25 Years of Leadership in Corporate Governance Leadership ExpertiseIntegrity ISS | Institutional Shareholder Services Inc. SIO Responsible Investment Conference 2013 Governance: Executive Compensation Debra Sisti, Head of Canadian Research

ISS | Institutional Shareholder Services Inc.2 2 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.3 3 Agenda Where have we been? Where are we going?

ISS | Institutional Shareholder Services Inc.4 4 Executive Compensation Through the Ages 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; 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%); Pre-Financial Crisis

ISS | Institutional Shareholder Services Inc.5 5 What was Hot 2008?: Top SP Issues (submitted

ISS | Institutional Shareholder Services Inc.6 6 Executive Compensation Through the Ages Turning Point: 2009 new Canadian compensation disclosure requirements took effect; 2009 – 13 more Advisory Say on Pay SPs receive majority support; Post-Financial Crisis

ISS | Institutional Shareholder Services Inc.7 7 Shareholder Proposals YEAR PROPONENTCOMPENSATION CATEGORYISSUEAVERAGE SUPPORT 2010MERITASSAY ON PAYADVISORY VOTE ON PAY42.1%/13 WD 2010ETHICAL FUNDSSUSTAINABILITYLINK EXEC COMP TO ESG GOALSWD 2010MEDACPAY DISPARITYDISCLOSE RATIO VS AVG EMPLOYEE7.87% 2010LOWELL WEIRREPRICINGOBTAIN SHAREHOLDER APPROVAL2 OMITTED 2011MEDACSAY ON PAYADVISORY VOTE ON PAY8.88% 2011MEDACPAY DISPARITYADOPT POLICY ON ETHICAL RATIO7.50% 2011MEDACPEER BENCHMARKINGINCREASE DISCLOSURE PEER GROUP8.0%/ 2 WD 2011NEI INVESTMENTSPERFORMANCE METRICSINCLUDE NON-FINANCIAL METRICS35.9%/ 1 WD 2011NEI INVESTMENTSPERFORMANCE METRICSDISCLOSE RATIONALE FOR SINGLE METRIC27.7% 2012MERITAS/MEDAC/MONTRUSCOSAY ON PAYANNUAL ADVISORY VOTE ON PAY40.4%/ 1 WD 2012NEI INVESTMENTSPERFORMANCE METRICSDISCLOSE MEASUREABLE PERFORMANCE TARGETS46.8%/ 1 WD 2012MEDACPEER BENCHMARKINGDISCLOSE BENCHMARKING3.53% 2012MEDACPAY FOR PERFORMANCEEXERCISE OPTIONS BASED ON PERFORMANCE5.65% 2012MEDACCOMP CONSULTANTSINCREASED DISCLOSURE RE EXTERNAL ADVISORS8.76% 2012MEDACCOMP COMMITTEEMINIMUM 7 YRS RELEVANT EXPERTISE FOR COMMITTEE2.46% 2012MEDACRELATIVE PAY FOR PERFORMANCEDISCLOSE RELATIVE PAY VS RELATIVE PERFORMANCE3.60% 2012YOLANDA DEFOEPENSIONSEQUAL PENSION CALC/UNREDUCED AFTER 35 YEARS2.73% 2012LOWELL WEIRBINDING PAY APPROVAL<60% SoP SUPPORT REQUIRES BINDING VOTE NEXT YEAR1.93% 2012NEI INVESTMENTSPERFORMANCE METRICSASSESS RISKS AND BENEFITS OF SINGLE METRIC46.75%

ISS | Institutional Shareholder Services Inc.8 8 Shareholder Proposals 2010 – 2013 cont. YEAR PROPONENTCOMPENSATION CATEGORYISSUEAVERAGE SUPPORT 2013MEDACSAY ON PAYADVISORY VOTE ON RESPONSE4.9% 2013MEDACPENSIONREPORT ON PENSION OVERSIGHT3.45% 2013MEDACPENSIONADOPT POLICY OF SAME PENSION OFFERING TO ALL4.49% 2013MEDACPAY DISPARITYLIMIT CEO COMP TO 30X AVERAGE WORKER2.15% 2013MEDACPAY DISPARITYDISCLOSE EQUITY RATIO CEO PAY TO MEDIAN EMPLOYEE4.48% 2013NEI INVESTMENTSPEER BENCHMARKINGREPORT ON RISKS OF HORIZONTAL BENCHMARKINGALL WD 2013MEDACRISK MITIGATIONADOPT CLAWBACK8.94% 2013MEDACCOMP CONSULTANTSADOPT POLICY TO ENSURE ADVISOR INDEPENDENCE2.79% 2013LOWELL WEIRDIRECTOR COMPENSATIONSET AGGREGATE MAXIMUM AT $3 MILLION3.07% 2013KEN CHRISTIEBINDING VOTE ON PAYSHAREHOLDER APPROVAL OF EXEC AND DIRECTOR PAY3.90% 2013KEN CHRISTIECAP EXECUTIVE COMPENSATION25X ANNUAL SALARY OF LOWEST PAID EMPLOYEE1.10%

ISS | Institutional Shareholder Services Inc.9 9 Canadian Say on Pay Update Voluntary Adoptions Increase/ Average Support Marginally Decreases

ISS | Institutional Shareholder Services Inc.10ISS | Institutional Shareholder Services Inc.10 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.11ISS | Institutional Shareholder Services Inc.11 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.12ISS | Institutional Shareholder Services Inc.12 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;

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