 2% of companies falling below 50%

76% 76% 16% 16% 6% 6% 2% 2%

2018 SAY-ON-PAY ‘FOR’ VOTES

>90% 70% - 90% 50% - 70% <50%

PSUs 56% RSUs 21% Options / SARs 23%

CEO Average LTI Mix ix

▪ Greater emphasis on performance-based compensation (particularly PSUs) ▪ Multiple performance metrics are the norm with the number increasing ▪ Concerns over complexity of pay programs and too many metrics/vehicles ▪ RSUs are now more prevalent than options

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US Compensation Design reveals higher prominence

• f PSUs

Source: Steven Hall & Partners, Equilar

Shareholder sentiment and themes on pay design

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➢ Tax Cuts and Job Act of 2017 ➢ Corporate Governance Reform and Transparency Act

• f 2017

➢ Dodd-Frank Rollback ➢ Wells Fargo – Federal Reserve Restrictions ➢ Continued Trends in Shareholder Engagement ➢ Pay ratio Findings

US Snapshot: Regulatory & Related Governance

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CEO Pay Ratio findings

13x 72x 39x 19x 28x 112x 56x 37x 65x 158x 87x 53x 137x 267x 164x 81x 264x 378x 345x 136x

0x 50x 100x 150x 200x 250x 300x 350x 400x Total Sample (n=1000) Large Cap (n=218) Mid Cap (n=159) Small Cap (n=161) CEO Pay Ratios 10th %ile 25th %ile 50th %ile 75th %ile 90th %ile

Discussion

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