2018 PROXY SEASON REVIEW & OTHER TOPICS Hugessen Breakfast Seminar | June 13, 14 & 20 2018
Agenda for Today’s Event Welcome Highlights from 2017 Proxy Season Comments from Guests Open Discussion Closing Remarks 2
Highlights from 2018 Proxy Season 3
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) 4
2017 Sector Performance – solid year following a strong 2016 15% 10% 8.53% 5.74% 5% 5.23% 3.89% 0% -5% -10% -13.22% -15% -20% -25% -30% 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 5
2017 Growth – resource sector underperforms non- resources TSX60 Index Constituents - 2016 Total Shareholder Return 200% Resource 37% 150% Non-Resource 95% 100% 2016 50% 0% -50% -100% TSX60 Index Constituents - 2017 Total Shareholder Return 75% Resource -9% 50% Non-Resource 12% 25% 2017 0% -25% -50% 6
Is CEO Pay Being “Ratcheted” Up? 5 Year Trend in Median TSX 60 CEO TDC $10,000,000 2% CAGR 3% CAGR 3% CAGR $9,000,000 15% 10% $8,000,000 12% $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 All TSX60 (n=59) Same Constituent (n=51) Same Incumbent 5 Years (n=30) 7
2017 CEO Pay Trends – material increase in STIP TSX60: : Year ar-Over-Year ar Chan anges in Actual Compensat ation 2016 & 2017 $1,200 8% Salary $1,116 $3,257 22 % TCC $2,680 $8,368 12 % TDC $7,447 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 CAD '000s 2017 2017 2016 2016 8
2017 Industry Pay – a strong year for materials and financials Year-over-Year Change in Median TSX 60 CEO TDC Materials (n=10) 25% 21% TSX60 (n=60) 20% 13% Financials (n=10) 15% 9% 10% 5% 0% -5% Other (n=27) Energy (n=13) -10% -3% -3% -15% -20% -25% -30% Median Average 9
2017 Same Incumbent YOY Actual Pay More instances of companies increasing YOY same incumbent pay – mostly in the 5-25% range Year-over-Year Change in Same Incumbent Actual Total Direct Compensation (n=51) 10 10 9 9 8 Number of Companies 6 6 5 4 4 3 2 2 2 1 0 <-50% -25% to - -10% to - -5% to - 0% to -5% 0% to 5% 5% to 10% 10% to 25% to >50% 50% 25% 10% 25% 50% 10
TSX60 Incentive Design – No significant change in STIP design 2016 Average STIP Scorecard Weight 2017 Average STIP Scorecard Weight Ope peratio ional Strategic Strategic 17% 17% Ope peratio ional 8% 8% 7% 7% 15% 15% Oth ther Oth ther 20% 20% Financial al 17% 17% 55% 55% Financial al 61% 61% 2017 STIP Metrics 2016 STIP Metrics Average number of types of metrics used: 2.8 Average number of types of metrics used: 2.6 57% have an individual component 60% have an individual component 11
Lower prevalence of “override” discretion in 2017 Applied Adjustment to metrics in light of Discretion acquisition timing 13.3% Decrease of CEO salary and STIP Did not Apply Downward adjustment to corporate Discretion 86.7% performance score Downward discretion to offset favourable impact of US operations sale 13% of the TSX60 applied discretion in 2017 2017, Increase to qualitative adjustment for CEO representing a decrease in use of discretion and top 4 NEOs from 2016 2016 (29%) Note: n=59 12
CEO Pay Mix and Plan Design: LTI Mix Long-term incentive plan mix generally consistent year over year DSUs DSUs DS 2% 3% 3% Options Options 34% 34% PSUs 46% PSUs 48% RSUs 15% RSUs 18% 2016 2016 2017 2017 13
Pay Mix and Plan Design: PSU Framework Little change in PSU performance design 2016 2016 2017 2017 63% 63% 63% 63% Use of relative TSR metric 33% 33% 30% 30% Use of return metric (e.g. ROE) 17% 17% 10% 10% Use of operational metric (e.g. safety) 2.0 2.0 1.7 1.7 # of performance metrics on average 14
Say-on-Pay results of TSX listed companies in 2018 Overall, we see a similar pattern in voting results as 2017 Canada Say-on-Pay Voting Results 2018 vs. 2017 2018 2017 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% >90% 80-90% 70-80% 60-70% 50-60% <50% Results as of June 20 th , 2018 15
Say on Pay Results: Influence of ISS and Glass Lewis on TSX60 Companies 100% 94% 91% 90% 80% 20188 Average SOP Score 70% 60% 54% 50% 40% 30% 20% 10% 0% n=40 n=2 n=1 16
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 “AGAINST” 2018 SoP Company Recommendation from Key Issue Result Proxy Advisor 37% Pay and performance disconnect Pay and performance disconnect 47% Pay and performance disconnect 70% 17
Companies Responding to Low Say-on-Pay in 2017 Substantial changes in pay practice and decisions led to notable improvements in 2017 Say-on-Pay approval rating Company Co Key Issue Resp espon onse So SoP Resu esult lt • Engaged with shareholders • Coal negotiation and transition metric added to STIP Pay and • Reduce option weighting by 5% 47% → 89% performance disconnect • Increase PSU weighting by 5% • Removed Enbridge as a peer • No discretionary awards considered • Engaged with shareholders • Cancelled CEO’s front -loaded sign-on Pay and PSU grant 68% → 95% performance • STIP payouts purely formulaic disconnect • CEO LTIP mix change from pure PSUs to mix of PSUs, RSUs, Stock Options 18
Companies Responding to Low Say-on-Pay in 2017 Substantial changes in pay practice and decisions led to notable improvements in 2018 Say-on-Pay approval rating Co Company Key Issue Resp espon onse So SoP Resu esult lt • Engaged with shareholders • Removal of Working Capital and Misalignment of Cost/Oz metrics, addition of value distribution Strategic Initiatives metric 68% → between 95% • 2-Year relative TSR replaced with shareholders and 50/50 split between 1-Year and 3- executives Year relative TSR • Clarified equity award metrics • Adoption of clawback • Improved disclosure of STIP metrics and discretionary bonuses 73% → Poor overall design • 96% STIP scorecard reweighting (50% discretionary to 25% discretionary) • Introduction of PSU plan 19
Best Practices in Proxy Disclosure (CCGG) Shareholder Director Nominee Use of Visual Aid Engagement Profiles Executive Executive Compensation and Diversity Policy Succession Risk Management 20
On-going Themes Long Longer-Term Long Long-Term Use e of of Op Optio ions Inc ncentiv ives 2 companies introducing/re- Introduction of instruments introducing options in 2017 with terms of 5+ years De Decrease in n the the sole ole use use of of Simplify Sim ifyin ing Plans Rela elativ ive TSR SR Focusing management on true Movement towards absolute value-add drivers, easing metrics communication and understanding of plans North-Americ Nort icaniz izatio ion of of Can Canadia ian Co Companie ies Adoption of US or North American pay philosophy 21
Case Studies – Crescent Point and Hydro One • • Minority shareholder, Cation Capital, Hydro One’s executive and director launches a proxy contest in April 2018 compensation and related governance provisions drew criticism from Ontario • Cation puts forward 4 nominees, of politicians which ISS supported two • Province of Ontario (47% owner) • Shareholders voted down the proposal abstained from voting on Say-on-Pay. and voted to re-elect all Crescent Point Balance of shareholders voted 92% in directors favor on SoP • Key Takeaways: Board quickly engaged • Key Takeaways: importance of shareholders in response to the effectively communicating the rationale dissident proposal for pay framework (Canadian growth, • Average Management Nominee director expansion to the US, financial support: 83% performance) • 2018 Say-on-Pay support: 38.5% • Yet not immune from politicization 22
Director Compensation Trends Median TSX 60 director pay (total annual retainer) decreased to $194,852 from $199,110 Director 58% of TSX 60 issuers use a flat fee Compensation structure (no meeting fees) Trends Median TSX Board Chair retainer is $420,000 23
Emerging Topics 24
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