25 Years of Leadership in Corporate Governance Leadership Expertise Integrity

SIO Responsible Investment Conference 2013

Governance: Executive Compensation

Debra Sisti, Head of Canadian Research [email protected]

416-687-6265 ISS | Institutional Shareholder Services Inc.

www.issgovernance.com

Background and Context

ISS Canada reviews over 2600 Canadian public company proxy circulars each year in order to assess and make voting recommendations on voting items including boards, equity plans, advisory Say on Pay resolutions, and shareholder proposals.

Equity plans proposals and advisory Say on Pay resolutions are evaluated using quant models to provide relative assessment, plus qualitative analysis.

In developing policy guidelines for Canadian compensation issues, ISS undertakes an annual comprehensive and inclusive client outreach program to discuss current trends and issues and obtain client input which informs the development of policy guidelines applicable to these matters. Broader market outreach is also undertaken.

ISS | Institutional Shareholder Services Inc.

Agenda

•

Where have we been?

•

Where are we going?

ISS | Institutional Shareholder Services Inc.

Executive Compensation Through the Ages Pre-Financial Crisis

• • • • • • 70’s – shareholders rail against Restricted Stock awards: share giveaways, pay for breathing, not performance-based, provide value regardless; 70’s - 80’s – Stock Options replace RS as the equity award of choice – but not expensed until 1982 in Canada, later in U.S.; 2006 – option backdating practices condemned; 2005-2010 executive compensation always top 3 in ISS survey of governance issues; Pre-2008 biggest hurdle for shareholders was lack of disclosure, Shareholder Proposals: 2008 proxy season 1 st Advisory Say on Pay shareholder proposals at big five banks receive average support of 40.5% of votes cast (pre-approval or binding request proposal support 3.8%); ISS | Institutional Shareholder Services Inc.

What was Hot 2008?: Top SP Issues (submitted

30 25 20 15 10 5 0 M aj . E le ct io n Say o Pay n -P Pay er fo rm an ce SE RP Ot s he r Co Ri sk m Bo /I p ar nt d er Go nal v Co nt Cl ro im ls at e & Hu En m v an R Bo ig ar Su ht d st Di ai s ve nab rs ili ity ty R ep or t 2006 2007 2008

ISS | Institutional Shareholder Services Inc.

Executive Compensation Through the Ages Post-Financial Crisis

• • Turning Point: 2009 new Canadian compensation disclosure requirements took effect; 2009 – 13 more Advisory Say on Pay SPs receive majority support; 3 2 1 0 8 7 6 5 4 Category 1 Category 2 ISS | Institutional Shareholder Services Inc.

Shareholder Proposals 2010 - 2013

YEAR

2010 2010 2010 2010 2011 2011 2011 2011 2011 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012

PROPONENT

MERITAS ETHICAL FUNDS MEDAC LOWELL WEIR MEDAC MEDAC MEDAC NEI INVESTMENTS NEI INVESTMENTS MERITAS/MEDAC/MONTRUSCO NEI INVESTMENTS MEDAC MEDAC MEDAC MEDAC MEDAC YOLANDA DEFOE LOWELL WEIR

COMPENSATION CATEGORY

SAY ON PAY SUSTAINABILITY PAY DISPARITY REPRICING SAY ON PAY PAY DISPARITY PEER BENCHMARKING PERFORMANCE METRICS PERFORMANCE METRICS SAY ON PAY PERFORMANCE METRICS PEER BENCHMARKING PAY FOR PERFORMANCE COMP CONSULTANTS COMP COMMITTEE RELATIVE PAY FOR PERFORMANCE PENSIONS BINDING PAY APPROVAL NEI INVESTMENTS PERFORMANCE METRICS

ISSUE

ADVISORY VOTE ON PAY LINK EXEC COMP TO ESG GOALS DISCLOSE RATIO VS AVG EMPLOYEE OBTAIN SHAREHOLDER APPROVAL ADVISORY VOTE ON PAY ADOPT POLICY ON ETHICAL RATIO INCREASE DISCLOSURE PEER GROUP INCLUDE NON-FINANCIAL METRICS DISCLOSE RATIONALE FOR SINGLE METRIC ANNUAL ADVISORY VOTE ON PAY DISCLOSE MEASUREABLE PERFORMANCE TARGETS DISCLOSE BENCHMARKING EXERCISE OPTIONS BASED ON PERFORMANCE INCREASED DISCLOSURE RE EXTERNAL ADVISORS MINIMUM 7 YRS RELEVANT EXPERTISE FOR COMMITTEE DISCLOSE RELATIVE PAY VS RELATIVE PERFORMANCE EQUAL PENSION CALC/UNREDUCED AFTER 35 YEARS <60% SoP SUPPORT REQUIRES BINDING VOTE NEXT YEAR ASSESS RISKS AND BENEFITS OF SINGLE METRIC ISS | Institutional Shareholder Services Inc.

AVERAGE SUPPORT

42.1%/13 WD WD 7.87% 2 OMITTED 8.88% 7.50% 8.0%/ 2 WD 35.9%/ 1 WD 27.7% 40.4%/ 1 WD 46.8%/ 1 WD 3.53% 5.65% 8.76% 2.46% 3.60% 2.73% 1.93% 46.75%

Shareholder Proposals 2010 – 2013 cont.

2013 2013 2013 2013 2013 2013 2013

YEAR

2013 2013 2013 2013

PROPONENT

MEDAC MEDAC MEDAC MEDAC MEDAC NEI INVESTMENTS MEDAC MEDAC LOWELL WEIR KEN CHRISTIE KEN CHRISTIE

COMPENSATION CATEGORY

SAY ON PAY PENSION PENSION PAY DISPARITY PAY DISPARITY PEER BENCHMARKING RISK MITIGATION COMP CONSULTANTS DIRECTOR COMPENSATION BINDING VOTE ON PAY CAP EXECUTIVE COMPENSATION

ISSUE

ADVISORY VOTE ON RESPONSE REPORT ON PENSION OVERSIGHT ADOPT POLICY OF SAME PENSION OFFERING TO ALL LIMIT CEO COMP TO 30X AVERAGE WORKER DISCLOSE EQUITY RATIO CEO PAY TO MEDIAN EMPLOYEE REPORT ON RISKS OF HORIZONTAL BENCHMARKING ADOPT CLAWBACK ADOPT POLICY TO ENSURE ADVISOR INDEPENDENCE SET AGGREGATE MAXIMUM AT $3 MILLION SHAREHOLDER APPROVAL OF EXEC AND DIRECTOR PAY 25X ANNUAL SALARY OF LOWEST PAID EMPLOYEE

AVERAGE SUPPORT

4.9% 3.45% 4.49% 2.15% 4.48% ALL WD 8.94% 2.79% 3.07% 3.90% 1.10% ISS | Institutional Shareholder Services Inc.

Canadian Say on Pay Update

Voluntary Adoptions Increase/ Average Support Marginally Decreases 14 12 10 2 0 8 6 4 Category 1 Category 2 ISS | Institutional Shareholder Services Inc.

Category 3 Category 4

Global Developments

•

Australia

“2 Strikes” law is in its second year in which >100 firms have already received their first strike (majority Against Say on Pay resolution) – those that receive a second strike this yeaer will have to put the entire board up for election within 90 days.

• • •

U.K.

Awaiting final rollout of pending legislation that would require binding votes on prospective pay plans.

Principles released by NAPF and 4 other institutions recommend shares granted to top executives be held for at least 10 years, even if they leave the company.

Trade Union Shareowners new guidelines for asset managers cap top executive pay at 20X lowest paid •

Switzerland

Referendum passed March 3, 2013 requires binding shareholder votes on executive AND director pay, and a ban on severance payments.

•

Germany

Revisions to the German Corporate Governance Code require caps on total executive compensation as well as individual components, and standardized reporting.

•

Israel

December 14, 2012 new law came into effect requiring AGM ballot on future pay plans – plans voted down (less than majority support) have to be reconsidered by the Board •

France

Planned legislation would require binding shareholder votes on pay and caps or bans on golden parachutes.

ISS | Institutional Shareholder Services Inc.

Challenges to sustainable pay structures

• • •

Board Oversight

Independence of compensation committee/external advisors (AND directors compensated in the same manner as management); Board qualifications and expertise Balance of board power – independent Chair/former execs on board/long tenured directors • • • • • • • •

Unacceptable Pay Structure

guaranteed pay – lengthy contracts/guaranteed bonus/time-vesting equity; • discretionary payouts – lack of pre-established rigorous and disclosed performance targets (including non-financial tied to KPMs) no disclosure of achievement; LTIP equity vesting of less than 3 years – (minimal % of otherwise performance-based awards); Large “retention” grants (sign-on, promotion, underperformance); Reliance on single performance metric for both short and long-term incentive pay; Use of only time-vesting incentive equity (stock options, RSUs); Excessive termination arrangements, change in control basis/multiple/definition, pension basis; Lack of clawback, anti-hedging/pledging policies, shareholding requirements

SHORT TERM FOCUS OF INVESTORS

ISS | Institutional Shareholder Services Inc.

Pandora is out of the box – what now?

• • • • • •

Establish comprehensive voting policies – and it goes without saying VOTE your proxies; Engage with corporate issuers re pay concerns; File shareholder proposals that are reasonable and well drafted; Encourage additional Say on Pay Adoption; Press for majority voting for director elections Advocate for what is appropriate for THIS Comply-or Explain market;

ISS | Institutional Shareholder Services Inc.

Legal Disclaimer

This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is the property of Institutional Shareholder Services Inc. (“ISS”), its subsidiaries, or in some cases third party suppliers. The Information may not be reproduced or redisseminated in whole or in part without prior written permission of ISS.

The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies. Issuers mentioned in this document may have purchased self-assessment tools and publications from ISS Corporate Services, Inc. (“ICS”), a wholly-owned subsidiary of ISS, or ICS may have provided advisory or analytical services to the issuer. No employee of ICS played a role in the preparation of this document. Any issuer that is mentioned in this document may be a client of ISS, ICS, ISS’ parent company, MSCI Inc., or a subsidiary of MSCI Inc., or may be the parent of, or affiliated with, a client of ISS, ICS, MSCI Inc., or another MSCI Inc. subsidiary.

The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION. Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.

ISS | Institutional Shareholder Services Inc.