Effective January 31, 2017, Mr. E. Hunter Harrison resigned from all positions held by him at the Company, including as the Company’s Chief Executive Officer and as a member of the Board of Directors of the Company. In connection with Mr. Harrison’s resignation, the Company entered into a separation agreement with Mr. Harrison. Under the terms of the separation agreement, the Company agreed to a limited waiver of Mr. Harrison’s non-competition and non-solicitation obligations.

Effective January 31, 2017, pursuant to the separation agreement, Mr. Harrison forfeited certain pension and post-retirement benefits and agreed to the surrender for cancellation of 22,514 performance share units ("PSU"), 68,612 deferred share units ("DSU"), and 752,145 stock options. As a result of this agreement, the Company recognized a recovery of $51 million in "Compensation and benefits" in the first quarter of 2017. Of this amount, $27 million related to a recovery from cancellation of certain pension benefits.



	Options outstanding				Non-vested options
	Number of options		Weighted average exercise price		Number of options		Weighted average grant date fair value
Outstanding, January 1, 2018	1,479,275		$	150.64	682,927		$	45.46
Granted	282,125		$	248.54	282,125		$	55.63
Exercised	(200,552	)	$	118.86	N/A		N/A
Vested	N/A		N/A		(226,623	)	$	46.94
Forfeited	(26,650	)	$	211.80	(24,327	)	$	47.65
Expired	(600	)	$	71.69	N/A		N/A
Outstanding, December 31, 2018	1,533,598		$	176.02	714,102		$	48.94
Vested or expected to vest at December 31, 2018⁽¹⁾	1,500,135		$	174.77	N/A		N/A
Exercisable, December 31, 2018	819,496		$	140.54	N/A		N/A

⁽¹⁾As at December 31, 2018, the weighted average remaining term of vested or expected to vest options was 7.0 years with an aggregate intrinsic value of $104 million.

The following table provides the number of stock options outstanding and exercisable as at December 31, 2018 by range of exercise price and their related intrinsic aggregate value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on December 31, 2018 at the Company’s closing stock price of $242.24.



	Options outstanding						Options exercisable
Range of exercise prices	Number of options	Weighted average years to expiration	Weighted average exercise price		Aggregate intrinsic value (millions)		Number of options	Weighted average exercise price		Aggregate intrinsic value (millions)
$36.29 – $122.76	410,049	3.3	$	93.51	$	61	410,049	$	93.51	$	61
$122.77 – $200.75	339,686	6.1	$	164.47	$	26	232,206	$	164.49	$	18
$200.76 – $217.68	388,527	5.1	$	205.80	$	14	88,013	$	207.63	$	3
$217.69 – $272.92	395,336	6.2	$	242.25	$	3	89,228	$	228.12	$	1
Total⁽¹⁾	1,533,598	5.2	$	176.02	$	104	819,496	$	140.54	$	83

⁽¹⁾ As at December 31, 2018, the total number of in-the-money stock options outstanding was 1,342,215 with a weighted-average exercise price of $164.62. The weighted-average years to expiration of exercisable stock options is 4.5 years.

Pursuant to the employee plan, options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after seven years. Certain stock options granted in 2018 vest upon the achievement of specific performance criteria. Under the fair value method, the fair value of options at the grant date was approximately $16 million for options issued in 2018 (2017 – $17 million; 2016 – $16 million). The weighted average fair value assumptions were approximately:



	2018			2017			2016
Expected option life (years)⁽¹⁾	5.00			5.48			5.25
Risk-free interest rate⁽²⁾	2.22		%	1.85		%	1.21		%
Expected stock price volatility⁽³⁾	25		%	27		%	27		%
Expected annual dividends per share⁽⁴⁾	$	2.3854		$	2.0010		$	1.4000
Estimated forfeiture rate⁽⁵⁾	4.7		%	2.8		%	2.0		%
Weighted average grant date fair value of options granted during the year	$	55.63		$	45.78		$	39.01

⁽¹⁾ Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour or, when available, specific expectations regarding future exercise behaviour were used to estimate the expected life of the option.

⁽²⁾ Based on the implied yield available on zero-coupon government issues with an equivalent remaining term at the time of the grant.

⁽³⁾ Based on the historical stock price volatility of the Company’s stock over a period commensurate with the expected term of the option.

⁽⁴⁾ Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option. On May 10, 2018, the Company announced an increase in its quarterly dividend to $0.6500 per share, representing $2.6000 on an annual basis.

In 2018, the expense for stock options (regular and performance) was $10 million (2017 – $3 million; 2016 – $14 million). At December 31, 2018, there was $15 million of total unrecognized compensation related to stock options which is expected to be recognized over a weighted-average period of approximately 1.6 years.

The total fair value of shares vested for the stock option plan during 2018 was $11 million (2017 – $14 million; 2016 – $15 million).

The following table provides information related to all options exercised in the stock option plan during the years ended December 31:



(in millions of Canadian dollars)	2018		2017		2016
Total intrinsic value	$	17	$	36	$	30
Cash received by the Company upon exercise of options	$	24	$	45	$	21

During 2018, the Company issued 162,255 PSUs with a grant date fair value of approximately $40 million. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Common Shares. PSUs vest and are settled in cash or in CP Common Shares, approximately 3 years after the grant date, contingent upon CP’s performance (performance factor). The fair value of PSUs is measured periodically until settlement, using a lattice-based valuation model or a Monte Carlo simulation model.

The performance period for 125,280 PSUs issued in 2018 was January 1, 2018 to December 31, 2020, and the performance factors for these PSUs are Return on Invested Capital ("ROIC"), Total Shareholder Return ("TSR") compared to the S&P/TSX Capped Industrial Index, and TSR compared to S&P 1500 Road and Rail Index. The performance factors for the remaining 36,975 PSUs are annual revenue for the fiscal year 2020, diluted EPS for the fiscal year 2020, and share price appreciation.

The performance period for PSUs issued in 2017 is January 1, 2017 to December 31, 2019, and the performance factors for these PSUs are ROIC, TSR compared to the S&P/TSX Capped Industrial index, and TSR compared to S&P 1500 Road and Rail index.

The performance period for PSUs issued in 2016 is January 1, 2016 to December 31, 2018, and the performance factors for these PSUs are Operating Ratio, ROIC, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. The resulting estimated payout was 177% on 117,095 total outstanding awards representing a total fair value of $54 million at December 31, 2018, calculated using the Company's average share price using the last 30 trading days preceding December 31, 2018.

The performance period for PSUs issued in 2015 was January 1, 2015 to December 31, 2017. The performance factors for these PSUs were Operating Ratio, ROIC, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. The resulting payout was 160% of the outstanding units multiplied by the Company's average share price that was calculated using the last 30 trading days preceding December 31, 2017. In the first quarter of 2018, payouts occurred on the total outstanding awards, including dividends reinvested, totaling $30 million on 82,800 outstanding awards.



	2018		2017
Outstanding, January 1	334,028		373,593
Granted	162,255		134,991
Units, in lieu of dividends	3,643		3,571
Settled	(66,243	)	(133,728	)
Forfeited	(38,635	)	(44,399	)
Outstanding, December 31	395,048		334,028

In 2018, the expense for PSUs was $54 million (2017 – $30 million; 2016 – $29 million). At December 31, 2018, there was $29 million of total unrecognized compensation related to PSUs which is expected to be recognized over a weighted-average period of approximately 1.6 years.

The Company established the DSU plan as a means to compensate and assist in attaining share ownership targets set for certain key employees and Directors. A DSU entitles the holder to receive, upon redemption, a cash payment equivalent to the Company's average share price using the 10 trading days prior to redemption. DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated.

Senior managers may elect to receive DSUs in lieu of annual bonus cash payments in the bonus deferral program. In addition, senior managers will be granted a 25% company match of DSUs when deferring cash to DSUs to meet ownership targets. The election to receive eligible payments in DSUs is no longer available to a participant when the value of the participant’s DSUs is sufficient to meet the Company’s stock ownership guidelines. Senior managers have 5 years to meet their ownership targets.

An expense for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.



	2018		2017
Outstanding, January 1	156,547		234,036
Granted	16,481		23,932
Units, in lieu of dividends	1,551		1,969
Settled	(20,072	)	(33,682	)
Forfeited	(1,747	)	(69,708	)
Outstanding, December 31	152,760		156,547

During 2018, the Company granted 16,481 DSUs with a grant date fair value of approximately $4 million. In 2018, the expense for DSUs was $4 million (2017 – $3 million recovery; 2016 – $2 million expense). At December 31, 2018, there was $0.6 million of total unrecognized compensation related to DSUs which is expected to be recognized over a weighted-average period of approximately 1.0 years.



(in millions of Canadian dollars)	2018		2017		2016
Plan
PSUs	$	30	$	31	$	31
DSUs	6		6		17
Other	1		2		—
Total	$	37	$	39	$	48

The Company has an employee share purchase plan whereby both employee and the Company contributions are used to purchase shares on the open market for employees. The Company’s contributions are expensed over the one year vesting period. Under the plan, the Company matches $1 for every $3 contributed by employees up to a maximum employee contribution of 6% of annual salary.