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The Future of Executive Compensation in Canada Domenico DAlessandro, Managing Director Bob Levasseur, Senior Consultant What We Will be Talking About Today 1. What is the current state of Executive Compensation in Canada? 2. What are business strategists contemplating and how might their thinking affect executive compensation in the future? 3. What are some examples of TSX companies that have introduced novel incentive compensation approaches for executives? 4. What are the Regulators and Proxy Advisors up to? 5. What is going on in Executive Compensation outside of the public company sector? 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 2 Lets Talk About Executive Compensation

2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 3 Sound familiar? CEO compensation surged in 2017 Executive pay continues to skyrocket Six CEO pay packages that explain soaring executive compensation Tackling soaring executive pay Want to make money like a CEO? Work for 275 years 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 4 CEO Pay Ratio Hype Example from AFL-CIO PayWatch In 2017, CEOs of S&P 500 Index companies received, on average, $13.94 million in total compensation Americas production and nonsupervisory workers earned only $38,613, on

average, in 2017 a CEO-to-worker pay ratio of 361 to 1. Criticisms of the AFL-CIO analysis from Economist Mark Perry, Professor, University of Michigan: AFL-CIO ratio is based on the average CEO total reported pay, which is 13.4% higher than the median, and includes non-cash compensation, such as pensions Worker pay calculation is cash pay only, for all companies large and small, and for an average work week of 33.7 hours vs. 50-60 for large company CEOs Using the median CEO pay, a 40 hour week for workers and the data for companies with more than 500 employees, the CEO pay ratio falls to 177 to 1 And from John Merline, Investors Business Daily (September 15, 2018) There are nearly 300,000 CEOs in the US, whose average CEO pay is $196,050 a year, according to Bureau of Labor Statistics data That works out to a CEO-to-worker pay ratio of about 4 to 1 5 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM TSX CEO Research The average TSX 60 CEOs total compensation has increased at a compound rate of about

2%: it definitely has not skyrocketed! The average LTI award grant value has flat lined, but the Short-Term Incentive award has increased by 14% over the last 4 year period. Meanwhile, our ongoing research at Gallagher indicates that the average compensation of the CEOs of the next 60 TSX companies is typically only half that of the S&P/TSX 60 companies! 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 6 What about the Banks? All of the big bank CEOs retired over the past 5 years and all their new CEOs were promoted from within In 2013, the median of the banks CEO compensation was $10.7 million

The median dropped to $10.5 million in 2014 after ScotiaBanks CEO retired The median dropped more noticeably to $9.0 million in 2015 after CIBCs, Royal Banks and TDs CEOs retired There was no change to the median in 2016, but it started to climb back again in 2017 to $10.0 million! 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 7 Canadian Western Bank: Significant Executive Compensation Decisions 8 Headlines You Never See 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM

9 Stock Options are Not necessarily evil and can be used effectively Just Know What Youve Signed up For Stock options continue to be viewed with suspicion by governance experts Yet stock options are the most tax effective vehicle for Canadian participants, and allow them to choose when to exercise over a long period of time that allowed by the income tax rules for other plans The popular media usually misrepresents stock options when reporting their value as if they were actual cash in the bank Option leverage can be spectacular or they can be worthless Multiple grants over a period of years add to their complexity Equity-based compensation is betting on the companys future success Market theory suggests eventual alignment of share price with profits However, in reality operational success and share price are not always neatly aligned, especially over a CEOs

increasingly short tenure and the typical 3 year term of a Restricted Stock Unit (RSU) or Performance Stock Unit (PSU) Stock options are not always liquid once they vest Blackout periods and SEDI option exercise monitoring by vehicles for insiders 10 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. analysts limit the liquidity of these AJGCANADA.COM Relative TSR Obsession Approximately 40% of S&P/TSX companies include relative TSR in their Performance Stock Unit plans. Does this make sense? A study by Connell University's Business School found that 52% of S&P 500 companies using TSR as a measure were influenced by proxy advisory services (e.g. ISS and Glass Lewis) to do so.

The study found that: There was no evidence that using TSR in an incentive plan improved future performance; There was a weak negative relationship between TSRs use and revenue growth; Firms with TSR-based incentive plans were typically larger, yet less profitable than average, based on 10 year compound growth rates. 2018 GALLAGHER BENEFIT SERVICES (CANADA) Source: TSR, Executive Compensation, and Firm Performance A Brief prepared for the Institute for Compensation Studies,GROUP INC. AJGCANADA.COM ILR School, Cornell University, Sept 2015

11 Relative TSR Obsession Ontario Teachers Pension Plan is bucking the trend by stressing absolute TSR over relative TSR for oil and gas exploration and production companies Questions: Is relative TSR an effective incentive motivator to a busy executive? How is it linked to the companys business plan? Is a relative TSR plan just seen by executives as an after-the fact, unpredictable reward, like a lottery? 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 12 Ruminations From the Business Strategists 2018 GALLAGHER BENEFIT SERVICES (CANADA)

GROUP INC. AJGCANADA.COM 13 Key Performance Research Findings No company can continually outperform the stock market over the long term. Creative Destruction, Foster and Kaplan, 2001 Companies that generate strong economic profit results can sustain their competitive position over the long term, but it is not easy, as many lose their initial advantages. On average, 60% of a companys economic profit can be attributed to the market segments the company selects, its unique proprietary advantages and its special capabilities, while 40% can be explained by the industry in which the company competes. The Strategic Yardstick You Cant Afford to Ignore, McKinsey Quarterly, 2013 All CEOs have aspirational long-term goals, but when it comes to priorities and plans of action, few have headlights that can shine further than two or three years.

Perspectives on the Long Term, McKinsey Quarterly, 2015 14 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM Key Performance Research Findings Managing companies for success across a range of time frames a requisite for achieving better performance and health is one of the toughest challenges in business. A companys strategy should be reflected in a portfolio of initiatives that consciously embrace different time horizons. Building the Healthy Corporation, McKinsey Quarterly, 2005 Organizations exist to create value for their customers, not just for their owners, and they grow customer value through employees who are engaged, are innovative and who provide superior customer service. Bill George on Rethinking Capitalism, McKinsey Interview, 2013 2018 GALLAGHER BENEFIT SERVICES (CANADA)

GROUP INC. AJGCANADA.COM 15 Implications for Measuring and Rewarding Performance in Executive Compensation Plans Organizations rank various measures that run along the performance spectrum beginning with operational metrics and ending with shareholder return metrics. Most publicly traded company mid-term / long-term executive compensation plan measures are biased towards the shareholder-return zone of the spectrum. Privately held companies and not-for-profit organizations tend to use incentive measures closer to the left end of the spectrum 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 16 TSX Incentive Plan design Outliers

2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 17 WARNING: Dont Try These Stunts at Home I. Instead of focusing on what the majority is doing, we have collected Outlier examples II. We have gathered certain atypical plans disclosed in information circulars. III. Some companies are trying to redress a company-specific issue.

IV. Most are trying to respond to shareholder concerns. V. We do not necessarily endorse these arrangements: Our purpose is to explore the underlying issues being addressed by these approaches. 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 18 Three Categories of Outliers 1. The Outright Bizarre These plans are of questionable design and/or may test our income tax rules.

2. Response to a Particular Event Plans that have been developed to deal with an M & A, the appointment of a new CEO, or other special circumstances. 3. Response to Board Imperatives These initiatives attempt to provide more effective ways of paying for performance or to deal with criticism of executive compensation plans from various parties. 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 19 Open-market shares purchased by company

^ Complicated escrow system used + Treasury or Cash at Board Discretion 20 ARC Resources Restricted Share Plan I. ARC Resources introduced a new long-term restricted share plan in 2015 A. date Dilutiv Treasury shares are issued to a third party trustee on the grante B. The awards have a 10 year term, with one-third vesting on Not a SDA each of the 8th, 9th and 10th anniversaries

C. D. Painless Grants will be taxed at time of share issue, not upon vesting tax Cash component provided to offset income taxes treatment E. Dividends will be reinvested within the trust Long Term Vesting II. ARC continues to use PSUs and Options in addition to the Restricted WhyShare introduce plan. this type of Plan as well as Stock Options?

Real equity is put in the hands of plan participants If the share price depreciates, losses are real 2018 GALLAGHER BENEFIT SERVICES (CANADA) Real alignment with shareholders GROUP INC. AJGCANADA.COM 21 Barrick Gold Performance-Granted Share Units I. 100% of NEO long-term incentives made in Performance Granted Share Units (PGSUs) II. PGSU grant sizes to be based on Long-Term Company Scorecard that measures achievement of 5 quantitative and 3 qualitative measures for the previous year, within a 0 to 100% range III.

Awards vest at the end of the third calendar year from the date of grant IV. After-tax value of awards used to purchase open market shares through a third party administrative agent V. Shares cannot be sold until a participant retires or leaves the company (or over two years if the participant joins a competitor) No more options Look Back Participant owns

them Long-term hold A. Participants receive dividends during the non-sale period B. Compensation Committee has authority to waive the 2018 GALLAGHER BENEFIT SERVICES (CANADA) prohibitions on the sale, transfer or other disposition of the shares GROUP INC. AJGCANADA.COM on a case-by-case basis, without shareholder approval 22 BlackBerrry On Hire CEO Compensation John Chen was appointed as BlackBerrys CEO on November 13, 2013 The stock price was trading at US $6.52 at that time His on-hire package included: 1. $1.0 million US annual salary 2. $1.2 million US guaranteed annual bonus

He took his bonus in Restricted Stock Units (RSUs) for FY2015, FY2016 and FY2017 3. A special on-hire equity grant consisting of 13.0 million RSUs worth US $84.7 RSUs to vest 25% at end of year 3 (Nov. 2016), 50% at end of year 4 (Nov. 2017) and 100% at end of year 5 (Nov. 2018) No additional LTI awards were to be made during the 5 year RSU term By February 28, 2018, BlackBerrys stock price had increased by 86% from US 6.52 to US $12.14 Mr. Chen owned 3.4 million BlackBerry shares outright by that time, including shares acquired 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. with his vested RSUs AJGCANADA.COM He also had 6.5 million unvested RSUs worth US $78.9 million 23 BlackBerrry

2018 CEO Contract Extension On March 14, 2018 (6 months before the expiry of his initial contract) Mr. Chens appointment was extended for five more years to November 3, 2023, with the following package: 1. Same $1.0 million US annual salary 2. Same $1.2 million US guaranteed annual bonus 3. 10.0 million new Restricted Stock Units, of which 5.0 million RSUs will time vest at 20% per annum starting November 3, 2019, and 5.0 million RSUs will vest 20% per annum starting November 3, 2019 provided the stock price increases in US dollars to at least $16 after year 1, $17 after year 2, to $18 after year three, $19 after year four and $20 by the end of the 5 year term Subject to immediate vesting on a change of control 4. A cash payment of US $90 million if the stock price reaches US $30 before the end of the 5 year term 5. No additional long-term incentive awards to be made for the duration of hisBENEFIT extended five

2018 GALLAGHER SERVICES (CANADA) GROUP INC. year term AJGCANADA.COM BlackBerrys closing stock price on March2414, 2018 was US $12.80 Agrium and Potash Nutrien Executive Compensation Before The Merger Agrium Potash Targeted pay at 50th percentile of US peer group PSUs and Stock Options were equally weighted

PSUs had 50% relative TSR and 50% Free Cash Flow per Share measures Options had 4 year pro-rata vesting with 10 year terms o Used Binomial model for compensation purposes and Black-Scholes for accounting purposes Defined benefit SERP o 2% of annual cash compensation that is not covered by the basic Defined Contribution Plan o Excess earnings caps applied to CEO ($2.5 million) and other NEOs ($1.0 million) o Age 60 unreduced retirement age Targeted pay at 50th percentile of a North American peer group PSUs and Stock Options were weighted 70% and 30% PSUs had 50% relative TSR and 50% CFROI/Weighted Capital measures Options had 3 year cliff vesting, with 10 year

terms New Canadian SERP o Company contributes total of 10% of annual cash compensation, including registered plan contributions US SERP o Top up 1.5% Defined Benefit Plan 2018 GALLAGHER BENEFIT SERVICES (CANADA) o Age 62 unreduced retirement age GROUP INC. AJGCANADA.COM 25 Agrium and Potash Nutrien Executive Compensation After The Merger New US peer group led to target compensation increase decisions: 1. CEO (Chuck Magro, ex-Agrium CEO) No change to salary: $1.6 million paid in C$ Annual incentive target changed from 135% to 140% of salary

Long Term Incentive target changed from 515% to 600% of salary 2. Executive Chair (Johen Tilk, ex-Potash CEO) No change to salary: $1.2 million paid in C$ Annual incentive target changed from 130% to 140% of salary Long Term Incentive target changed from 435% to 450% of salary LTIP decisions: i. PSUs and Stock Option grant values equally weighted ii. Use the accounting value of stock options for compensation decision making purposes (not the binomial model) iii. PSUs will have 100% Relative TSR vesting; to be settled in cash iv. Options have 4 year pro-rata vesting, with 10 year term (as per Agrium) SERP decisions Use the Agrium Defined Benefit Plan 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 26 Where is the Future of Equity Based compensation Headed? 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM

27 The Regulators and Proxy Advisors 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 28 Canadian Regulatory Environment I. No changes have been made to the Canadian Securities Administrators (CSA) proxy disclosure rules for executive compensation since they were last updated in 2009! II. The CSA has major concerns over increasing company use of non-GAAP performance measures in their disclosures, in press

releases and MD&As, and thus in CD&As III. No changes to the Income Tax Act affecting executive compensation have been made for many years 50% stock option deduction is regularly questioned, but usually without mentioning lack of corporate tax deduction for stock option value (unlike in the US where the employees gain is 100% taxable, but 100% deductible by the company) 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 29 OSFI Corporate Governance Guidelines OSFI updated its Corporate Governance Guideline back in 2013 OSFI subsequently released some 60 documents dealing with its expectations of the Board of Directors In June 2016 OSFI announced that it intended to streamline

and simplify its Guideline The Guideline was re-released by OSFI on September 18, 2018 to delineate more clearly the roles of the Board and Management and to incorporate the various interim updates 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 30 OSFI Corporate Governance Guidelines Boards primary responsibility is to approve and oversee: Strategy Risk Management Key Appointments Audit Plans Executive compensation falls under the Key Appointments category. Appointment, performance review, and compensation of the CEO and other key members of Senior Management, including the heads of the Oversight Functions." + succession plans for those positions Financial Institutions are still governed by Financial

Stabilization Board (FSB) guidelines. 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 31 What About The CEO Pay Ratio? I. CEO pay ratio disclosure is required by the SEC to be disclosed in US proxies starting this year, due to the Dodd-Frank Act Companies have to compare the CEOs total comp in the Summary Compensation Table to the total comp of the median employee using the same methodology The median employee could be anywhere in the world II. Initial results vary from a high of 5,908 to 1 for Weight Watchers to a low of 1 to 1 for Tesla Source: AFL-CIO PayWatch website

III. As far as we know, CEO Pay Ratio disclosure Not in the cards for Canada 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 32 Proxy Advisory Group: ISS What they say vs. ISS does not advocate that companies use TSR as the metric underlying their incentive programs Maintain appropriate pay-for-performance alignment with emphasis on long-term shareholder value ISSs P4P methodology comprises an initial quantitative screen and routine qualitative

assessment TSR measurements even over the long term are sensitive to the endpoints of the periods being measured. What they do ISS primarily uses a companys relative TSR to assess its quantitative performance: TSR, which is objective and transparent, is the primary metric ISS utilizes in evaluating pay and performance alignment Relative TSR is measured on a mid-term (3 year) basis, not on a longer-term basis ISS also looks at o the CEOs pay in the most recent year relative to the median pay of the peer group CEOs, and o the CEOs pay history over the past five years relative to the companys absolute TSR 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM

33 Proxy Advisory Group: Glass Lewis What they say What they do vs. We generally prefer that at least a portion of medium or long-term incentives be linked to specific performance targets. The following features are desirable in fullvalue equity award plans: Glass Lewis benchmarks a companys top 5 executives pay and its performance relative to a group of peer companies selected by Equilar Relative performance is measured across 5 metrics: 1. The inclusion of performance metrics

1. TSR * 2. Performance periods of at least 3 years 2. EPS growth * 3. At least one relative performance metric 3. Change in Operating Cash Flow * 4. No re-testing or lowering of performance conditions 4. ROA 5. ROE 5. Performance metrics that cannot be easily manipulated by management * Calculated based on 1, 2 and 3 year weighted averages

6. Stretching metrics that incentivize executives to strive for outstanding performance 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 7. Individual limits expressed as a % of salary 34 Questions? 2018 GALLAGHER BENEFIT SERVICES (CANADA) GROUP INC. AJGCANADA.COM 35

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