www.mercer.com

19 May 2011

Executive Remuneration 2011: Global trends

Will Ferguson, Los Angeles

Mark Hoble, London

Hans Kothuis, Hong Kong

Gregg Passin, New York

Lisa Slipp, Toronto

1Mercer

Today’s speakers

Will Ferguson, moderatorLos Angeles+1 213 346 2240will.ferguson@mercer.com

Mark HobleLondon+44 20 7178 5725mark.hoble@mercer.com

Hans KothuisHong Kong+852 3476 3817hans.kothuis@mercer.com

Gregg PassinNew York+1 212 345 1009gregg.passin@mercer.com

Lisa SlippToronto+1 416 868 7665lisa.slipp@mercer.com

Photo

2Mercer

Agenda

� Today’s landscape: Executive remuneration pressures around the world

� Trends in North America, Europe and Asia Pacific

� Panel discussion: How are global companies responding?

� Q&A

Submit questions at any time:Use the Q&A tab on the bottom right-hand side of your screen

Today’s landscape: Executive remuneration pressures around the world

4Mercer

The changing face of executive compensationA global convergence of trends

Worldwide pressures

� Supply and demand

� Heightened scrutiny

� Pay for performance

� Pay levels

� Clawbacks

� Transparency

5Mercer

Global observations and trends – 2011

Regulation

� US joins other countries with say-on-pay

Remuneration

� Global financial services regulation continues

Governance

� Pay mix– US and Canada have heavier emphasis on short-and long-term incentives; Europe has stronger focus on fixed pay and benefits; Asia has heaviest emphasis on short-term incentives and least on fixed pay

� LTI– Focus of delivering pay for performance alignment; practices vary on eligibility

� Annual cash incentives– Strong award leverage

– Differentiation more pronounced than in salary increases

– Approaches vary by industry and or sales models

� Base salary– 2011 salary increases remain conservative with distinct differences by geography

– Most firms target base salaries at market median, but strive for differentiation by individual performance

� With recovery and heightened scrutiny and transparency, pay for performance reemerges as an area of focus

� Most critical challenges focus on lack of global leaders, developing leadership capabilities/skills, and lack of women executives

Performance

Trends in North America

7Mercer

Top trends in the USShort-term incentives

4%Below Threshold

21%Below Target

27%Target (+/-)

37%Above Target

11%Maximum

Percent of Respondents

Estimated 2010 STI Payout

We expect to see continued steady results in 2011, although Comp Committees will remain sensitive to paying for performance com ing out of the recession

We expect to see continued steady results in 2011, although Comp Committees will remain sensitive to paying for performance com ing out of the recession

0%

25%

50%

75%

100%

125%

150%

175%

2007 2008 2009

75th Percentile

50th Percentile

25th Percentile

Mercer 350 (2007 – 2009)Actual STI Awarded as Percent of Target

� After wild ride in 2008, less volatility, and expec ted good performance for 2010-11

8Mercer

Stock Options

Restricted Stock

Performance Awards

Top trends in the USLong-term incentives

2010

Average Long-Term Incentive Mix ($ Value)

41%35%

24%

2005

52%

27%

21%

Has the market found its equilibrium, or will it co ntinue to move in the same direction?Has the market found its equilibrium, or will it co ntinue to move in the same direction?

� The LTI story over the last few years is one away f rom options and towards performance-based awards

9Mercer

17%

10%

7% 7%

13%

6%5%

7%

23%

25%

6%

9%

15%

20%

7%

26%

0%

5%

10%

15%

20%

25%

30%

Options,Restricted, andPerformance

Aw ards

Stock Optionsand Performance

Aw ards

Stock Optionsand Restricted

Shares

Stock OptionsOnly

RestrictedShares andPerformance

Aw ards

PerformanceAw ards Only

RestrictedShares Only

No LTI

2008 2010

Top trends in the USLong-term incentives continued

Awards with Stock Options (68%)

Percent of Companies

� Most companies continue to use options, but as part of a portfolio

10Mercer

571Total

3%17Fail

97%554Pass

%Number

SOP Vote Results as of May 13

3%17Below 50%

6%3250%-70%

17%9670%-90%

74%42590%-100%

%Number% in Favor

SOP Vote Breakdown

Source: Mercer WRG.

Vote results are reported as votes in favor as a % of the total number of votes in favor plus votes against, not including abstentions or broker non-votes.

Top trends in the USSay on Pay

11Mercer

Top trends in the US Say on Pay continued

%Votes

69%Proposals with ISS “Against” Recommendation

94%Proposals with ISS “For” Recommendation

91%All Proposals

Average “For” Votes

Source: ISS. Based on companies in Russell 3000. As of May 13.

� ISS has an impact, but is not decisive

– ISS has recommended a vote against SOP on about 12% of companies

– Of the 733 votes taken where ISS has made a recommendation:� All with a Pass recommendation passed� 78 of 95 with a Fail recommendation passed (only 17 failed)

– ISS does sway institutional voters:

12Mercer

Top trends in the US Other Dodd-Frank issues

Tentative SEC Timeline for Dodd-Frank Implementatio n

� Final SEC rules expected Aug. – Dec. 2011

� Issued March 30, 2011Compensation consultant conflicts: Disclosure

� Final SEC rules expected Aug. – Dec. 2011

� Final stock exchange rules expected second half of 2012

� Issued March 30, 2011Compensation committee, adviser independence: Listing standards

� Aug. – Dec. 2011� Aug. – Dec. 2011Disclosure on pay for performance, internal pay equity* and hedging policies

� Aug. – Dec. 2011� Aug. – Dec. 2011Clawback policies

Adopt RulesProposed RulesTopic

* House sub-Committee has voted to rescind this provision

13Mercer

Top trends in CanadaShort-term incentives

We expect this trend to continue in 2011, given the economic recovery in CanadaWe expect this trend to continue in 2011, given the economic recovery in Canada

Uncertain, 5%No payout, 5%

Payout below target, 25%

Payout around target, 44%

Payout above target, 20%

Payout will be at maximum, 2%

� Almost 2/3 of companies surveyed in late 2010 expec ted to pay out around or above target for 2010 performance

14Mercer

Top trends in CanadaLong-term incentives

� More companies are using performance-based LTI plans

We expect this trend to continue in 2011, given the focus on paying for performanceWe expect this trend to continue in 2011, given the focus on paying for performance

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010

Movement of Current S&P/TSX 60 from 2004 - 2010

Pre

vale

nce

[ N =

60

]

Regular Stock Options

Performance Share Units

Restricted Share Units

Performance Options

Cash Long-term Incentive Plan

15Mercer

Top trends in CanadaSay on Pay

� Say on pay, while not mandatory, continues to gain momentum in Canada

� As of May 13, 82 companies have adopted, or committe d to adopt, a say on pay policy, either voluntarily or as a result of shareh older proposals

19%714%480% - 90%

2011 (as of May 13)2010

81%2986%2490% - 100%

% of TotalNumber% of Total1Number% in Favor

1) Does not include companies that did not disclose voting results

Will say on pay become mandatory in Canada?Will say on pay become mandatory in Canada?

16Mercer

Top trends in CanadaDirector voting

� Many consider individual voting, with or without maj ority voting, a better alternative to say on pay

– Currently, 145 companies have adopted majority voting

Slate Voting

Individual Voting

Majority Voting

Will majority voting become a requirement in Canada ?Will majority voting become a requirement in Canada ?

17Mercer

What is "performance" in paying for performance?

TSR? Financial? Balanced scorecard? Individual? Absolute

or relative? Over what time frame?

Top trends in CanadaPay for performance

� Pay for performance is increasingly being discussed among leading Canadian companies, raising questions such as:

How can we ensure that we are paying for

performance ?

PAY FOR PERFORMANCE

How can we demonstrate to our employees and investors that we

are paying for performance?

What is "pay" in pay for performance?

Incentives? Total direct? Total remuneration? Grant date fair

value? Realized pay?

Organizations are giving more thought to what payin g for performance means to them, and how they can deliver on this objective

Organizations are giving more thought to what payin g for performance means to them, and how they can deliver on this objective

18Mercer

Top trends in CanadaFocus on risk

� Increased focus on Risk Assessment– Already addressed by financial institutions; now being considered across other sectors– Proposed disclosure regarding risks associated with compensation

� Clawbacks– ~1/2 of 60 largest companies have disclosed a clawback policy, although many are primarily for

SOX compliance

COVERAGE

Which elements of pay?

Which employees?

TRIGGERS

Fraud / misconduct?

Material financial restatement only?

Board discretion?

ENFORCEMENT

Tax considerations

Documentation

Timing

Clawback Considerations

19Mercer

Top trends in CanadaFocus on risk

� Share Retention Policies– ~1/4 of 60 largest companies have disclosed share retention requirements

Only until stock ownership guidelines are met?

1-2 years post departure?

Timeframe

Multiple of salary?Amounts

Vesting / exercise of LTIs?

Departure from company?

Triggers

Considerations

CEO? CFO? NEOs?Who

Trends in Europe

21Mercer

Top trends in EuropeHot topics

Salary freezes and salary cuts are being replaced b y modest wage growth in most European markets

� Increases range from 2 to 3% in Western Europe and 5 to 6% in Eastern Europe for 2010, and are forecasted to be the same for 2011

Companies are increasing their focus on managing th e risk of their incentive plans

� Increasing use of bonus clawbacks and deferrals (particularly where bonus potentials have increased)

� Increasing pressures to demonstrate strong link between pay and performance is likely to continue as long as economic uncertainty persists

� For the UK, 2011 is being dominated by governmental pressure on financial services companies

Changing remuneration philosophies

� More companies are repositioning pay at the median, instead of the upper quartile, and using more targeted industry-specific peer groups in the war for talented executives

� Transparency and disclosure continues to increase, while board oversight is becoming more robust

� Many controversial executive pay practices have disappeared or been drastically reduced, for example perquisites and severance packages

– Common practice in the UK has traditionally been 1-year severance pay and this trend is now spreading across the rest of Europe

22Mercer

Top trends in EuropeShort-term incentive payouts

� Target bonus levels have remained fairly stable ove r the past two years at an average of 50 to 80%

� Actual payouts versus target levels have decreased by an average of 14% across Europe from 2009 to 2010*

* Based on Mercer analysis in France, Germany, Ital y, Netherlands, Spain and the UK

102%

92%98%

92%

100%

67%

99%

87% 87%

75%82%

91%

0%

20%

40%

60%

80%

100%

120%

UK Germany France Italy Netherlands Spain

% o

f tar

get a

ctua

lly p

aid

2009

2010

23Mercer

Top trends in EuropeShort-term incentive design

� Growing interest in deferred bonus plans (increased from 45% of companies in 2009 to 67% in 2010)

Overall trendCountry

� Deferral plans now apply to almost 50% of executives

� Of these, 50% have a clawback structure and a similar proportion have a Malus arrangement

United Kingdom

Germany, Italy, and Switzerland

� The percentage of organisations reporting deferral of cash compensation for executives is significantly higher in 2010, compared to 2009

Belgium and Ireland � Not yet typical market practice

� Increasing use of clawback structures where bonus de ferrals operate

– Some organisations also operate a Malus arrangement, where bonus does not vest immediately and can be reduced if performance indicators fall in future years

� Reviewing short-term performance measures– We are seeing a wider range of financial measures, sometimes used in combination – a

scorecard approach– For example, organisations are moving away from a pure focus on profit and are using measures

such as cash flow and EBITDA

24Mercer

Top trends in EuropeLong-term incentive plan prevalence

� Moving away from stock options; increasing use of lo ng-term cash plans– We have seen a fall in the use of share options from 33% to 25% on average across Europe and an

increase by almost 50% in the use of long-term cash plans

– Market intelligence suggests this trend is likely to continue, with performance shares becoming more popular than share options across Europe� This is already the case in the UK with 89% of FTSE100 companies using performance share

plans and just 56% using share option plans

* Based on Mercer analysis in France, Germany, Ital y, Netherlands, Spain and the UK

13%

53%

19%

25%

15%

50%

28%

33%

0%

10%

20%

30%

40%

50%

60%

Stock Options Performance Shares Restricted Stock Long -term cash

% o

f com

panie

s w

ith p

lan in

pla

ce

2009

2010

25Mercer

� “Say on pay” is well established in the UK and the r elationship between boards of directors and their shareholders has grown particul arly strong over the past few years

– Dialogue has increased due to better communication arrangements– Shareholding bodies now have a better understanding of the differentiation between companies

and consequently appreciate that what might work for one company may not work for another

� Since 2004, the number of blue tops has increased, as has the number of red tops. However, the number of amber tops has decline d*

Top trends in EuropeUK “Say on pay”

60% 62% 64%68% 68%

63%

20%22%26%27%28%30%

10% 10% 10% 10% 10% 12%

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007 2008 2009

% c

ompa

nies

* Source: Ivis Reviews 2004 - 2009

Red top: Matter of serious concern; breach of guidelines

Amber top: Issue for shareholder judgement

Blue top: No areas for major concern

Trends in Asia Pacific

27Mercer

Top trends in Asia PacificPay levels

Asian executive salaries could surpass those of the US

within next two to three years

In some countries, e.g. India, there is starting to emerge greater shareholder ‘impatience’ with increased executive compensation a t companies who do not deliver

expected performance.

Moderate increases in Australia and Japan

Record increases in executive pay in China, India, Indonesia, Vietnam, Philippines and Malaysia due to rapid growth in indu strial production and

GDP, leadership shortages and inflation.

28Mercer

Top trends in Asia PacificPay for performance

Companies are taking a “re-look” at performance metr ics, with a lengthening of vesting periods and incentive compensation constituting an increased proportion of the mix of pay

� Extension of equity compensation deeper into the organization, to mid-management levels, especially at smaller organizations

� Grants are often dependent on performance hurdles having been met

India

� Options remain most prevalent vehicle, but restricted- and performance-share programs increasingly being adopted

Greater China, India and Japan

� Performance shares very common, especially in the banking sectorKorea

� Full value share awards as common as options, with performance programs becoming the norm, often tied to a value creation metric

� Attempts to design incentive programs that mitigate pre-payment risk

Singapore

� Changes to the tax legislation have driven a move from options to performance rights or performance shares

Australia

29Mercer

Top trends in Asia PacificGovernance

Remuneration committees are increasingly focusing o n receiving objective advice and are more sensitive to shareholders’ reception of rem uneration plans

� Convergence towards IFRS-2 on expensing of stock compensation being finalizedIndia

� No significant reaction to new disclosure rules on total remuneration of individual executives in excess of JPY 100 million

Japan

� Proposed amendments to Corporations Act impacting disclosure, board member re-election and appointment of advisors

� Committees are reviewing and assessing executive compensation frameworks to ensure linkage to market, business strategy and financial performance

Australia

How are global companies responding?

31Mercer

The changing face of executive compensationA global convergence of trends

Worldwide pressures

� Supply and demand

� Heightened scrutiny

� Pay for performance

� Pay levels

� Clawbacks

� Transparency

Q&A

33Mercer

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For global insight into executive remuneration tren ds, visit www.mercer.com/perspective

Will Ferguson, Los Angeles, moderator+1 213 346 2240will.ferguson@mercer.com

Mark Hoble, London+44 20 7178 5725mark.hoble@mercer.com

Hans Kothuis, Hong Kong+852 3476 3817hans.kothuis@mercer.com

Gregg Passin, New York+1 212 345 1009gregg.passin@mercer.com

Lisa Slipp, Toronto+1 416 868 7665lisa.slipp@mercer.com

www.mercer.com