Governance 2012 Say on Pay ( SoP ) Landscape

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1 Executive Briefing Canada Issue 4 July 2012 Your executive compensation resource > Governance SoP in Canada Overall standings Underlying trends Year-over-year highlights SoP lessons > Contact Kennedy Lee t kennedy.lee@haygroup.com Wiclif Ma t wiclif.ma@haygroup.com Anand Parsan t anand.parsan@haygroup.com Hay Group Limited Executive Compensation National Practice 121 King Street West Suite 700 Toronto, ON M5H 3X7 Canada Governance 2012 Say on Pay ( SoP ) Landscape Say on Pay refers to the ability of shareholders to vote for or against the executive compensation pay policy of a company. SoP is mandatory and binding in some countries, such as the Netherlands, Sweden and Norway. On the other hand, countries such as Australia, Spain, the UK and the US mandate that public companies give shareholders a non-binding vote on their executive compensation. Some recent SoP developments are highlighted below: In Australia, a 2 Strikes Rule 1 has been implemented, where shareholders are provided with an opportunity to vote on whether to convene an additional meeting to remove the Board if the remuneration report is unfavourably received at two consecutive annual general meetings. Earlier this year, the UK Government proposed plans to introduce (1) a binding shareholder vote on executive pay policy, (2) a non-binding shareholder vote on the subsequent application of that pay policy and (3) a binding shareholder vote on exit payments in excess of one year s basic salary 2. Another emerging trend has been the activity of Shareholder Spring in the UK. This is a movement by shareholder activists, trade unions and environmental groups to organize shareholders to vote against measures that were seen to counter their interests, with a particular focus on remuneration packages. As part of the Dodd-Frank Act, the US made it mandatory for all of its publicly listed companies to conduct a nonbinding SoP vote, starting in early Compared to the previous year, the 2012 voting results have been largely flat. According to a June 6 th study by Semler Brossy Consulting Group, LLC 3, 40 out of 1594, or 2.5% of the companies in the Russell 3000 have failed a SoP vote, compared to 1.4% through the same date in With the exception of 3 companies which failed in both years, companies that failed in 2011 generally received more support in Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 became law on June 27, Blake Dawson, July

2 SoP in Canada Although not mandatory, SoP in Canada has gained momentum since The number of companies that have SoP s increased from almost 70 to 99 this year, with indications that several other companies are keen on adopting this policy in the future. There have been no significant changes in the overall results of the vote, despite the influx of companies that made a decision to adopt the policy this year. However, one of the few major changes year-overyear has been that of QLT Inc., Canada s first failed SoP vote. Despite being a non-binding vote, most companies take the SoP vote very seriously, actively trying to engage with shareholders to improve voting results. Not all organizations that hold a vote report the results. Of the 85 companies that reported numerical vote results, 81 had a 70% or higher approval vote. The following table summarizes the voting results as of June 19, SoP voting summary SoP result Number of companies 90% and above 65 80% to less than 90% 11 70% to less than 80% 5 Less than 70% 4 Approved with undisclosed percentages 6 Total votes conducted as of June 19, Pending 5 Non-annual votes 3 Total number of companies with SoP votes 99 Overall standings At first glance, there have not been major changes in the results of the vote compared to the previous year. When examined more closely, we observed the following: The average for vote for 2012 was 91.86% with a median of 95.52%. There is almost no change from 2011 which had an average and median vote of 93.95% and 96.60% respectively. Among companies that adopted the policy for the first time this year, the average vote was 93.2%, compared to the existing companies whose average vote was 91.45%. The minimum vote for first time adopters was 74.75%, while for existing policy adopters, it was 42.08%. QLT Inc. is the first Canadian company to have a failed SoP vote with a majority 57.92% of shareholders voting against its approach to executive compensation. Some investors in the company stated disappointment with the expansion of the company s 2000 Incentive Stock Plan, which was also voted down separately. These results came after the company was embroiled in a dispute with NB Public Equity, its second biggest shareholder. NB Public Equity launched a proxy battle to elect a dissident slate of directors TDC: Total Direct Compensation (The sum of salary, short- and long-term incentive compensation) 6 Includes option-based awards not awarded the previous year

3 Delving further into the numbers, we provide the top and bottom 10 companies for SoP voting this year along with a cursory pay for performance analysis: Top 10 companies: S&P/TSX Year TSR Annual change # Company Index Result (FY2011) in CEO TDC 5 1 Progress Energy Resources Corp. N 99.72% 7.38% % 6 2 MacDonald, Dettwiler and Associates Ltd. N 99.28% -4.94% +8.21% 3 Premium Brands Holdings Corporation N 99.20% 27.82% % 7 4 Capital Power Corporation N 99.09% 11.54% % 5 Methanex Corporation N 99.07% % -3.62% 6 Major Drilling Corporation N 99.01% 81.42% % 8 7 Bell Aliant Inc. N 98.98% 17.80% % 8 Cott Corporation N 98.94% % % 9 9 Domtar Corporation N 98.73% 9.40% % 10 Intact Financial Corporation N 98.72% 18.31% % Bottom 10 companies: S&P/TSX Year TSR Annual change # Company Index Result (FY2011) in CEO TDC 5 1 QLT Inc. N 42.08% 0.00% % 2 Canadian Pacific Railway Ltd. Y 61.67% 8.87% % 3 Agnico-Eagle Mines Ltd. Y 64.06% % % 4 MDC Partners Inc. N 66.75% % % 10 5 Yamana Gold Inc. Y 74.75% 19.03% % 6 SNC-Lavalin Group Inc. Y 75.30% % % 7 EnCana Corporation Y 75.82% % -5.54% 8 Kinross Gold Corp. Y 78.47% % % 9 Stantec Inc. N 78.51% -0.58% +3.31% 10 Magna International Inc. Y 80.26% % +2.06% Underlying trends based on 2012 data We note that among the 10 companies that received the highest SOP votes, none are on the high profile S&P/TSX 60 Index. In contrast, 7 out of 10 companies in the bottom 10 are on the higher profile S&P/TSX 60 Index. Are Say on Pay votes impacted by the increased scrutiny from being in the S&P/TSX60 Index with a widely held and sophisticated investor base? 7 Includes special awards 8 Includes an annual incentive not awarded the previous year compensation excludes options cancelled pursuant to an agreement between the CEO and the Company 10 Includes stock awards and EVARS (agreements to issue equity awards conditional upon extraordinary equity value appreciation)

4 For each of top and bottom 10 companies, the change in CEO s Total Direct Compensation ( TDC ) was compared to the 1-Year Total Shareholder Return ( TSR ) for fiscal 2011 to determine if a relationship exists between the two factors. While there was no apparent correlation between CEO compensation change and TSR for the bottom 10 companies, a strong correlation (0.673) was observed for the top 10 companies. It tends to suggest that neither pay nor performance (as measured by TSR) is sufficient for high SoP approval. Perhaps, what really matters is the alignment of pay and performance and/or the structure of the pay plans. Standings by Industry The following table outlines the average SoP vote by major industry based on the Global Industry Classification Standard ( GICS ): 2012 Number Average 2012 Volatility (standard Average 2011 Annual change 11 # Industry of companies SoP vote deviation) 2012 SoP vote ( ) 1 Diversified Telecommunication % 2.70% 91.07% +4.93% 2 Insurance % 7.70% 93.03% +1.00% 3 Commercial Banks % 3.76% 94.81% -1.87% 4 Metals & Mining % 12.17% 90.60% +1.76% 5 Oil, Gas & Consumable Fuels % 6.58% 91.89% -1.08% Diversified Telecommunication has the highest average vote and lowest volatility (potentially due to the comparatively lower number of companies) in terms of voting results. Companies within the Metals & Mining industry have the highest standard deviation, with votes ranging from 64.06% to 99.01%. Year-over-year, Diversified Telecommunications saw the highest increase in average vote, while Commercial Banks saw a slight dip in average vote by approximately 2 percentage points. Year-over-year highlights For those companies that reported numerical vote results in 2011 and 2012, the average votes dropped only 2 percentage points. We have highlighted below a sample of companies with major yearly movements. Companies with high positive change: With one of the lowest vote results last year, Thompson Creek Metals Company Inc. displayed the highest increase year-over-year, with a rise of percentage points to secure a 95.67% approval rating. The company clearly outlined some of the following points to their Management Information Circular: Full disclosure of the method used to structure the compensation for executives; The proposed changes in their compensation structure from 2011 to 2012; and 11 Reflects percentage point change in average vote. Year-over-year data does not reflect a constant sample An account of their engagement with shareholders to obtain feedback regarding their approach to executive compensation. Other characteristics common to most companies that have secured a high increase in approval vote year-over-year include: Clear disclosure of information, structured and in plain language and simple terms; Clearly demonstrated the linkage between pay and performance; Discussion of comparator group(s) and related selection criteria; and Explanation of compensation risks and measures taken to mitigate risk-taking behaviours, etc.

5 Companies with high negative change: The company with the steepest decrease in votes year-over-year was Canadian Pacific Railway Ltd. with a decline of percentage points to 61.67%. Reasons for the drop in votes might be due to the controversy that plagued the company surrounding Pershing Square, their largest shareholder. Pershing Square wanted to replace the CEO to improve performance. The fact that Canadian Pacific Railway Ltd. has consistently scored high on governance ratings and has been adhering to best compensation practices seemed to have little effect on the SoP vote outcome. MDC Partners Inc. had the second highest decrease at percentage points. It provided its CEO with approximately a 300% increase in TDC as the company s TSR fell 16% in the last fiscal year. SNC-Lavalin Group Inc., on the other hand, was also plagued with controversy during the voting season when its ex-ceo was accused of having authorized illegal payments. This could have potentially upset its shareholders and skewed the SoP vote. Perils of SoP In our view, companies should be wary of several aspects of SoP: When shareholders vote against the approach to executive compensation, it is challenging to determine what the real issues were (i.e. payment amount, plan design, or transparency in the disclosure document) and institutional investors with a major stake could skew the vote based on other motives Permitting shareholders to micromanage the company, executive pay decisions should be made by the Board in tandem with the CEO Slippery Slope: Will an advisory vote on executive compensation encourage advisory votes on other issues? 12 * Our special thanks to Sarmishta Revanoor, summer student for her contribution to this article. SoP lessons There has been a recent spark of controversy surrounding SoP on an international scale. In the UK, Shareholder Spring has already impacted 3 CEOs by focusing on the imbalance between pay and performance. Andrew Moss, ex-ceo of Aviva, purportedly resigned after intense opposition from investors regarding the company s executive pay. David Brennan, ex-ceo of Astra Zeneca, and Sly Bailey, of the Trinity Mirror, stepped down after shareholder pressure over performance and compensation structure of the company. Ironically, Moss, Brennan and Bailey all secured votes above 80% for their re-election 12. We note that the re-election votes are binding, as opposed to the non-binding nature of the SoP. US companies trail closely behind their UK peers in terms of shareholder activism and revolt, with a handful of companies receiving criticism for their compensation arrangements. Among the group of companies that had failed SoP votes, Citigroup s CEO, Vikram Pandit, has faced the most public scrutiny over his pay package and Citigroup was sued over excessive pay for the CEO. The situation is slightly different in Canada which has emerged from the financial crisis relatively intact and the prevailing wisdom is that shareholders are more forgiving so long as performance meets expectations. Hence, a higher SoP voting approval rate in comparison to other countries. Most Canadian companies have been focusing on improving their SoP results, to ensure that they do not end up near the bottom of the list. However, recent incidents such as Canadian Pacific Railway, SNC-Lavalin and QLT Inc. might serve as a wake-up call for Canadian Boards signaling that expectations are changing. We feel shareholders may use SoP as a venue for expressing non-binding opinions, which may not be compensation-related. As we have seen in other countries, SoP does have influence and it s significance is increasing here in Canada.

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