August, 2015 | Issue 5

EXECUTIVEBRIEFINGCANADA

Your executive compensation resource

MORE CANADIAN COMPANIES ARE ADOPTING SAY ON PAY Say on Pay

Highlights

Canadian SoP landscape

Historical trends & performance

Top & bottom players in Canada

Lessons learned

Shareholders becoming more vocal

2015 HIGHLIGHTSn Within a 12-month period, the number of S&P/TSX companies with a Say on Pay (“SoP”) policy has increased to over 140. Two of the twelve new additions are on the Top 10 SoP list ― Turquoise Hill Resources and SmartREIT (formerly Calloway Real Estate).

n About 20% of S&P/TSX60 companies still do not have a SoP policy.

n As of mid-June 2015, three companies failed the SoP vote ― Barrick Gold, CIBC and Yamana Gold.

n Compensation Committee members of those companies that have failed SoP are more likely to receive a withheld vote on director election.

Canada continues to have no SoP legislation requiring either binding or non-binding votes. Yet many Canadian issuers have voluntarily adopted an advisory vote on executive pay as a means to foster shareholder engagement, or simply due to

shareholder desire. As of mid-June 2015, over 140 Canadian companies have adopted SoP. Twelve of them implemented an advisory in 2015 (Table 1).Among the 12 companies whichheld SoP votes for the first time in 2015, the majority are either

energy or materials companies. Despite their varying annual TSR performance, the majority received strong SoP support (over 90%) from their shareholders.

Twelve (20%) S&P/TSX60 companies still do not have a SoP policy. They are mostly “controlled” companies whose voting shares are held by an individual or a small group of majority shareholders.

CURRENT CANADIAN SOP LANDSCAPE

Table 1: Companies that implemented SoP in 2015

Company Industry "For" vote TSR

1 Turquoise Hill Resources Ltd Materials 99.8% 2%

2 SmartREIT (formerly Calloway REIT) Real Estate 99.4% 15%

3 Inter Pipeline Ltd Energy 98.0% 45%

4 Emera Inc Utilities 97.7% 32%

5 Pason Systems Inc Energy 97.7% -3%

6 Bankers Petroleum Ltd Energy 97.1% -26%

7 Dundee Precious Metals Inc Materials 97.1% -11%

8 Alacer Gold Corp Materials 94.9% 8%

9 TransGlobe Energy Corp Energy 91.3% -43%

10 Dominion Diamond Corp Materials 89.9% 37%

11 First Majestic Silver Corp Materials 85.6% -44%

12 Ener�ex Ltd Energy 85.5% 11%

* Annual TSR from 12/31/2013 to 12/31/2014

Canadian Tire Corporation

Say on Pay 2

S&P/TSX60 Companies without SoP

95 - 100% 90 - 95% 85 - 90% 80-85% < 80%

20142013

49%SoP “For”higher than 95%

52%SoP “For”higher than 95%

20152014

53%SoP “For”higher than 95%

Canadian average SoP had a noticeable downswing from 2011 to 2013.  Were the SoP results more dispersed or more clustered over the years?  We find that SoP results were more scattered in

2013 with the highest dispersion, as measured by standard deviation (Figure 1).  Since 2013, average SoP has rebounded with a lower dispersion. Interestingly, the number of companies achieving an

approval rating of 95% or higher has grown over the past three years ― from 49% in 2013 to 52% in 2015 (Figure 2).

HISTORICAL TREND & 2015 PERFORMANCE

Figure 1: Average "For" vote ― Canada

Figure 2: Canadian SoP voting results from 2013 to 2015

Say on Pay 3

94.0%

89.6%

92.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

87%

88%

89%

90%

91%

92%

93%

94%

95%

2011 2012 2013 2014 2015

StandardDeviation

Average“For”

Following the same pattern in 2014, a number of real estate companies (i.e., Crombie and SmartREIT (formerly Calloway REIT)) continue to win high SoP approval this year. On the other hand, mining companies such as First Quantum, St Andrew, and Turquoise Hill, continue to receive very strong SoP support despite falling commodity prices. It is worth mentioning that Aurico Gold Inc. had a significant improvement on SoP from the bottom 10 in 2014 to a 98.2% vote in 2015 by taking some positive actions including:

n more interactions with shareholders;

n clearer disclosure of compensation plans; and

n better alignment between pay and performance.

2015 TOP AND BOTTOM PLAYERS IN CANADATable 2: Top 10 2015

Company Industry "For" vote TSR

1 Trican Well Service Ltd Energy 99.9% -56%

2 Turquoise Hill Resources Ltd Materials 99.8% 2%

3 Celestica Inc Technology 99.5% 24%

4 Kingsway Financial Services Inc Insurance 99.5% 58%

5 First Quantum Minerals Ltd * Materials 99.4% -13%

6 Crombie Real Estate Investment Trust * Real Estate 99.4% 2%

7 SmartREIT (formerly Calloway REIT) Real Estate 99.4% 15%

8 St Andrew Gold�elds Ltd * Materials 99.3% -11%

9 West Fraser Timber Co Ltd * Materials 99.1% 29%

10 Capital Power Corp Utilities 98.8% 28%

* Top 10 in 2014

Say on Pay 4

CIBC surprised the investor community by being the first Canadian bank to fail SoP. The bank was criticized for providing its exiting Chief Executive O�cer and Chief Operating O�cer with overly generous pensions upon acceleration of their retirement.

In the case of Barrick Gold, it is the second time the gold miner failed SoP. In 2013, only 14.8% of the shareholders voted for the advisory resolution. After a

strong rebound last year, share-holders were once again disap-pointed with its approach to executive compensation. In response to a preliminary SoP count at the company's 2015 annual meeting, the Board Chair agreed to refine the executive compensation system, including his own pay.

Yamana Gold awarded special cash bonuses to its senior executives upon completing the acquisition of

Osisko Mining in 2014 while the share price was down significantly in the same year. The Chairman and CEO at Yamana decided to “return” 450,000 performance share units that were granted to him last year following the Osisko Mining transaction. “I hope that will be seen as a positive sign,” said the Yamana Chair-man and CEO.

2015 TOP AND BOTTOM PLAYERS IN CANADA

LEARNED LESSONS

Table 3: Bottom 10 2015 Company Industry "For" vote TSR

1 Baytex Energy Corp Energy 81.9% -50%

2 Ballard Power Systems Inc Capital Goods 80.2% 47%

3 Agnico Eagle Mines Ltd * Materials 77.2% 4%

4 Transat AT Inc Consumer Services 76.7% -31%

5 Penn West Petroleum Ltd Energy 73.7% -70%

6 Imax Corp † Media 63.3% 15%

7 MDC Partners Inc * Media 53.0% 1%

8 CIBC Banks 43.2% 15%

9 Yamana Gold Inc Materials 37.3% -48%

10 Barrick Gold Corp Materials 26.6% -32%

* Bottom 10 in 2014

† Delisted from S&P/TSX in Jan 2015 but continues to trade on NYSE

Say on Pay 5

Authors:Kennedy Lee | kennedy.lee@haygroup.com | T +1.416.815.6443Wiclif Ma | wiclif.ma@haygroup.com | T +1.416.815.6377We would like to thank Emma Yang for her contributions to this article.

Table 4: Average election withheld votes

Other board members 1% 8% 3%

Compensation committee members 8% 25% 17%

While no single director received more than 50% withheld vote, the risk of not being elected is suddenly becoming more apparent with the introduction of majority voting which came into e�ect in June 2014. Major voting provisions generally require:

n any director who receives more “withheld” than “for” votes will be required to tender his or her resignation immediately to the board of directors except in the context of a contested meeting

n the board of directors will accept or refuse (but only in

exceptional circumstances) a tendered resignation within 90 days of the relevant meeting.

To some critics, institutional investors and shareholder activists, this may still not be enough given the recent experience. This has prompted the Ontario Securities Commission (“OSC”) to re-examine its position regarding:

n whether boards are adjusting compensation practices in response to SoP results

n whether mandatory SoP would result in improved executive compensation practices.

Executive compensation disclosure and the SoP land-scape in the U.S might become even more complicated as reflected in the recent Securities and Exchange Commission (“SEC”)’s proposals on CEO pay-ratio and pay versus performance. While we do not expect the proposed SEC rules to be directly imported to Canada, we believe there will still be a significant impact on Canadian issuers and their shareholders’ preferences.

SHAREHOLDERS ARE BECOMING MORE VOCAL

Say on Pay 6

Dissatisfied shareholders have become more vocal in articulating their discontent. This year, we saw more shareholders extending their discontent to the election

of directors, especially those on the Compensation Committee. As shown in Table 4 below, directors sitting on the Compensation Committee of the three companies

that have failed SoP are more likely to receive a withheld vote on their election than other members of the board.

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