Pay-for-Performance Model - Institutional Shareholder … is the total pay figure calculated? ........

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AustraliaPay-for-PerformanceModelFrequentlyAskedQuestions

EffectiveforMeetingsonorafterOctober1,2017

PublishedAugust2017

FAQ:AustraliaPayforPerformance

Enablingthefinancialcommunitytomanagegovernanceriskforthebenefitofshareholders.©2017ISS|InstitutionalShareholderServices 2of18

PAY-FOR-PERFORMANCEMETHODOLOGY.........................................................................................................................41. HowwillthemodelbeusedinISSbenchmarkresearch?.....................................................................................42. WhatisthecoverageuniversefortheAustralianPay-for-Performancemodel?.................................................4

DefinitionofTotalPay..............................................................................................................................................53. Howisthetotalpayfigurecalculated?.................................................................................................................54. WhydidISSchoosetousegrantedpayfortheAustralianmodel?......................................................................65. HowdoesISSaccountforbonusdeferralinthemodel?......................................................................................66. HowdoesISSaccountformorethanoneCEOinagivenfiscalyear?...................................................................67. Howareright/shares/stockawardsvaluedundertheAustralianPFPmodel?.....................................................68. HowareoptionsvaluedundertheAustralianPFPmodel?...................................................................................69. IfthecompanyhastransitionedtoanewCEOinaparticularfiscalyear,howdoesISScomputetotalannualisedpayforthenewCEO?.................................................................................................................................610. ForPay-for-Performancealignment,howwillISStreatCEOswhohavenotbeeninthepositionforthreeyears?............................................................................................................................................................................711. DoesISStakeintoaccountthepayofotherexecutives,directors,ortheboardasawholeintheAustralianPFPmodel?..........................................................................................................................................................................712. HowdoesISStreatrestatedpayamountsforprioryears?ThismayincludescenariosinwhichtheBoardgrantedincentiveawardstotheexecutivethattheexecutivelaterdeclined..............................................................713. HowarepeercompanymedianscalculatedfortheComponentsofPayTable?..................................................7

DefinitionofPerformance.........................................................................................................................................714. HowdoesISSmeasuretheperformanceofacompanyforthequantitativesectionofthePay-for-Performancemethodology?...............................................................................................................................................................715. DoesISS'sPay-for-PerformanceanalysisonlyuseTSRtogaugecompanyperformance?...................................716. WheredoesISSobtain1-,3-and5-YearTSRdata?Andhowoftenarethesevaluesupdated?..........................817. HowdoesStandard&Poor’sResearchInsightcalculate1-,3-,and5-yearTSR?.................................................8

QUANTITATIVEPAY-FOR-PERFORMANCEEVALUATION.....................................................................................................9RelativeDegreeofAlignment(RDA)andMultipleofMedian(MOM)........................................................................9

18. WhatdoesRDAmeasure?.....................................................................................................................................919. WhatTSRtimeperiodwillISSuseforthesubjectcompanyandthepeersintherelativePay-for-Performanceanalysis?........................................................................................................................................................................920. WhatremunerationtimeperiodwillISSuseforthesubjectcompanyandthepeersintherelativePay-for-Performanceanalysis?..................................................................................................................................................921. WhatistherangeofvaluesforRDA?....................................................................................................................922. WhathappensifthesubjectcompanydoesnothavethreeyearsofTSRorCEOpaydataavailable?..............10

ConstructingComparisonGroups............................................................................................................................1023. HowaretheISSpeercompaniesdetermined?...................................................................................................1024. WhatareISS'sizeparametersforqualifyingapotentialpeer?..........................................................................1125. WhydoesISSuse0.25x–4xrevenue/assetrange?............................................................................................1126. Whichindustrygroupswilluseassetsforsizecomparisons?Whathappenswhenacompanyhaspotentialpeersinbothasset-basedandrevenue-basedindustrygroups?...............................................................................1127. WhydoesISSselectaminimumof11peercompanies?....................................................................................12



28. Doyouincludethesubjectcompanyinthederivationofthepeergroupmedian?Whenyousay11companiesminimumforpeers,doesthe11includethesubjectcompany?................................................................................1229. Willacompanyalwaysbeatthemedianofitspeergroupintermsofsize?.....................................................1230. Whenwillthecompany'speergrouphavemorethan11companies?..............................................................1231. WillISSusecompaniesfromcountriesotherthanAustraliatocreatethecomparisonISSpeergroup?...........1232. WhocanIcontactifIdisagreewiththeGICSclassification?..............................................................................1233. WhenandhowoftenwillISSreconstructpeergroups?.....................................................................................1334. IfacompanydoesnotagreewithitsassignedISSpeers,whatshoulditdo?....................................................13

Pay-TSRAlignment(PTA)........................................................................................................................................1335. WhatdoesPay-TSRAlignment(PTA)measure?..................................................................................................1336. HowisPTAcalculated?........................................................................................................................................1337. Canyouprovidemoredetailsabouttheregressions?........................................................................................13

ThresholdsforQuantitativeEvaluation...................................................................................................................1438. WhatarethevaluesforeachPay-for-Performancemeasurethatmayraisesomedegreeofconcern?............14

QUALITATIVEPAY-FOR-PERFORMANCEEVALUATION......................................................................................................1539. WhatimpactmightaneleveatedconcernlevelonthequantitativeportionofthePay-for-Performancemethodologyhave?....................................................................................................................................................1540. WhatqualitativefactorsareconsideredbyISSinthequalitativeassessmentofthecompany'spayandperformancealignment?............................................................................................................................................15

MISCELLANEOUSQUESTIONS..........................................................................................................................................1641. Ifacompanyhasnotbeenpubliclytradedforfivefullfiscalyears,doesthequantitativePay-for-Performanceevaluationstillapply?Whatifacompanyhasnotbeenpubliclytradedforthreefiscalyears?Wouldsuchacompanybeusedasapeercompanyforothercompanies?.....................................................................................1642. Ifacompanymakesequitygrantsforafiscalyearoutsideofthefiscalyearstartandenddates(i.e.,rightbeforethestartoftheyearORrightaftertheendoftheyear),willtheequitygrantedbecountedforthefiscalyearinwhichitwasintended?...................................................................................................................................1643. HowdoesISSaccountfordifferencesindisclosurecurrency?...........................................................................16



PAY-FOR-PERFORMANCEMETHODOLOGY

1. HowwillthemodelbeusedinISSbenchmarkresearch?

TheAustralianPay-for-Performance(PFP)modelcomprisesthreequantitativetestsresultinginanoveralllevelofconcern,whichwillbeincludedinISSresearchreportsforcompaniescoveredbythemodel.ISSresearchwillhaveregardforthemodeloutcomeswithinthequalitativereviewofacompany’sremunerationpracticesaspartoftheISSbenchmarkpolicyapplication.Anyremuneration-relatedvoterecommendationswillbebasedonaholisticreviewconsideringallrelevantqualitativeandquantitativefactors.

ForinstitutionalinvestorclientswhopartnerwithISSontheirowncustomisedvotingpolicies,theAustralianPay-for-Performancemodeland/orunderlyingdatamayalsobeaninputintotheirfinalvoteconsiderationsanddecisions.

2. WhatisthecoverageuniversefortheAustralianPay-for-Performancemodel?

TheAustralianPFPcoverageuniverseformeetingsfromOctober1,2017,willcompriseallcompaniesintheASX3001thatareunderISSAustraliapolicycoverage,assetinJune2017.Forthefirstyearofthemodel,theuniverseofconstituentswassetinJune2017andindexconstituentsforPFPcoveragewillbereviewedandsetannuallygoingforward.

----------------------1https://us.spindices.com/indices/equity/sp-asx-300



DefinitionofTotalPay

3. Howisthetotalpayfigurecalculated?

AllfiguresintheAustralianPFPmodelarebasedonavariationofgrantedpay,combiningcashandnon-cashbenefitsreceivedforthefiscalyearalongwiththegrant-datevalueofallequityawards.

BelowisabreakdownofthepaycomponentscoveredbytheAustralianPFPmodelalongwithadescriptionofeachcomponent:

Item Description

TotalPay

FixedPay

Basesalary Theannualbasesalaryreceivedforthefiscalyear.Thisfigureisannualisedincasesofpartial-yearCEOs.

Non-monetarybenefits

Anynon-cashbenefitsandmiscellaneousamountgiventotheindividual.Examplesarelifeinsurance,fringebenefitstax,andcommercialinterestonemployeeloans.

Superannuation Thestatutorypaymentforretirementtotheexecutivebythecompany(companycontribution).

RetirementAccrual Thenon-statutorybenefitsforretirementpaidtotheexecutivebythecompany.

Expatbenefits Thenon-cashbenefitsormiscellaneousamountsinrelationtorelocationcostsgiventotheexecutive.

Otherbenefits Allotherpaymentsthatdonotfitintoanyothercategory,suchasclubmembershipfees,securitypayments,andhousingallowances.

Sign-onpayment Thesign-onbenefitsamountthatanindividualreceiveduponjoiningthecompany.

Short-Term

Incentives

CashBonus Theearnedcashcomponentoftheshort-termincentives(paidoutanddeferred).

DeferredShareBonus

Theearnedvalueoftheequitycomponentoftheshort-termincentivesthatanindividualearnedinrelationtothefiscalyear.

One-TimeSTI Thevalueoftheone-timeSTIawardthattheindividualreceivedduringthefiscalyear.Thiscaneitherbecashorequity.

Long-Term

Incentives

OptionAwardsThecompanydisclosedoptionawardfairvalue(companydisclosedgrant-datefairvalue)foreachLTIoptionawardgrantedwithinthefiscalyear.Includestime-based,performance-based,andretentionawards.

StockAwards

ThegrantdatevalueofLTIstockawardsgrantedwithinthefiscalyear,ascalculatedbyISS.ThestockawardsvaluesarecalculatedbyISSbytakingthetargetnumberofsharesgrantedandvaluingthematthegrantdateshareprice.Includestime-based,performance-based,andretentionawards.



4. WhydidISSchoosetousegrantedpayfortheAustralianmodel?

Duringthedevelopmentofthemodel,theISSAustralianresearchteamreviewedhowpayistypicallydisclosedintheAustralianmarketanddiscussedalternativepaydefinitionswithmanyinstitutionalinvestors,andtheoutcomewasthatamodelbasedongrantedpaywouldbestalignwithdisclosurestandardsandpracticesforAustraliancompanies.

5. HowdoesISSaccountforbonusdeferralinthemodel?

Duringtheyearunderreview,thevalueofthedeferredbonuscountedbythemodelwillbetakentobetheportionoftheannualbonusthathasbeenearnedandwillbedeferred,assumingthatthedeferredportionisnotsubjecttoanyfurtherperformanceconditionsotherthancontinuedemployment.Themodelwillincludetheearnedvalueofthebonuesearnedduringtheyear,includingifthebonusisdeferredincashorinshares/rights.

6. HowdoesISSaccountformorethanoneCEOinagivenfiscalyear?

WhenacompanytransitionsfromoneCEOtoanother,ISSwilluseonlyoneCEO'spayforthemodel.TheCEOthatwasinthepositionattheendofthefiscalyearwillgenerallybetheonewhosepaywillbeused.ThebasesalaryforaCEOservinglessthanoneyearwillbeannualised.Seeitem9belowforfurtherdetails.

Ifthecompanyhasco-CEOs,thepayofonlyoneco-CEOwillbeused,generallyonewiththehighertotalpayfigure;note,however,thattheimpactofco-CEOpaycostsmaybeaddressedseparatelyasapartofISS'qualitativeremunerationreportevaluation.

7. Howareright/shares/stockawardsvaluedundertheAustralianPFPmodel?

Allfull-valueawardsofrights/shares/stock,whethertheyaretime-based,performance-based,joiningorretentionawards,arevaluedasthenumberofgrantedunitsvaluedatthegrant-dateshareprice.Iftheawardisperformance-based,ISSwillusethetargetnumberofperformanceunitsforthisvaluation.

8. HowareoptionsvaluedundertheAustralianPFPmodel?

ISSwillusethedisclosedgrant-datefairvalueofalloptionawardsgrantedtotheCEOinagivenfiscalyear.

9. IfthecompanyhastransitionedtoanewCEOinaparticularfiscalyear,howdoesISScomputetotalannualisedpayforthenewCEO?

Inordertocomparethetotalpayofexecutives,thebasesalaryofthenewCEOisannualised.ISSdoesnot,however,annualiseanyotherpaycomponentsuchasequityornon-equityrelatedincentiveplancomponentsbecausetheseawardsarelikelyrelatedtoachievementofperformancegoals.

IfthecompanydisclosesthenewCEO’scontractualsalaryintheremunerationreport,thenthiswillbeusedasbasesalaryinsteadofcalculatinganannualisedbasesalary.Ifthisdisclosureisnotavailable,ISSwillcomputetheannualisedbasesalarybasedonthestartdateoftheexecutiveandfiscalyearendofthecompany,usinga365dayyear.StartdateisthediscloseddatetheexecutivebeganemploymentastheCEO.



10. ForPay-for-Performancealignment,howwillISStreatCEOswhohavenotbeeninthepositionforthreeyears?

ThequantitativemethodologywillanalyzetotalCEOpayforeachyearintheanalysiswithoutregardtowhetherallyearsrelatetothesameordifferentCEOs.IfthatanalysisindicatessignificantPay-for-Performancemisalignment,theensuingin-depthqualitativeanalysismaytakeintoaccountanyrelevantfactorsrelatedtoachangeinCEOduringtheperiod.

11. DoesISStakeintoaccountthepayofotherexecutives,directors,ortheboardasawholeintheAustralianPFPmodel?

No,notinthecurrentversion.

12. HowdoesISStreatrestatedpayamountsforprioryears?ThismayincludescenariosinwhichtheBoardgrantedincentiveawardstotheexecutivethattheexecutivelaterdeclined.

ISSwillnotrestatethepayamountsforthepurposeofthePay-for-Performancemethodologyunlessthereareexceptionalcircumstances.Specifically,ISSwillnotrestateprioryearamountsifpreviouslygrantedperformancebasedequityawardsdidnotvest;theseawardswillcontinuetoberecordedattheirgrantdatevalue.Therationalebehindthisdecisionisthatthetotalpaypriortotherestatementwaswhattheremunerationcommitteeintendedtoawardtheexecutive,andthereforethatthisisthebestmeasureoftheremunerationcommittee’sdecisionsregardingpayamountsawarded.Subsequenteventsthatleadtoarestatementofgrantdatevaluesoranexecutivedecliningpay-relatedawardsmaybeincludedintheISSqualitativeassessment.WhatpaydatadoesISSuseforcompanieswithmeetingsearlyintheseasonwhosepeercompanies’CEOpayinformationhasnotyetbeenreleasedforthelatestfinancialyear?

ISSusesthemostrecentpaydataavailableforthepeercompanies,whichmaybefromthepreviousyearinsomecases.Paydataisupdatedveryquicklyasannualreportsarereleased,andthepeerdataisusedonlyasascreeningmechanism,sotheimpactofdifferingpayyearswithinapaygroupmaybeconsideredduringISS'qualitativereview.

13. HowarepeercompanymedianscalculatedfortheComponentsofPayTable?

Themedianisseparatelycalculatedforeachcomponentofpayandforthetotalannualpay.Forthisreason,themediantotalpayofthepeerCEOswillnotequalthesumofallthepeermedianpaycomponents,becausethevaluesarecalculatedseparatelyforeachpaycomponent.Rather,themediantotalpayreflectsthemedianofthetotalpayofthepeergroupconstituents.

DefinitionofPerformance

14. HowdoesISSmeasuretheperformanceofacompanyforthequantitativesectionofthePay-for-Performancemethodology?

Totalshareholderreturn(TSR)isthekeymeasureusedforassessinglong-termPay-for-Performancealignmentinthemodel–i.e.,changeinstockpriceplusreinvesteddividendsoverthespecifiedmeasurementperiod.

15. DoesISS'sPay-for-PerformanceanalysisonlyuseTSRtogaugecompanyperformance?

Thequantitativeanalysis(i.e.thescreeningphaseofthePay-for-Performancemethodology)intheAustraliaPFPmodelonlyusesTSRtodefineacompany'sperformance;howeverISSunderstandsthattherearemyriadwaystomeasurecorporate



performance,andthatkeymetricsmayvaryconsiderablyfromindustrytoindustryandfromcompanytocompanydependingonthecompany'sparticularbusinessstrategyatanygiventime.Hence,ISSdoesnotadvocatethatcompaniesshoulduseTSRasthemetricunderlyingtheirincentiveprograms;onthecontrary,shareholdersmayoftenpreferthatincentiveawardsbetiedtothecompany'sshort-andlong-termbusinessgoals.Ifacompany'sbusinessstrategyissoundandwellexecuted,theexpectationisthatitwillcreatevalueforshareholdersovertime,asreflectedinlong-termtotalshareholderreturns.Forthisreason,TSR,whichisobjectiveandtransparent,istheprimarymetricISSutilisesinevaluatingpayandperformancealignmentinthequantitativeanalysis.

16. WheredoesISSobtain1-,3-and5-YearTSRdata?Andhowoftenarethesevaluesupdated?

ISSobtainsallfinancialdatausedinthePFPmodelandremunerationprofilefromStandard&Poor'sResearchInsight.TheTSRvaluesareupdatedeverymonthtoensureTSRvaluesaccuratelyrepresentthefiscalyearendofthecompanyinquestion.

17. HowdoesStandard&Poor’sResearchInsightcalculate1-,3-,and5-yearTSR?

Theone-,three-andfive-yearTSRistheannualisedrateofreturnreflectingpriceappreciationplusdividends(basedonreinvestmentasoftheendofthemonthofthedividendpayment)andthecompoundingeffectofdividendspaidonreinvesteddividends,overtherelevanttimeperiod.



QUANTITATIVEPAY-FOR-PERFORMANCEEVALUATION

RelativeDegreeofAlignment(RDA)andMultipleofMedian(MOM)

18. WhatdoesRDAmeasure?

RDAaddressesthequestion:IsthepayopportunitydeliveredtotheCEOcommensuratewiththeperformanceachievedbyshareholders,relativetoacomparablegroupofcompanies?Thismeasurecomparesthepercentilerankofacompany'sCEOpayandTSRperformance,relativetoacomparatororpeergroup,thatisselectedbyISSonthebasisonsize,industry,andmarketcapitalization,overathree-yearperiod.FormoreinformationonpeergroupspleaseseetheConstructingComparisonGroupssectionbelow.

TheRelativeDegreeofAlignmentisequaltothedifferencebetweenpercentileranks:theperformancepercentilerankminusthepaypercentilerank,overathreeyearperiod.

Performance Pay Difference

3-yearpercentile

rank32 59 -27

19. WhatTSRtimeperiodwillISSuseforthesubjectcompanyandthepeersintherelativePay-for-Performanceanalysis?

TSRforthesubjectcompanyandallitspeersismeasuredfromthelastdayofthemonthclosesttothesubjectcompany'sfiscalyearend.Forexample,ifthesubjectcompany'sfiscalyearendisJune30,thenthethree-yearTSRforthesubjectcompanyanditspeerswillbebasedonJune30.TheISSreportwillshowtheseclosestmonth-endfiscalyearendTSRsforthecompanyanditspeergroups,whichthusmaydifferfromthereportedfiscalyearreturnsofthecompanyanditspeers.Toillustrate:ifacompany’sfiscalyearendsonMay16,2017,thenthreeyearTSRwillbemeasuredovertheperiodsMay31,2014–May31,2017.

20. WhatremunerationtimeperiodwillISSuseforthesubjectcompanyandthepeersintherelativePay-for-Performanceanalysis?

Remuneration/payfiguresforallcompaniesareasofthelatestavailablepublicdisclosurefiling.

21. WhatistherangeofvaluesforRDA?

ValuesfortheRelativeDegreeofAlignment(RDA)measurerangebetween-100and+100,with-100representinghighpayforlowperformance(i.e.,100thpercentilepaycombinedwith0thpercentileperformance),zerorepresentingahighdegreeofalignment(thepayrankisequaltotheperformancerank),andpositivevaluesrepresentinghighperformanceforlowpay.



22. WhathappensifthesubjectcompanydoesnothavethreeyearsofTSRorCEOpaydataavailable?

TheRelativeDegreeofAlignment(RDA)levelwillonlybeconsideredinoverallquantitativeconcernlevelwhenthesubjectcompanyhasaminimumoftwoyearsofpayandTSRdata.Companieswithlessthantwoyearsofdatawillreceivea“notapplicable(N/A)”concernfortheirRDAtest,andtheOverallQuantitativescreenwillbebasedstrictlyontheMultipleofMedian(MOM)test.

ConstructingComparisonGroups

23. HowaretheISSpeercompaniesdetermined?

ISSconstructsacomparisongroupofatleast11AustralianpeercompaniesforeachsubjectcompanycoveredbythePFPmethodology.Peergroupsforallsubjectcompaniesanalyzedunderthismethodologyareconstructedonceperyear,basedondataprovidedbyanindependentsource(S&PXpressFeedQuarterlyDataDownload[QDD]).Thefollowingcriteriaareusedtodeterminepeercompanies:

› theGICSindustryclassificationofthesubjectcompany› Sizeconstrainsforforbothrevenue(orassetsforcertainfinancialcompanies)andmarketvalue,utilizingfourmarket

cap"buckets"(micro,small,mid,andlarge)

Subjecttothesizeconstraints,andwhilechoosingcompaniesthatpushthesubjectcompany'ssizeclosertothemedianofthepeergroup,peersareselectedfromapotentialpeeruniverseinthefollowingorder:

1. fromthesubject'sown8-digitGICSgroup2. fromthesubject'sown6-digitGICSgroup3. fromthesubject'sown4-digitGICSgroup4. fromthesubject’sown2-digitGICSgroup5. fromthesubject’s“SuperGICS”group(describedfurtherbelow)

If11comparatorgroupmembersarenotselectedfromthecompaniesintheuniversethatsharethesubjectcompany’seight-digitGICScategory,theprocessisrepeatedwithcompaniesinthecomparisonuniversethatsharethecompany’ssix-digitGICScategory,maintainingthecompanyatthemedianpositionwherepossible,until11ormorecomparisoncompaniesareselected;if11comparisoncompaniescannotbeselectedusingthepeers’six-digitGICScategory,thentheprocessisrepeatedusingthenextuniversesetlistedabove(i.e.,thesubject’sfour-digitGICSgroup),until11ormorecompaniesareselected;andsoon.

Insomecaseswherelessthan11peershavebeenidentifiedusingthestandardmethodology,theindustrygrouptowhichthesubjectcompanybelongsisexpandedtoincludecompaniesthatareotherwisecomparabletothesubjectcompanyoperationally.Todothis,ISScreatesa“SuperGICS”group,whichcombinescloselyrelatedtwo-digitGICSgroupstocreatealargerpeeruniverseforcompaniesthathavefewerthan11peers.TheSuperGICSgroupsusedbyISSare:

SuperGICSCategory Two-DigitGICSIncluded NamesofIncludedSectorsA 10,15,20,55 Materials,Industrials,EnergyandUtilitiesB 25,30,35 ConsumerDiscretionary,ConsumerStaples,andHealthCareC 45,50 TechnologyandTelecom



24. WhatareISS'sizeparametersforqualifyingapotentialpeer?

ISSappliestwosizeconstraintstoqualifypotentialpeers:

1. Revenue2(orassetsforcertainfinancialcompanies,asnotedbelow)Ingeneralcompaniesshouldfallintherange0.25to4.0timesthesubjectcompany'srevenue(orassets).Theserangesareexpandedwhenthesubjectcompany'srevenueislargerthan$8billion(AUD)orsmallerthan$160millioninrevenue(assets).

2. Marketcapitalization(definedas200dayaveragepricemultipliedbysharesissuedandoutstanding)Companiesareclassifiedintomarketcapitalizationbucketsasfollows(inAUDmillions):

Bucket Lowend HighendMicro 0 160Small 160 800Mid 800 8,000Large 8,000 Nocap

Apotentialpeermusthaveamarketcapthatfallsbetween0.25timesthelowendand4timesthehighendofthesubject'smarketcapitalizationbucket.

25. WhydoesISSuse0.25x–4xrevenue/assetrange?

ThereisanextensiveliteraturethatdemonstratesastrongcorrelationbetweencompanysizeandCEOpay.Amongexecutivepaypractitioners,asizerangeof0.5timesto2times(measuredbyrevenueorassets,asappropriateforthecompany’sindustry)hasemergedasastandardofpractice.Given,however,thesizeoftheAustralianmarket,ISShasexpandedthisrangetocapturepeersthatmaybesimilarinfunctionbutdonotfallintoanarrowsizerange–hence,therangechosenforthemarketis0.25timesto4times(roundedtothenearesttenth).

26. Whichindustrygroupswilluseassetsforsizecomparisons?Whathappenswhenacompanyhaspotentialpeersinbothasset-basedandrevenue-basedindustrygroups?

ISSwillusebalancesheetassets(ratherthanincomestatementrevenue)tomeasurethesizeofcompaniesinthefollowing8-digitGICSgroups.

› 40101010CommercialBanks› 40101015RegionalBanks› 40102010Thriftsandmortgage› 40202010ConsumerFinance› 40201020OtherDiversified

----------------------

2PeersforcompanieswithintheOil,Gas&ConsumableFuelsGICSIndustry(8-digitGICSgroups10102010,10102020,10102030,10102040,and10102050)aredeterminedsolelybasedonmarketcapitalization



Boththesubjectcompanyandpotentialpeersmustbeintheasset-basedGICSgroupslistedaboveinordertobecomparedonthebasisofassets.Incaseswhereasubjectcompanyisinoneoftheasset-basedGICSgroupsandapotentialpeerisnot,revenueswillbeusedforsizecomparisons.Thisprincipleappliestothesizecomparisonsmadetoqualifyacompanyforpotentialinclusionasapeer;tothesizerankingsmadetomaintainthesubjectcompanynearthemediansizeofthepeergroup;andtothesizeprioritizationofpeers.

Inaddition,asdeemedappropriatebyISS,additional8-digitGICScategoriesmaybedeterminedtoutiliseassetsand/ormarketcaptoidentifypeers.

27. WhydoesISSselectaminimumof11peercompanies?

TheRelativeDegreeofAlignmentcalculationmeasurespercentileranksofpayandperformanceforthesubjectcompany.Thelargerthecomparisongroup,thefinertheresolutionofthepercentileranks(forinstance:inacomparisongroupof24,percentileranksmoveinapproximately4-pointincrements,whereastheymovein10-pointincrementsforagroupoflessthanten).Webelievethatusing11ormorecompaniesinthecomparisongroupsprovidessufficientresolutionforthepercentilemeasure,whilealsoallowingustogeneratecomparisongroupsforthevastmajorityofcompanieswithinthemethodology’ssizeandindustryconstraints.

28. Doyouincludethesubjectcompanyinthederivationofthepeergroupmedian?Whenyousay11companiesminimumforpeers,doesthe11includethesubjectcompany?

No,neithertheCEOpaynortheTSRforthesubjectcompanyisincludedinthemediancalculation.Thesubjectcompanyisalsonotincludedinthenumberofpeercompanies.

29. Willacompanyalwaysbeatthemedianofitspeergroupintermsofsize?

Theaimofthemethodologyistoproduceamixofpeerslargerandsmallerthanthesubjectcompany(ideallyputtingitatthemedian);howeveraslongasacompany'sGICSgrouppeersmeetthemarketcapandrevenue/assetrangecriteriatheymaybeselected.Thepremiseisthatanycompanywithinthesizerangemaybeexpectedtoprovidepayopportunitiesataroundthesamelevelasanyothercompanywithinitssizerange.

30. Whenwillthecompany'speergrouphavemorethan11companies?

Ifmorethan11companieswithinthesubjectcompany'seight-andsix-digitGICSgroupmeettheapplicablesizecriteria(marketcapandrevenue/assets),upto24ofthosecompaniesmaybeselectedforthepeergroup.Iflessthan11companiesinthesubjectcompany'ssix-digitGICSgroupmeetthesizecriteria,peersthatdonotmeetthecriteriawillbeselectedfromthebroaderGICSgroupsuntil11ormoreareidentified.

31. WillISSusecompaniesfromcountriesotherthanAustraliatocreatethecomparisonISSpeergroup?

No.Forthepurposeofselectingpeercompanies,ISSwillonlyselectAustraliancompaniescoveredunderISS’Australiamarketpolicy.PleasenotethatISSwillnotconsiderAustralianincorporatedcompaniesthatfileDEF-14AintheUSforthepurposeofpeerselectionbecausethesecompaniesaredeemedU.S.domesticreportingissuersundertheSecuritiesandExchangeCommission(SEC)andarethuscoveredbyISSU.S.ResearchusingU.S.policy.

32. WhocanIcontactifIdisagreewiththeGICSclassification?



ISSdoesnotclassifycompaniesintotheGICScodes.PleasecontactStandard&Poor'sifyoubelievethatacompanyhasbeenmisclassified.

33. WhenandhowoftenwillISSreconstructpeergroups?

CompanypeergroupswillbereconstructedonceeveryyearinJune.

34. IfacompanydoesnotagreewithitsassignedISSpeers,whatshoulditdo?

IfacompanydoesnotagreewiththeISSpeerswhichhavebeenallocatedbythemodel,orconsiderstheyhavebeenwronglyallocated,itcanprovidethisfeedbacktotheISSPFPhelpdeskviaemailtoAustralianP4PSupport@issgovernance.com.

Pay-TSRAlignment(PTA)

35. WhatdoesPay-TSRAlignment(PTA)measure?

Pay-TSRAlignment(PTA)isameasureoflongtermabsolutealignmentandisdesignedtoindicatewhethershareholdersofasubjectcompanyanditsexecutiveshaveexperiencedthesamelong-termtrend.ItisimportanttonotethatPTAisnotdesignedtomeasurethesensitivityofCEOpaytoperformance;i.e.,whetherpayandperformancegoupanddowntogetheronayear-over-yearbasis.Rather,PTAisalong-termmeasureofdirectionalalignment.

36. HowisPTAcalculated?

Atahighlevel,themeasureiscalculatedasthedifferencebetweentheslopesofweightedlinearregressionsforpayandforshareholderreturnsoverafive-yearperiod.ThisdifferenceindicatesthedegreetowhichCEOpayhaschangedmoreorlessrapidlythanshareholderreturnsoverthatperiod.

Byusingregressionstoestimatethelong-termtrendsforpayandTSR,themethodavoidsthepitfallsofevaluatingpayandperformanceovertime:

› Performanceoverafiscalyearandpaygrantedoverthatperiodaremeasuredinaconsistentfashion,onthesamescale,andarematchedintime.

› Lumpinessofpayandvolatilityofperformancearesmoothedbutnoteliminated–addressinginaconsistentfashionboththe“lumpypay”problemaswellasthesensitivityofTSRtochoiceofendpoints.

Thetrendlinescalculatedbytheseregressionsareanalogoustoa5-year“trendrate”forpayandperformance,weightedtoreflectrecenthistory.ThefinalPay-TSRAlignmentmeasureissimplyequaltothedifference:performanceslopeminusthepayslope.

37. Canyouprovidemoredetailsabouttheregressions?

FulldetailsareavailableinAppendixIIofEvaluatingPayforPerformance:ISS’QuantitativeandQualitativeApproach.



ThresholdsforQuantitativeEvaluation

Thephilosophyoftheframeworkissimple:ifpay-for-performancemeasuresforacompanyliewithinarangeoftypicalvalues,thenithasdemonstratedsomeevidenceofpay-for-performancealignment;ifthecompany’smeasureisanoutlierbeyondthatrange,however,itbeginstoraisesomedegreeofconcernthatapotentialmisalignmentmayexist.

38. WhatarethevaluesforeachPay-for-Performancemeasurethatmayraisesomedegreeofconcern?

Theevaluativeapproachbeginsbyidentifyingcompaniesthataresignificantoutliersineachmeasure.Theapproachisbasedonempiricalobservationofthedistributionofthemeasureswithintheback-testinguniverse.Additionally,themethodology,wherepossible,avoidsarbitrarythresholdeffectsbyusingacontinuousscoringapproach.Asaresult,scoresareadditive;concernsraisedformultiplemeasurescanaccumulatetoprovideevidenceforapotentialPay-for-Performancemisalignmentandadeeperdivebytheanalystcoveringthecompany.Thusthemethodologyidentifieswhether:

1. acompany’sparticularmeasureisasufficientoutliertodemonstrateahighconcernbyitself;or2. acompany’sparticularmeasureisasufficientoutliertodemonstrateahighconcerninconjunctionwithoneor

bothoftheothermeasures.

Thetablebelowshowsthelevelsforeachmeasurethatindicate,basedoninitialtestinganalysis,whereacompanywouldbeconsideredanoutlier(triggeringMediumconcern)orasignificantoutlier(whichwouldtriggerHighconcern).HighconcernforanyindividualfactorwillresultinanoverallHighconcernlevelforthequantitativecomponentofthepay-for-performanceevaluation,andtwoormoreMediumconcernlevelswillresultinanoverallHighconcern.

Measure MediumConcern HighConcern

RelativeDegreeofAlignment(RDA) -47.0 -61.2

MultipleofMedian(MoM) 2.8 3.4

Pay-TSRAlignment(PTA) -30 -40



QUALITATIVEPAY-FOR-PERFORMANCEEVALUATION

39. WhatimpactmightaneleveatedconcernlevelonthequantitativeportionofthePay-for-Performancemethodologyhave?

ThepurposeofISS'pay-for-performanceevaluationistoidentifycompanieswherethereisanapparentmisalignmentofpaydecisionsrelativetothecompany’sperformancetrackrecord.ISS'quantitativeassessmentisdesignedtodetectsuchapparentmisalignments,basedonbothrelativeandabsolutepay-performanceevaluations,aswellastoidentifyapparentgoodorsatisfactoryalignmentthatshareholdersmayalsoappreciatebeingawareof.

Animportantstepwhenpayandperformanceappearsmisalignedistoassesshowvariouspayelementsmaybeworkingtoencourage,ortoundermine,long-termvaluecreationandalignmentwithshareholderinterests.Allcaseswherethequantitativeanalysisindicatessignificantmisalignmentwillcontinuetoreceiveanin-depthqualitativeassessment,todetermineeitherthelikelycauseormitigatingfactors.AnelevatedconcernlevelonthequantitativeportionofthePay-for-Performancemethodologywillnotofitselfleadtoanadversevoterecommendation,rathertoanin-depthqualitativeanalysis.

40. WhatqualitativefactorsareconsideredbyISSinthequalitativeassessmentofthecompany'spayandperformancealignment?

ThefactorsconsideredbyISSduringthequalitativeassessmentofthecompany'sPay-for-Performancealignmentincludebutarenotlimitedtothefollowing:

Strengthofperformance-basedpay:Thiskeyconsiderationincludesareviewoftheoverallratioofperformance-basedpaytototalpay,focusingparticularlyontheremunerationcommittee'smostrecentdecision-making(whichreflectsitscurrentdirection)asregardstoperformancemetricsanddisclosureofperformancegoalswhicharerequiredtobeachieved.

Acompanythatexhibitssignificantapparentmisalignmentofpayandperformanceovertimemaybeexpectedtostronglyemphasiseperformance-basedpay(thoughnotbysimplyincreasingthesizeofthepaypackageinordertomakeitmoreperformance-based).ISSwillreviewbothrecentcashawardspaidandtheawardopportunities(long-termincentivegrants)intendedtodrivefutureperformancetoevaluatetheirperformanceconditions.Time-basedawards(includingtime-basedstockoptions)thatarenotgrantedduetotheattainmentofpre-setgoalsarenotconsideredstronglyperformance-basedinthiscontext.Shareholdersmayalsoexpectsuchacompanytofullydiscloseperformancemetricsandgoals,whichshouldbereasonablychallenginginthecontextofitspastperformanceandgoals,guidancethecompanyhasprovidedtoanalysts,etc.Useofasinglemetric,orsimilarmetrics,ineitherorbothoftheshort-andlong-termincentiveprogramsmaysuggestinappropriatefocusononeaspectofbusinessresultsattheexpenseofothers.Ifthecompanyusesnon-GAAPmetrics,suchasnormalisedearnings,adjustmentsshouldbeclearlydisclosed(alongwithcompellingrationaleifsuchadjustmentsarenonstandard).Ifthecompanyusesnon-financialmetrics,thenshareholdersmayalsoexpectsuffiicentdisclosuretojustifysuchmetricsandsufficentexplanationofachievementbeingalignedwiththecompany'sstrategyandlong-termshareholdervaluecreation.ISSwilltakeallrelevantfactorsintoconsiderationinthequalitativeassessment.

Thecompany'sownpeergroupbenchmarkingpractices:Severalstudieshavepointedtocompanies'peergroupbenchmarkingpracticesasasourceofpayescalationthatisdivorcedfromcompany-specificperformanceconsiderations.Companiesmayundertakebenchmarkinginordertoensurethattheirtopmanagementpaypackageswillstaycompetitiveintheinterestofattractingandretainingkeyexecutives.Whilethisisanimportantobjective,therearenoestablishedstandardsorrulesforthepractice,onewhichhasbeendescribedas"moreofanartthanascience"..Peerselectionforbenchmarkingmaybeinfluencedbymanyconsiderations.Ifacompanyexhibitslong-termapparentdisconnectbetweenpayandperformance,ISScloselyexaminestheappropriatenessofitsdisclosedbenchmarkingapproachtodetermine



whetherthatmaybeacontributingfactor.Forexample,apreponderanceofself-selectedpeersthatarelargerthanthesubjectcompanymaydriveuppaywithoutregardtoperformance.Above-mediantargetingmayhavethesameeffect.

Resultsoffinancial/operationalmetrics:Ifadisconnectisdrivenbycashpay,ISSconsiderstherigorofperformancegoals(ifany)thatgeneratedthepayouts.Recentresultsonmetricssuchasreturnmeasuresandgrowthinrevenue,profit,cashflow,etc.–bothabsoluteandrelativetopeers–mayalsobeexaminedtoassesstherigorofgoalsandwhetherthequantitativeanalysismaybeanomalous(ifothermetricssuggestsustainedsuperiorperformance).Asnotedabove,companydisclosureaboutthemetrics,goals,andadjustmentstoresults,shouldbeclearandsufficientlydetailed.

Specialcircumstances:Thequalitativeanalysismayalsoconsiderexceptionalsituations,suchasrecruitmentofanewCEOinthepriorfiscalyearorunusualcashorequitygrantpracticesthatmaydistortaquantitativeanalysis.Wenote,however,thatsuchcircumstancesdonotautomaticallyinvalidateotheraspectsoftheanalysis,includingthequantitativeresults,sincethatmethodology'slong-termorientationisdesignedtosmooththeimpactoftiminganomalies.Further,whileshareholdersmaywelcomeanewCEOinlightoflaggingperformance,theymayneverthelessbeconcernedaboutaboardthathasbeenforcedtopaydearlyforoutsidetalentbutfailstoappropriatelylinkthenewCEO'spaytoperformanceimprovement.

MISCELLANEOUSQUESTIONS

41. Ifacompanyhasnotbeenpubliclytradedforfivefullfiscalyears,doesthequantitativePay-for-Performanceevaluationstillapply?Whatifacompanyhasnotbeenpubliclytradedforthreefiscalyears?Wouldsuchacompanybeusedasapeercompanyforothercompanies?

Ifthecompanyhasnotyetbeenpubliclytradedforfivefullfiscalyears,therelativeassessment(specifically,therelativeannualisedthree-yearTSRpayandperformancerankandthemultipleofpayagainstthepeermedian)willstillapply.Theabsoluteassessment(i.e.,thepay-TSRalignmenttest)willnotapplyasitrequiresatleast4yearsofdatatobevalid.

Ifthecompanyhasbeenpubliclytradedforlessthanthreeyears,therelativedegreeofalignmenttestwillapplyifatleasttwoyearsofannualisedTSRandCEOpaydataareavailable;otherwise,therelativetestwillonlyincludethemultipleofmedian,whichonlyrequiresoneyearofpaydata.

Thecompany'slimitedlongevityasapubliclytradedcompanywillalsobeconsideredaspartofanyqualitativeevaluation.

Generally,onlycompanieswiththreefullyearsofdatawillbeselectedasISSpeercompanies.Inlimitedcircumstances,acompanywithlessthan3yearsofdatamaybeusedwhenthequantitativeevaluationfocusesononlyoneyear.

42. Ifacompanymakesequitygrantsforafiscalyearoutsideofthefiscalyearstartandenddates(i.e.,rightbeforethestartoftheyearORrightaftertheendoftheyear),willtheequitygrantedbecountedforthefiscalyearinwhichitwasintended?

No.Equityawardsarecountedforthefiscalyearduringwhichtheyweregranted,regardlessoftheintendedfiscalyearoftheaward.Forexample,ifagrantedequityawardisintendedforthefiscalyearendedJune30,2017,butitsgrantdateisJunly15,2017,theawardwillbecountedandvaluedforthefiscalyearendingJune30,2018becauseitwasgrantedduringthatfiscalyear.

43. HowdoesISSaccountfordifferencesindisclosurecurrency?



AllcompaniesanalyzedundertheAustralianPay-for-Performancepolicyareanalyzedinthecurrencyoftheirmostrecentdisclosure.Todoso,allfiguresforthecompanyacrossallyearsareconvertedtomatchthemostrecentdisclosurecurrency.Andifequityawardsaredislcosedinadifferentcurrencythanotherremunerationcomponents,allpaydataisconvertedtothecurrencyfothebasesalarydisclosure.

DuringthePay-for-Performanceanalysis,allpeerpaydataisconvertedtothesubjectcompany’sdisclosurecurrencyaswellinordertoperformaccuratecomparisonsbetweencompanies.

Toconvertdata,ISSusesayearlyaverageexchangerate.Theexchangerateusedtoconvertanindividualcompany’sCEOpaytoistheyearlyaverageexchangerateendinginthemonthclosesttotherespectivecompany’sfiscalyearenddate.Ifacompany’sFYEdateisonorafterthe15thdayofagivenmonth,theexchangerateasofthatmonth-endwillbeused;otherwise,thepreviousmonth’syearlyaverageexchangerateisused.



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