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TSX60 Proxy Review, COVID-19 & Emerging Topics WebinarJune 2021
2021 PROXY SEASON REVIEW, COVID-19 OBSERVATIONS, AND EMERGING TOPICS & TRENDSHugessen TSX60 Webinar
June 2021
3
Michelle TanPartnerHugessen – Toronto
1 Welcome
2 Highlights from 2021 Proxy Season
3 COVID-19 & Emerging Topics
4 US Pay Trends
5 Q&A and Closing Remarks
Kevin ZhuAssociateHugessen – Toronto
Blair JonesManaging DirectorSemler Brossy - NYC
Speakers Agenda
If you have any questions, please submit them on Teams. Questions will be addressed at the end of this presentation
John SkinnerManagerHugessen – Toronto
EXECUTIVE COMPENSATIONPERFORMANCE AND PAY
Scope of Study:• Companies in the TSX60 Index• 2021 Proxies commenting on Fiscal 2020 (n=57)
5
2020 & YTD 2021 PerformanceStrong post-COVID recovery across most sectors
-80%
-60%
-40%
-20%
0%
20%
40%
60%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
S&P/TSX CappedMaterials Index
S&P/TSX 60 Index
S&P/TSX CompositeIndex
S&P/TSX CappedFinancials Index
S&P/TSX Capped EnergyIndex
End of 2020
-50%
25%
100%
175%
TSX60 Index Constituents - 2019 Total Shareholder Return
-50%
25%
100%
175%
TSX60 Index Constituents - 2020 Total Shareholder Return
6
2019 – 2020 TSR
Energy
Materials
Non-Resource
A greater proportion of TSX60 constituents had positive TSRs in 2019 compared to 2020
22%
28%
-22%
23%
7
2020 YoY Median CEO TDC by IndustryCompensation in the majority of sectors saw YoY decline or stagnation in median TDC
-5%
-2% -1%
0.2%
4%
-10%
-5%
0%
5%
10%
15%
20%
Energy(n=7)
Materials(n=10)
Other(n=30)
All TSX60(n=57)
Financials(n=10)
Year-Over-Year Change in Median & Average TSX60 CEO TDC
Median Average
8
Median CEO Pay YoYMedian TSX60 compensation has seen a relatively stable increase over the last five years
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
All TSX60 (n=57) Same Constituent (n=50) Same Incumbent (n=25)
5 Year Trend in Median TSX 60 CEO TDC
2016 2017 2018 2019 2020
4% 4-yr CAGR5% 4-yr CAGR 4% 4-yr CAGR
0.2% YoY 0.2% YoY0.5% YoY
9
Actual vs. Target PayContrary to 2019, actual CEO Total Cash Compensation (“TCC”) and Total Direct Compensation (“TDC”) was less than target in 2020
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000
TDC
TCC
Compensation (CAD '000s)
2019 vs. 2020 Change in Actual and Target Median Compensation
2019 - Target 2020 - Target
2019 - Actual 2020 - Actual
10
Compensation Levels: Top 5 PayTotal top 5 pay increased year over year, CEO share of total remains stable
Legend
P75
P50/ Median
P25
Average
CEO Pay as a Multiple of NEO Pay
2019 2020
CFO 2.93x 3.03x
NEO3 2.34x 2.52x
NEO4 3.14x 2.96x
NEO5 3.68x 3.45x$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
2019 2020
CA
D 0
00
's
Aggregate Top 5 Pay
EXECUTIVE COMPENSATIONPAY MIX AND PLAN DESIGN
Scope of Study:• Companies in the TSX60 Index• 2021 Proxies commenting on Fiscal 2020 (n=57)
12
Short Term Incentive Design
2019 STIP Metrics 2020
5.3 Number of metrics used, on average 5.6
64% Scorecards with an individual component 67%
17% Board exercised discretion 47%
STIP design remains relatively stable year-over-year, with modest increases to ESG weighting
Financial69%
Operational13%
Strategic8%
ESG6%
Other4%
2019 Corporate STIP Mix
Financial70%
Operational11%
Strategic8%
ESG8%
Other3%
2020 Corporate STIP Mix
13
Long Term Incentive Design
2019 LTIP Metrics 2020
2.4 Average number of metrics used in PSUs 2.4
63% Relative TSR metric used 63%
32% Return metric used (e.g. ROE) 33%
LTIP mix continues to shift away from stock options and towards RSUs
PSUs52%
RSUs18%
Options29%
DSUs1%
2019 Average Target LTIP Mix
PSUs53%
RSUs21%
Options26%
2020 Average Target LTIP Mix
2020 SAY ON PAY RESULTS
Scope of Study:• Say on Pay results among the TSX Composite Index as of May 28, 2021 (n = 125)
15
Canadian Say on Pay ResultsThe number of companies scoring below 50% increased from none in 2020 to 5 in 2021
79%
12%6%
2% 0%
77%
14%
3% 2% 4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
>90% 80-90% 70-80% 50-70% Less than 50%
Say-on-Pay Approval Rating
Canada Say-on-Pay Voting Results 2021 vs. 2020
2020 2021
16
Canadian Say on Pay Results by IndustrySay on Pay results increased for most sectors in 2021 compared to 2020 results
91.0% 91.0%
88.0%
91.4%92.4% 92.4%
88.7%
93.4%
90.5%90.9%
89.5%
92.4%
85%
87%
89%
91%
93%
95%
Overall Materials Energy Financials
Average SOP Results by Industry(2019 - 2021)
2019 2020 2021
COVID-19 & EMERGING TOPICS
COVID-19 Observations
Implications for 2021 & Beyond• Widening of performance shoulders for financial metrics• Increased use of non-financial metrics and formal discretionary components• PSU design adjustments
Actions Taken in 2020• Salary and board retainers cuts early on• Challenge of balancing poor financial results and management performance • Adjustments to financial metrics and application of overall discretion at year-end• Equitable treatment across the organization
Shareholder & Market Reactions• Increase in failed Say-on-Pay votes• Negative proxy advisor commentary• Increase in negative press
Emerging Topics & Trends
Stock Option Taxation Changes
Environmental, Social, and Governance
Recent Initial Public Offering Activity
US PAY TRENDS
21
The most prevalent modifications involved adjusting annual incentive plan (AIP) payouts by changing metrics and/or goals, using discretion, or setting wider performance ranges to accommodate potential variability in performance outcomes.
Adjusted AIP payout approaches include applying discretion, adjusting metrics and/or targets, and widening performance ranges to accommodate potential variability.
Select S&P 500 Covid-Related Modifications
25%
9%
3% 2% 1%
Adjusted AIP Payout Granted Special Award Adjusted PSU Payout Modified OutstandingPSUs
Adjusted LTI Mix MoreTime Based
n=345
Covid Impact
22
The retail industry struggled due to changes in consumer behavior, mandated closures, and supply chain disruptions resulting from Covid-19. Most modifications occurred within the AIP rather than the LTIP.
Retail Deep Dive
28%
23%
18% 18%
13%
7% 3% 11% 10% 8% 8% 5%
Select Retail n=61
23
Auto industry manufacturers also experienced the challenges of the pandemic.
Automotive OEM and Russell 3000 Deep Dive
22%
7%
11%
4%
15% 15% 4%
Applied Discretion ModifiedOutstanding
Awards
ModifiedPerformance
Period
Reset Goals ReducedTarget/MaxOpportunity
Canceled Plan
Select Automative OEM n=27
24
Lasting Impacts from 2021 Proxy Season
Seasonal annual plans—expect
prevalent in retail, food & food service,
hospitality
New metrics—indicators of
operational success and strategic milestones
Wider performance curves
Lower performance curves/governors on
the maximums
Rebalancing of LTI—less PSU, less risk
Enhancing 2021 LTI award size…but with
risk of Say on Pay backlash
Rebalancing of formula vs. discretion
Proportionality relative to all stakeholders
Ability to explain actions transparently
and credibly
▪ The current SOP failure rate is 2.9%. Initial evaluation of the likely reasons for failure indicates that fourteen of the forty-eight failed Say on Pay votes are due in part to Covid-19 related actions.
▪ The top chart indicates 48 failures thus far. 16 of these failures are S&P 500 companies
▪ The bottom chart shows SOP results by industry, with energy companies having the highest proportion of failures
Current Say on Pay (SOP) Results
As of June 8, 2021 25
92% 87% 85% 83% 79% 79% 77% 71% 71% 70% 68%
6% 11% 10% 11% 15% 10% 16% 21% 21% 22%
19%
2% 1% 2% 2% 4%
4% 2% 6% 2% 5%
8%
1% 3% 4% 2% 7% 4% 3% 6% 2% 5%
UtilitiesAvg: 94.4%
n: 65
Materials93.0%
93
Industrials92.3%
261
ConsumerStaples92.0%
53
Financials91.2%
370
Energy89.5%
71
Real Estate90.0%
134
Health Care89.4%
200
InformationTechnology
89.1%179
ConsumerDiscretionary
89.6%165
Comm.Services87.6%
37
90%+ 70 - 90% 50 - 70% Below 50%
72% 73% 76% 75% 76% 75% 78% 75% 76% 74% 76% 78%
21% 19% 15% 17% 16% 17% 15% 16% 15% 19% 18% 16%
6% 6% 6% 6% 6% 6% 5% 6% 6% 5% 4% 4%
1.4% 2.6% 2.5% 2.4% 2.8% 1.7% 1.5% 2.6% 2.7% 2.3% 2.3% 2.9%
201190.9%2,660
37
201289.8%2,226
57
201390.6%2,253
57
201490.9%2,545
60
201590.8%2,157
61
201690.9%2,116
35
201791.7%2,356
35
201890.2%2,153
57
201990.5%2,236
60
202090.5%2,396
56
2020YTD91.0%1,667
39
202190.8%1,628
48
< 50%
50-70%
70-90%
> 90%
PERCENTAPPROVAL
Avg:n:
Failures:
2021 Say onPay Season
1 Companies outlined in the boxes received low or failing vote support in 2021. 26
ISS against recommendations (10%) are lower than they were in 2020 (11%); however, many large cap companies are experiencing increased ‘Against’ recommendations and low vote support in comparison to 2020.
Breakdown of Say on Pay Results
78%
16%
4% 3%76% 18% 4% 2%
100%-90% 90%-70% 70%-50% 50% & below
Say on Pay 2021 vs 2020
27
Themes Emerging from 2021 Say on Pay Season
Topic Detail
Spotlight on Large
Cap Companies
▪ Early evaluations of the 2021 Say on Pay season have revealed an increased focus on larger cap
companies from ISS and institutional shareholders (approximately a third of failures are
companies amongst the S&P 500)
New Challenges
with Litigation
Expenses
▪ Institutions and proxy advisors expressed new interest in greater disclosure regarding
Commitees’ incentive decision making process as it pertains to litigation expenses, with some
contending significant litigation expenses should not be excluded from incentive calculations
Special Awards
Panned
▪ Proxy advisors were critical of those who made special awards solely based on retention as well
as awards that did not have strong performance conditions or long-term vesting schedules
2021 Actions Carry
Over
▪ Some companies enhanced 2021 grants, modified go forward awards, and/or paid annual
incentives in stock in response to pandemic performance shortfalls. These actions have yet to
be evaluated
ESG Proposals ▪ Proposals have received an elevated level of support, often above 70%, involving matters such
as disclosure of EEO-1 statistics, diversity and inclusion efforts, board diversity, lobbying
payments, climate impact reporting, and emission reduction target disclosure
1 Data is sourced from 2021 Proxy Statements 28
62% of the largest 200 companies incorporate ESG in incentives, compared to 55% for the smaller 300. This follows expectations – high-profile companies face more public scrutiny and are often among the first to adopt new governance trends
ESG Metric Prevalence in Incentives
38%
29% 26% 26%
20% 17%15%
10% 9% 8% 6%4% 4% 3% 3% 3%
22% 26% 20% 23% 9% 16% 14% 12% 5% 4% 4% 1% 2% 2% 2% 2%
Metric Prevalence at Top 200 and Bottom 300 S&P 500 Companies by Revenue1
(N=500; revenue as of 5/1/2021)
ESG Metrics
29
▪ The technology sector talent market remains hyper competitive
▪ Pay levels for high-growth tech companies up 15% to 25% year-over-year for multiple senior-level roles—including individuals receiving 50%+ premiums upon joining competitors
▪ IPO/ SPAC market creating a desire for “moonshot” awards that can be as large as $1B in grant date fair value
▪ Use of one-time special awards increasing as companies look for more ways to attract and retain top talent
▪ Continued shift towards equity as a time-based currency rather than a performance-based currency—acknowledging the continued increasing proportion of pay delivered in equity as more and more tech companies eliminate cash bonus programs
▪ Bellwethers like Google, Facebook, and Apple continue to have significant impact on the talent market, though their influence has receded somewhat under the backdrop of recent IPO successes
▪ Increased employee and stakeholder activism (e.g., Amazon employees supporting shareholder proposal) has garnered significant media attention but has not had a noticeable impact on the overall talent market at FAANG companies
Trends in Tech-Industry Pay
The technology talent market continues to be strong as companies “pay-up” for experienced talent. The two “unknowns” for us to monitor over the coming year—and which could impact pay levels—include: (i) will the IPO/ SPAC market weaken,
strengthen, or stabilize, and (ii) how will companies “return to work” (or not) in the post-COVID environment?
Digital Pay Practices
Q&AIf your question was not addressed during our Q&A session, please contact [email protected]
CLOSING REMARKS
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TSX60 Proxy Webinar and DiscussionJune 2021