EX-99.1 2 d558585dex991.htm EX-99.1 EX-99.1
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    NOTICE OF ANNUAL MEETING

    OF SHAREHOLDERS

 

 

LOGO

You’re invited to our 2018 annual meeting of

shareholders if you held common shares of

Canadian Pacific Railway Limited (CP) at the close

of business on March 15, 2018.

 

When

 

Wednesday, May 10, 2018

9:00 a.m. (Mountain Daylight Time)

Calgary, Alberta T2C 4X9

  

Where

 

CP Head Office

Royal Canadian Pacific Pavilion

7550 Ogden Dale Road S.E.

Calgary, Alberta T2C 4X9

We will cover five items of business:

1. Receive the audited consolidated financial statements for the year ended December 31, 2017
2. Appoint the auditor
3. Have a say on executive pay at CP
4. Elect directors
5. Consider other business that may properly come before the meeting.

We look forward to seeing you on May 10, 2018.

 

/s/ Jeffrey Ellis

Jeffrey Ellis

Corporate Secretary

Calgary, Alberta

March 15, 2018


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  LOGO     2018 MANAGEMENT PROXY CIRCULAR

 

This proxy circular includes important information about our 2018 annual meeting of shareholders and the items you will be voting on.

 

Please take some time to read the executive summary and the more detailed discussions about governance at CP and our executive compensation program, including 2017 performance and decisions about executive pay for the year.

  

 

 

 

LOGO

 

 

 

 

Where to find it

 

 


Table of Contents

LOGO

 

1.1 MESSAGE FROM THE CHAIRMAN OF THE BOARD

 

Fellow shareholders:

 

On behalf of the Board of Directors, I am pleased to invite you to CP’s 2018 annual meeting of shareholders at 9:00 a.m. Mountain Daylight Time on Thursday, May 10, 2018. The meeting will be held at the Royal Canadian Pacific Pavilion located at CP’s head office, 7550 Ogden Dale Road S.E., Calgary, Alberta.

 

At the meeting you will vote on several items of business, including the election of directors and the “say on pay” advisory vote on executive compensation. This proxy circular contains important information. Be sure to take some time to read it before you decide how to vote your shares.

 

Seamless leadership transition

 

On January 31, 2017, legendary railroader E. Hunter Harrison retired from his role as Chief Executive officer of CP. In what may be described as textbook succession planning, the Board appointed Keith Creel as President and CEO effective January 31, 2017. Keith is one of the most highly regarded railroaders in North America and a preeminent leader in the industry. He worked with Hunter for over two decades and has, since taking the helm, leveraged his

 

 

      LOGO

 

     Andrew F. Reardon

     Chairman of the Board

 

skills and experience to lead CP into the next stage of our development, building a strong foundation for sustainable long-term growth through our enhanced service offering, developing the strongest team of professional railroaders in the industry and further strengthening relationships with CP’s customers. Keith’s appointment as President and CEO was an integral part of our succession plan and his ability to maintain operational gains, while capitalizing on growth opportunities in a disciplined and thoughtful manner, is a testament to his accumulated knowledge and commitment to the principles of precision scheduled railroading.

Engaging with our shareholders

During 2016 and continuing throughout 2017 and into 2018, our Board initiated an extensive formal shareholder engagement program with the goal of hearing and understanding the concerns of our shareholders. I, together with other members of the Board and CP senior management, have met with shareholders across North America to hear their concerns face-to-face on the issues that concern us all, including succession planning, executive compensation, Board diversity and environmental, social and governance (ESG) reporting. We listened and, as a result of those meetings, CP has made changes to address our shareholders’ concerns.

Your Board is committed to engaging with shareholders face-to-face on a continual basis. This is your company. As stewards of your investment, we want your input. In addition to participating in meetings with members of our Board, you may also contact me through the Office of the Corporate Secretary at CP.

Excellence in execution

2017 was a record breaking year by nearly every financial performance measure. A disciplined growth strategy combined with the fundamentals of precision railroading produced full-year diluted earnings per share (EPS) of $16.44, up 55 percent from $10.63 and full-year adjusted diluted EPS of $11.39(1), an increase of 11 percent from $10.29. The full-year reported operating ratio was 57.4% and adjusted operating ratio 58.2%(1) – an all-time record for the company. In the area of safety, CP’s performance in 2017 was also stellar. Our personal injury rate improved by 1% and train accident frequency decreased 12% to a new all-time low, making 2017 the 12th consecutive year that we have led the industry on this key safety metric.

 

 

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CP continued to invest significantly in its capital program with an overall investment of C$1.34 billion in 2017, an increase of 14% from 2016, while maintaining its strong commitment to shareholders by returning C$691 million through share buybacks and dividends. We increased our dividend by 12.5% from $0.50 to $0.5625 per common share, in addition to the 43% increase in 2016.

 

Our Board has the same expectation of excellence at the Board level as it does with respect to management. This Board is continually evaluating itself to ensure that it continues to exceed the standards of good governance and that its members are able to function efficiently and effectively with each other and with management. Where additional directors have been added in the past years, those appointments have been made in order to enhance the skills and experiences of the Board, but never at the cost of CP’s high corporate governance standards. In 2017, CP welcomed Gordon Trafton to the Board. His extensive and unique business experience, in particular as a former railway executive, with expertise in executive leadership, risk management, strategic oversight and governance, have been invaluable. You can read about this year’s director nominees beginning on page 20.

 

On behalf of the Board, I would like to acknowledge the valuable contributions of Bill Fatt, who stepped down in November due to health reasons. Bill was appointed to the Board in 2016 and in his short time on the Board provided exemplary leadership as chair of CP’s finance committee and as a member of the audit committee. On behalf of the Board, I want to thank Bill for his outstanding contribution to CP. His wisdom and guidance during his tenure on the Board have been immeasurable and will be truly missed.

 

We thank you for your continued confidence in CP and look forward to seeing you at the meeting on May 10, 2018. Please remember to vote your shares.

 

Sincerely,

 

/s/ Andrew F. Reardon

 

Andrew F. Reardon

Chairman of the Board

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(1)  Adjusted diluted earnings per share, Adjusted Operating Income and Adjusted Operating Ratio are non-GAAP measures. For a full description and reconciliation of Non-GAAP measures see CP’s Form 10-K at www.cpr.ca.

 

 

4  CANADIAN PACIFIC


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LOGO

 

1.2 MESSAGE FROM THE CHAIR OF THE MANAGEMENT RESOURCES AND COMPENSATION COMMITTEE

 

Dear fellow shareholders,

The management resources and compensation committee is focused on making sure that executive compensation at CP pays for performance and aligns management’s interests with our business strategy and the interests of our shareholders. This, along with succession planning, has been our biggest priority over the past two years.

At our 2017 annual meeting, 71.11% of the votes were for our approach to executive pay, which was an indication from shareholders that we are making good progress.

We narrowly failed our say-on-pay advisory vote in 2016 with 49.9% of votes in favour, and spent a good portion of that year meeting with shareholders to hear their concerns first-hand, provide more information about our executive compensation program and solicit their feedback. In 2016, we met in person with 16 of our largest shareholders who represented approximately 30% of our outstanding shares as well as shareholder advocacy groups and proxy advisory firms. Andrew Reardon, Chairman of the Board, led these meetings. I participated in every meeting, along with representatives from management.

We continued our engagement efforts in 2017, communicating the changes that had been made and soliciting additional feedback. In 2017, we met in person or by telephone with 30 institutional shareholders who represented approximately 40% of our outstanding shares, some of which were a follow-up to our meetings in 2016, as well as shareholder advocacy groups and proxy advisory firms. These meetings were led by the Chairman of the Board. The chair of the corporate governance and nominating committee or myself also attended, as well as representatives from senior management. I am pleased to say that the changes we made to the executive compensation program and practices in 2017 were well received and no new compensation issues or concerns were raised (you can read more about shareholder engagement generally on page 80).

Shareholders raised several concerns in 2016 and we responded by making a number of changes to CP’s executive compensation program and announced them in last year’s proxy statement. All of these changes were implemented in 2017 and are summarized as follows:

 

What we heard   How we responded    Where to find
more information

1. Shareholders would like to see our compensation plans evolve as we grow

      Amended the measures for the short-term and long-term incentive plans for 2017    page 36
      Designed the compensation package for incoming CEO, Keith Creel, to be in line with the market and our peers    page 50
      Modified CEO perquisites, eliminating tax equalization and restricting the use of the corporate jet    page 64
      Shortened the term of options from 10 years to 7 years    page 44

2. Shareholders want better correlation between pay and long-term corporate performance

      Removed operating ratio as a long-term incentive plan measure, and increased the weightings of Return on Invested Capital (ROIC) and Total Shareholder Return (TSR)    page 43
      Increased the proportion of performance-based awards in the long-term incentive plan from 50% to 60%, and reduced the proportion of stock options from 50% to 40%    page 41
      Introduced performance stock options into Keith Creel’s compensation package as incoming CEO    page 44

3. Shareholders want greater transparency and disclosure on changes to performance measures

      Improved our disclosure and included explanations of the incentive plan changes and the rationale for the decisions    page 6 and 7

4. Shareholders would like to see safety and other operational measures formally incorporated into executive compensation

      Added a safety measure to the short-term incentive plan    page 39
      Added an operating measure to the short-term incentive plan    page 39

5. Shareholders felt that the individual component of the CEO’s bonus should not exceed the corporate performance result

      Capped the individual performance rating for the CEO at the corporate performance factor    page 40

 

 

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What we heard   How we responded    Where to find
more information

6. Shareholders raised concerns with respect to transition awards and disclosure for departing executives

      Former CEO, Hunter Harrison, who left CP five months ahead of schedule, forfeited approximately $122.9 million of compensation, reflecting the value of his CN pension that we replaced and the value of in-the-money equity incentive awards. He also did not receive a long-term incentive award for 2017 and his $3.9 million (US$3 million) post-retirement consulting agreement with CP that was to start at the end of June 2017 became null and void.    page 62

2017 compensation

CP delivered record financial and safety performance in 2017. A growing top line, coupled with disciplined cost control, produced record financial results. Train accident frequency decreased by 12 percent (to a new all-time low), making 2017 the 12th consecutive year that CP has led the industry on this key safety metric.

This year’s decisions about executive pay and the program changes we made for 2017 are directly linked to performance.

2017 short-term incentive plan

The short-term incentive plan rewards executives for achieving pre-determined corporate and individual performance objectives that are tied directly to CP’s strategy and operational requirements.

Starting in 2017, the corporate performance result is based on improving revenue growth in a cost-effective manner. We are using both financial and non-financial measures to create a balanced approach to performance assessment. Payouts range from 0% to 200% of target for each performance measure, with pre-defined levels for threshold, target and exceptional performance.

2017 corporate performance was assessed against four measures — operating ratio, operating income, safety and operating performance — and resulted in a corporate performance result of 138%. The table below sets out the changes we made to the plan measures in 2017. The results are above target for three of the measures, however, there is no payout for the operating measure because performance was below threshold.

 

Performance measure    2016
STIP
            New in
2017 STIP
   Why we made the change    Target
(100%)
   2017
STIP result
  2017
score

Financial measures

                                        

STIP Operating ratio

Operating expenses divided by total revenues

     50     >      40%   

•  Continues our focus on driving down costs while focusing on our growth strategy

   57.25%    57.1%   137%

STIP Operating income

Total revenues less operating expenses

     25     >      40%   

•  Highlights the importance of revenue growth to our strategy

   $2,745    $2,816   159%

Free cash flow

Cash from operating activities less cash used in investing activities

     25     >      0%   

•  Replaced by safety and operating measures

 

•  This measure can be volatile from year to year due to timing and quantum of land sales, tax payments and capital investments. The weighting of ROIC was increased as a long-term measure to ensure we deploy free cash flow in a responsible manner

             

Safety measure (new)

                                        

Safety

FRA defines train accident frequency as train accidents per 1 million train miles

     0     >      10%   

•  New safety metric helps create a more balanced scorecard

 

•  Safety measure pays out at maximum only if we achieve the stretch target and remain the best in the industry

   1.19    0.99   200%

Operating measure (new)

                                        

Operating performance

Train speed is defined as total train hours divided by total train miles, excluding bulk, passenger and local trains

     0     >      10%   

•  New operating metric helps create a more balanced scorecard

 

•  Train speed is a measure for improved asset utilization and delivery times, leading to enhanced customer experience

 

•  Train speed is an interim measure that will be replaced by Trip Plan compliance in 2018

   24    23.4   0%

2017 Corporate performance factor

                                       138%

The corporate score, combined with the individual performance scores, resulted in an annual cash bonus of $2,419,292 for the President and CEO and an average of $475,052 for the other named executives. You can read more about short-term incentive and the 2017 performance assessment beginning on page 37.

 

 

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EXECUTIVE SUMMARY

1.2 COMMITTEE CHAIR’S MESSAGE

 

 

2017 long-term incentive plan

Our long-term incentive plan includes:

 

  performance share units (PSUs) (60%) — focus executives on medium-term goals over a three-year performance period

 

  stock options (40%) — focus executives on generating long-term shareholder value.

Long-term incentive awards were granted to the named executives in early 2017 based on a percentage of base salary, several external factors, including the practices of our compensation comparator group and external market data, as well as internal factors such as executive retention, dilution impact and long-term value creation. You can find the dollar value of the awards and details about the allocation of PSUs and stock options beginning on page 42.

We increased the weighting of PSUs to 60% (from 50%) to tie more compensation directly to our performance and reduced the term for options to seven years from 10. Option awards continue to vest 25% each year over four years beginning on the first anniversary of the grant.

The new performance measures and weightings for the 2017 PSU awards are set out below. Payouts range from 0% to 200% of target for each performance measure, with pre-defined levels for threshold, target and exceptional performance.

 

Measure    2016
LTIP
          New in
2017 LTIP
     Why we made the change

PSU final year operating ratio

Operating expenses divided by total revenues

     60%     >      0%     

•  Eliminated operating ratio as a measure because executives successfully drove down costs during the turnaround and to remove the overlap with the short-term incentive plan

 

•  Increased the weighting of return on invested capital because it is a more appropriate long-term measure as we focus on growth

PSU three-year average return on invested capital (ROIC)

Net operating profit after tax divided by average invested capital

     20%     >      60%     

•  Increased the weighting significantly to focus executives on the effective use of capital as we grow

Total shareholder return

Compound average growth rate (“CAGR”) compared to the S&P/TSX Capped Industrial Index

     10%     >      20%     

•  Increased the weighting to align with shareholder interests

 

•  Compares our TSR to the S&P/TSX Capped Industrial Index which represents a range of Canadian industrial investment alternatives rather than the broader S&P/TSX60 as was done in 2016

Total shareholder return

CAGR compared to the S&P 1500 Road and Rail Index

     10%     >      20%     

•  Increased the weighting to align with shareholder interests

 

•  Compares our TSR to the S&P1500 Road and Rail Index which represents a broad range of transportation peers rather than the narrow group of publicly traded Class 1 peers as was done in 2016

CEO performance stock options

As disclosed in last year’s proxy statement, when Keith Creel became CEO on January 31, 2017, he received a special upfront grant of performance stock options, designed to motivate strong CEO performance, build his equity ownership and retain him during a period of significant change in the railroad industry. To make the upfront grant, the Committee reduced his target long-term incentive award to 400% of salary for the next five years (from the market median of 500% among the Class 1 railroads), and used the difference (5 years x 100%) to make the award, which was allocated 100% to performance stock options.

The options will cliff vest on February 1, 2022 based on our five-year TSR relative to two equally weighted measures: the S&P/TSX Capped Industrials Index and S&P 1500 Road and Rail Index. You can read about the vesting and performance conditions on page 44.

 

 

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Payout of 2015 PSU awards

Performance share units granted to the named executives in January 2015 vested on December 31, 2017 based on performance for the period January 1, 2015 to December 31, 2017. A strong operating ratio and average return on invested capital resulted in a PSU performance factor of 160%. Our three-year relative TSR was below threshold, resulting in a zero payout on the two TSR measures.

 

PSU measures    Target
(100%)
     2017 result      Weighting     PSU performance
factor
 

PSU Operating ratio

Operating expenses divided by total revenues

     62%        57.1%        50%       200%  

PSU 2015 to 2017 average ROIC

Net operating profit after tax divided by average invested capital

     14%        15.1%        30%       200%  

Total shareholder return

Three-year CAGR relative to the S&P/TSX 60 Index

     1%        -5.6%        10%       0%  

Total shareholder return

Ranking at the end of the three years relative to Class 1 Railroads

     3        5        10%       0%  

PSU performance factor

                               160%  

The named executives received a payout of 160% on the awards granted. You can read more about the performance assessment and the actual payout values beginning on page 47.

About CEO pay

We signed a new employment agreement with Keith Creel effective January 31, 2017, which sets out the terms of his compensation as CEO. This agreement was designed to put his total compensation more in line with the market median, does not include tax equalization and limits his use of the corporate aircraft.

Keith Creel is one of the most highly regarded railroaders in North America. The rail industry is in a period of significant change at the executive level and as other railroads look to recruit key executive talent, the Board needs to ensure that Mr. Creel has a compensation package that rewards his performance and acknowledges his expertise in order to ensure his retention during this key period.

The upfront grant of performance stock options, described above, made to Mr. Creel upon becoming CEO was designed to have maximum effect and is directly linked to building shareholder value. We mitigated the cost impact of this grant by reducing his annual target long term incentive award to 400%, which is below the market median.

Linking pay to shareholder value

We believe that using a significant portion of variable or at-risk pay can motivate strong performance and yield significant rewards.

92% of Mr. Creel’s pay for 2017 was variable or at risk, and a significant portion tied to the value of our shares, aligning his compensation with shareholder interests.

The graph on the next page shows the average compensation granted to Mr. Creel from 2015 to 2017 (as disclosed in our summary compensation table) and the realized and realizable value at December 31, 2017.

 

 

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EXECUTIVE SUMMARY

1.2 COMMITTEE CHAIR’S MESSAGE

 

 

 

The realized and realizable pay in the past three years is moderately higher than the compensation granted. This growth is reasonable given the increase in our share price over the period, reinforcing the pay for performance design of our compensation plans.

 

Motivating the team

 

Mr. Creel has built and continues to build a strong and qualified team to help execute our growth strategy and position CP for greater success.

 

We recognize the importance of maintaining a compensation program that motivates the executive team, retains them and keeps them excited about staying with CP.

 

Changes in 2018

 

Starting in 2018 we will use trip plan compliance rather than train speed as the operating measure under the short-term incentive plan.

 

Trip plan compliance has become CP’s cornerstone operating principle. It aligns our service plan and actions with actual customer expectations by improving efficiencies and reliability.

 

Through trip plan compliance, CP is generating superior service that is consistent and aligned with market requirements, while controlling costs through improved efficiencies. Our previous measure, train speed, which measures the movement time of trains from origin to destination, was used as an interim measure for trip plan compliance in 2017 as we refined our processes and gathered enough historical data to reliably and consistently measure trip plan compliance as a compensation measure.

 

The Committee and management believe this is an important change because train speed is only a component of trip plan compliance whereas trip plan compliance sets the standard of performance and represents our commitment to our customers.

 

The Committee continues to review CP’s executive compensation program against the market and best practices and is committed to responding to CP’s changing needs as it grows and evolves its strategy. We are confident that the changes we implemented in 2017 and plan for 2018 align our compensation practices with CP’s focus on growth and address the feedback we received.

 

Everyone at CP is committed to earning your trust and confidence. We welcome your comments and feedback at any time.

 

Sincerely,

 

/s/ Isabelle Courville

 

Isabelle Courville

Chair, Management Resources and Compensation Committee

  

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Notes:

Summary compensation table: average of salary earned, actual cash bonus received, and long-term incentives granted (using the grant date fair value from 2015 to 2017 as disclosed in the summary compensation table on page 62). The compensation figures have been converted to Canadian dollars using the following average exchange rates: $1.2787 for 2015, $1.3248 for 2016 and $1.2986 for 2017.

 

Realized and realizable: average of salary earned, actual cash bonus received, the value of long-term incentive awards that have vested or been exercised, and the estimated current value of unvested long-term incentive awards granted from 2015 to 2017:

 

•  vested PSUs and stock options are valued at the time of vesting or exercise

•  the value of vested 2015 PSUs payable in February 2018 was calculated using the 30-day average trading price of our shares prior to December 31, 2017 of US$176.56 on the NYSE with a performance multiplier of 1.6 and includes dividends earned up to the payment date

•  the value of unvested 2016 and 2017 PSU’s are based on the closing price of our shares on December 29, 2017 of US$182.76 on the NYSE with a performance multiplier of 1.0. PSUs include reinvestment of additional units received as dividend equivalents

•  the value of unvested/unexercised stock options is based on the closing price of our shares on December 29, 2017 of US$182.76 on the NYSE

•  the compensation figures for salary earned and actual bonus received have been converted to Canadian dollars using the following average exchange rates: $1.2787 for 2015, $1.3248 for 2016 and $1.2986 for 2017.

•  the value of any realized and realizable PSUs and Options have been converted into Canadian dollars using the 2017 year-end exchange rate of $1.2545

 

 

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LOGO

 

1.3 PROXY HIGHLIGHTS

 

You are entitled to attend and vote at our 2018 annual meeting of shareholders if you held CP common shares at the close of business on March 15, 2018.

2018 Meeting details

 

When

Wednesday, May 10, 2018
9:00 a.m. (Mountain
Daylight Time)

 

Where

CP Head Office

Royal Canadian Pacific

Pavilion

7550 Ogden Dale Road S.E.

Calgary, Alberta T2C 4X9

 

Meeting materials are being
mailed to shareholders on or
about April 3, 2018

         Business of the meeting    For more
Information
    

1. Receive the audited consolidated financial statements for the year ended December  31, 2017

 

The audited consolidated financial statements are included in our 2017 annual report, available on our website (www.cpr.ca)

 

   page 15
    

2. Appoint the auditor

 

Deloitte LLP has served as our auditor for over five years.

The Board recommends you vote FOR the appointment of Deloitte LLP as our auditor.

 

   page 15
    

3. Have a say on executive pay (advisory vote)

 

 

We believe in pay for performance and have made several changes to our compensation program based on shareholder input and feedback.

The Board recommends you vote FOR our approach to executive compensation.

 

   pages 16 and 27
    

4. Elect directors

 

You will elect nine directors to our Board this year. Each is qualified, experienced and committed to serving on the Board.

The Board recommends you vote FOR each nominee.

 

  

page 17

 

 

 

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EXECUTIVE SUMMARY

1.3 PROXY HIGHLIGHTS

 

 

Governance highlights

Our directors must have a mix of core skills and experience:

 

LOGO

 

 

industry

knowledge

 

   

 

financial and

accounting

expertise

 

   

 

strategic

planning

 

    

Board stats

Average age: 59

Average tenure: 3 years

Diversity: 44% women, 56% men

No Board interlocks

 

Key governance policies

and practices

•  Code of business conduct and ethics

•  Majority voting policy

•  Advance notice by-law

•  Shareholder engagement

•  Orientation and continuing
education

•  Board assessment process

 

    
 

 

human

resources

 

   

 

executive compensation experience

 

   

 

risk

management

 

    

Our 2018 nominated directors

Name   Age   Director since   Position   Independent  

Committee

memberships

 

2017 meeting

attendance

 

2017

voting result

 

Other public

company Boards

Andrew Reardon

  72   May 2013  

Retired Chairman and CEO

TTX Company

  Yes  

Audit

Corporate governance and nominating Finance

Management resources and compensation

  100%   99.20% for  

John Baird

  48   May 2015  

Senior Advisor

Bennett Jones LLP

Former Minister of Transport and Infrastructure Canada

  Yes  

Corporate governance and nominating

Management resources and compensation

  100%   97.94% for   2

Isabelle Courville

  55   May 2013  

Chair of the Board Laurentian Bank of

Canada

  Yes  

Management resources and compensation (chair)

Corporate governance and nominating

  100%   94.94% for   3

Keith Creel

  49   May 2015   President and CEO CP   No     100%   99.61% for  

Jill Denham

  57   Sept 2016   Chair of the Board Morneau Shepell Inc.   Yes  

Audit

Finance

  100%   99.30% for   3

Rebecca

MacDonald

  64   May 2012  

Executive Chair

Just Energy Group Inc.

  Yes  

Corporate governance and nominating (chair)

Management resources and compensation

  100%   97.60% for   1

Matthew Paull

  66   Jan 2016   Former Senior Executive Vice President and CFO McDonald’s Corporation   Yes  

Finance (chair)

Management resources and compensation

  100%   98.96% for   3

Jane Peverett

  59   Dec 2016  

Former President and CEO

BC Transmission Corporation

  Yes  

Audit (chair)

Finance

  100%   99.31% for   3

Gordon Trafton

  64   Jan 2017  

Former Senior Vice President

Canadian National Railway

  Yes  

Corporate governance and nominating

Management resources and compensation

  100%   99.16% for  

You can read more about each nominated director in the profiles beginning on page 20 and the skills matrix on page 86.

 

 

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Compensation highlights

Our executive compensation program is designed to pay for performance and to align management’s interests with our business strategy and the interests of our shareholders.

 

LOGO

 

 

performance

targets support

our-strategy

 

   

 

emphasis on

financial, safety

and operating

measures

 

   

 

focus on

building

shareholder

value

 

    

Key compensation governance policies and practices

•  Pay for performance philosophy

•  Align with shareholder interests

•  Share ownership requirements

•  Performance-based vesting

•  Caps on incentive plan payouts

•  Independent advice from an external consultant

•  Shareholder engagement program

•  Clawback policy

    
 

 

direct link

between

pay and

performance

 

   

 

majority of

executive pay

is at risk

 

   

 

executives are

also CP

shareholders

 

    

We made several changes to our executive compensation program for 2017, which you can read about in the message from the chair of the management resources and compensation committee beginning on page 5.

2017 compensation

The table below shows the total direct compensation awarded to the named executives for 2017.

 

            At-risk pay               
($ thousands)                  Long-term incentive awards               
      Base salary      Short-term
incentive
     Performance
share units
     Stock options     Deferred
share units
   

Total direct

compensation

    

%

at risk

 

Keith E. Creel

President and Chief Executive Officer

   $ 1,437      $ 2,419      $ 4,408      $ 10,517           $ 18,781        92

Nadeem S. Velani

Executive Vice-President and Chief Financial Officer

   $ 451      $ 491      $ 782      $ 203     $ 24     $ 1,951        77

Robert A. Johnson

Executive Vice-President, Operations

   $ 565      $ 597      $ 959      $ 556           $ 2,677        79

Laird J. Pitz

Senior Vice-President and Chief Risk Officer

   $ 458      $ 436      $ 394      $ 229           $ 1,517        70

Jeffrey J. Ellis

Chief Legal Officer and Corporate Secretary

   $ 443      $ 376      $ 387      $ 217           $ 1,423        69

All of the named executives except Mr. Velani and Mr. Ellis were paid in U.S. dollars. Their compensation has been converted to Canadian dollars using the 2017 average exchange rate of $1.2986.

As disclosed in last year’s proxy, when Mr. Creel became CEO on January 31, 2017, he received a special upfront grant of performance stock options valued in our summary compensation table under Stock Options at $7,989,462, designed to motivate strong CEO performance, build his equity ownership and retain him during a period of significant change in the railroad industry. The management resources and compensation committee reduced his target long-term incentive award to 400% of salary for the next five years (from the market median of 500% among the Class 1 railroads) to make the upfront grant (see page 44 for details).

You can read more about executive compensation in the compensation discussion and analysis beginning on page 28.

 

 

12  CANADIAN PACIFIC


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LOGO

 

LOGO

 

MANAGEMENT PROXY CIRCULAR

 

You have received this management proxy circular because you owned common shares of Canadian Pacific Railway Limited (CP) at the close of business on March 15, 2018. You are entitled to attend our 2018 annual meeting of shareholders and vote your shares.

 

Management is soliciting your proxy for the meeting, which will be held at CP’s head office at Royal Canadian Pacific Pavilion, 7550 Ogden Dale Road S.E. in Calgary, Alberta on Wednesday, May 10, 2018, beginning at 9:00 a.m. (Mountain Daylight Time).

 

We are soliciting proxies by mail, in person, by phone or by electronic communications and have retained Kingsdale Advisors (Kingsdale) as our strategic shareholder advisor and proxy solicitation agent. The fees paid to Kingsdale relating to their proxy solicitation services will be approximately $40,000 (as part of a total retainer of $85,000 for overall strategic governance advisory and solicitation management services). We will reimburse them for disbursements and out-of-pocket expenses. We will also pay $8 for each shareholder call they make or receive and any other fees we agree to. You can find Kingsdale’s contact information on page 91.

 

Please take some time to read this circular before you decide how to vote your shares.

 

Our Board of Directors has approved the contents of this proxy and has authorized us to send it to you.

 

   

In this document:

•  you and your refer to shareholders of Canadian Pacific Railway Limited

•  we, us, our, CP and company refer to Canadian Pacific Railway Limited and, where applicable, its subsidiaries

•  shares mean common shares of CP

•  all amounts are in Canadian dollars

•  any 2017 amounts paid in United States dollars (US$) have been converted to Canadian dollars using the Bank of Canada exchange rate on December 29, 2017 ($1.2545 = US$1.00), unless indicated otherwise

•  information in this document is as of March 15, 2018, unless indicated otherwise.

 

For more information

 

You can find more information about CP including our 2017 annual report on our website (www.cpr.ca), on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov).

 

You can also ask us for a free copy of the annual report by writing to:

Office of the Corporate Secretary Canadian Pacific

7550 Ogden Dale Road S.E. Calgary, Alberta T2C 4X9.

 

 

 

/s/ Jeffrey Ellis

 

Jeffrey Ellis

Corporate Secretary

March 15, 2018

   

 

 

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About the information in this document

 

Note regarding presentation

Our common shares are listed for trading on the TSX and the NYSE. We are classified as a foreign private issuer pursuant to applicable U.S. securities laws and are therefore exempt from the proxy rules under the U.S Securities Exchange Act of 1934 (the Exchange Act). This document is prepared in compliance with Canadian securities law and regulations. Additionally, as a foreign private issuer, we are permitted to follow home country practice instead of certain governance requirements set out in the NYSE rules, provided we disclose any significant differences between our governance practices and those required by NYSE rules. Further information regarding differences is available on our website at investor.cpr.ca/governance.

 

Non-GAAP measures

This proxy circular includes certain earnings measures that do not have a standardized meaning prescribed by generally accepted accounting principles (GAAP) in the United States and, therefore, may not be comparable to similar measures used by other companies. This includes measures like adjusted operating ratio, adjusted operating income, adjusted diluted earnings per share and adjusted return on invested capital, included in the messages from the Chairman of the Board and the chair of the management resources and compensation committee and in the compensation discussion and analysis beginning on page 3, 5 and 28, respectively. You can find more information about non-GAAP measures on page 92 and the definitions and reconciliation of these measures under See Non-GAAP Measures in Item 7 of our 2017 annual report on Form 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), available on our website (www.cpr.ca), on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov).

 

Forward-looking information

This proxy circular contains certain forward-looking information and forward-looking statements (collectively, forward-looking information) within the meaning of applicable securities laws relating to our compensation programs, operations, anticipated financial performance, business prospects, planned capital expenditures and strategies, among other things. This forward-looking information also includes, but is not limited to, statements about our expectations, beliefs, plans, goals, objectives, assumptions, information and statements about possible future events, conditions and results of operations or performance. Forward-looking information may contain statements with words such as anticipate, believe, expect, plan or similar words suggesting future outcomes.

 

You should not put undue reliance on forward-looking information. It is not a guarantee of future performance. Forward-looking information involves many assumptions, inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking information. This includes factors such as: changes in business strategies, general North American and global economic, credit and business conditions, the availability and price of commodities, the effects of competition, industry capacity, shifts in demand, changes in laws and regulations, cost increases, claims and litigation, labour disputes and liabilities arising from derailments, among other things.

 

These and other factors are detailed from time to time in reports we file with securities regulators in Canada and with the U.S. Securities and Exchange Commission (SEC) in the United States. You should refer to Item 1A – Risk Factors and Item 7 and Forward-Looking Information in our 2017 annual and interim reports.

 

Forward-looking information is based on our current expectations, estimates and projections and it is possible we will not achieve these predictions, forecasts, projections, and other forms of forward-looking information. We do not publicly update or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise, unless we are required to by law.

 

  

 

 

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LOGO

 

2.1 BUSINESS OF THE SHAREHOLDER MEETING

 

You will vote on three items of business at the meeting. None of the Company’s directors of officers since the beginning of the last financial year, nominated directors or their respective associates or affiliates have a material interest in any of the items that are being voted on.

1. Receive the financial statements

Our audited consolidated financial statements for the year ended December 31, 2017 and the auditor’s report will be presented at the meeting.

The audited consolidated financial statements are included in our 2017 annual report, which was mailed to all registered shareholders who did not decline to receive a copy and to non-registered shareholders who asked to receive a copy. The annual report is also available on our website (www.cpr.ca), or you can ask our Corporate Secretary to send you a copy.

 

2. Appoint the auditor

 

You will vote on appointing the auditor. Deloitte LLP (Deloitte) has served as our auditor for over five years and the Board recommends that they be re-appointed as our auditor until the close of the next annual meeting of shareholders. Deloitte’s audit fees are approved by the Board and all other Deloitte fees are approved by the audit committee. Deloitte’s appointment requires an affirmative vote from shareholders.

    

About voting

 

You can vote your shares by proxy or in person at the meeting. See page 89 for details about how to vote your CP shares.

 

The table below shows the fees we paid to Deloitte in 2017 and 2016 for audit and non-audit services. Representatives of Deloitte will be at the meeting and will have an opportunity to make a statement and respond to any questions from shareholders.

 

For the year ended December 31    2017      2016  

Audit fees

for audit of our annual financial statements, reviews of quarterly reports and services relating to statutory and regulatory filings or engagements (including attestation services and audit of financial statements of certain subsidiaries and certain pension and benefits plans, and advice on accounting and/or disclosure matters)

   $ 3,834,100      $ 2,398,500  

Audit-related fees

for assurance and services related to the audit but not included in the audit fees above, including securities filings, compliance review of third-party agreements, refinancing of subsidiary companies and accounting training

   $ 21,000      $ 289,800  

Tax fees

for services relating to tax compliance, tax planning and tax advice and access fees for taxation database resources

   $ 153,100      $ 147,000  

All other fees

for services provided relating to CP’s corporate sustainability report

   $ 34,600      $ 26,100  

Total

   $ 4,042,800      $ 2,861,400  

 

The Board recommends you vote FOR the appointment of Deloitte as our auditor.

You can read more about the audit committee on pages 24 and 79.

 

 

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3. Have a say on executive pay

You will have an opportunity to vote on executive pay at CP at the meeting. As this is an advisory vote, the results are non-binding but will give the Board important feedback on this issue.

Our executive compensation program is designed to support our growth strategy. We implemented several changes to our compensation program in 2017, as disclosed in the letter from the chair of the management resources and compensation committee (the “Compensation Committee”) beginning on page 5 and our executive compensation disclosure beginning on page 27. These changes were the result of an extensive shareholder engagement program as well as a detailed, ongoing review of executive compensation by the Compensation Committee, the Board and our human resources group.

Last year we received a 71.11% vote for our non-binding advisory vote on executive compensation, compared to 49.9% in 2016. The Compensation Committee continues to work hard to make sure our compensation program pays for performance, aligns with sound principles, supports long-term sustainable value, is clear and transparent and aligns with shareholder interests.

You can vote FOR or AGAINST the following resolution on executive pay at CP as described in this proxy circular:

“RESOLVED, on an advisory basis and not to diminish the role and responsibilities of the Board of Directors, that the shareholders accept the Company’s approach to the compensation of the named executives of Canadian Pacific as disclosed in the Company’s proxy circular (which includes the compensation discussion and analysis (CD&A), the compensation tables and the discussion accompanying the compensation tables) delivered prior to the 2018 annual meeting of shareholders.”

 

The Board recommends you vote FOR executive compensation at CP.

In order to be approved, the advisory resolution requires an affirmative vote of the majority of votes duly cast at the meeting. The Board will consider this year’s results, other feedback it receives as well as best practices in compensation and governance when reviewing our executive compensation in the future.

You can read about the program changes this year in the compensation discussion and analysis beginning on page 28 and the letter from the chair of the Compensation Committee beginning on page 5.

 

 

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PROXY CIRCULAR

2.1 BUSINESS OF THE SHAREHOLDER MEETING

 

 

 

4. Elect directors

 

Our governing documents require us to have between five and 20 directors on our Board.

 

This year the Board has decided that nine directors should be nominated for election to the Board. Directors are elected for a term of one year until the close of our next annual meeting of shareholders, unless a director resigns or is otherwise removed.

 

Each nominated director has expressed his or her willingness to serve on our Board. If before the meeting, however, we learn that a nominee is unable to serve, the people named on your proxy or voting instruction form can use their discretion to vote for another qualified nominee.

 

You can vote FOR or WITHHOLD your vote for each nominated director.

 

You can read more about the proposed Board and each nominated director beginning on page 18.

  

About majority voting

 

Our majority voting policy requires a nominee who receives more withheld than for votes to immediately tender their resignation to the Board.

 

The Board will review the matter and announce their decision to accept or reject the resignation within 90 days of the meeting and explain the reasons why. Generally the Board will accept the resignation unless there are extraordinary circumstances.

 

 

The Board recommends you vote FOR each nominated director.

5. Other business

We will consider any other business that is properly brought before the meeting. As of the date of this circular, the Board is not aware of any items that may be brought before the meeting.

 

Shareholder proposals

In 2017 Canadian Pacific did not receive any shareholder proposals requiring disclosure in this Proxy Circular.

If you want to submit a shareholder proposal for our 2019 annual meeting, it must be mailed to the Office of the Corporate Secretary, CP, 7550 Ogden Dale Road S.E., Calgary, Alberta T2C 4X9.

The proposal must be received by us by December 15, 2018. Note that under the Canada Business Corporations Act, simply submitting a shareholder proposal does not guarantee that it will be included in the proxy materials.

 

 

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LOGO

 

2.2 ABOUT THE NOMINATED DIRECTORS

 

 

LOGO  

The Board is elected by shareholders to oversee management and make sure the long-term interests of shareholders are served.

 

Key to proper stewardship is assembling a Board that is independent, qualified, and experienced, and operates independently of management.

 

Independence

 

Eight of the nine nominated directors, including the Chairman of the Board and all committee members, are independent. Mr. Creel is not independent because he is CP’s President and Chief Executive Officer.

 

Qualified and experienced

 

Our directors must have a mix of core skills and experience:

 

 

LOGO

 

 

industry

knowledge

 

   

 

financial and

accounting

expertise

 

   

 

strategic

planning

 

   
   

 

human

resources

 

   

 

executive compensation experience

 

   

 

risk

management

 

 

 

Diversity

 

The corporate governance and nominating committee of the Board (the “Governance Committee”) considers age, gender, cultural heritage and regional representation as part of its assessment of director candidates.

 

The proposed Board has an average age of 59 years and average tenure of three years. Four of the nine nominees 44% are female. Three of our Board committees are chaired by women.

 

 

 

 

18  CANADIAN PACIFIC


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2.2 ABOUT THE NOMINATED DIRECTORS

 

 

 

Serving on other Boards

 

Canadian Pacific Railway Company is our principal operating entity in Canada and it directly or indirectly owns all the voting shares of our other subsidiaries. Our directors serve as directors of Canadian Pacific Railway Limited and Canadian Pacific Railway Company and the two Boards meet concurrently. Canadian Pacific Railway Company is a reporting issuer in Canada because of its outstanding debt securities.

     

 

No Board interlocks

 

None of the nominated directors serve together on other public company Boards.

 

 

None of the nominated directors serves on more than three other public company Boards (see page 77 for more information about serving on other Boards).

 

Meeting attendance

 

We expect directors to attend all Board meetings and all of their committee meetings.

 

Meeting materials are provided to directors in advance. If a director cannot attend a meeting, he or she can provide their comments to the Chairman of the Board, committee chair or the Corporate Secretary beforehand and that person will ensure the comments and views are considered at the meeting.

 

2017 attendance

 

Nominee directors attended 100% of their Board and committee meetings in 2017. The independent directors also met in executive sessions without management present at each Board meeting.

 

 

     
     

Board

meetings

    

Committee

meetings

    

Total meetings

           

 

100% attendance

 

The 2018 nominee directors attended
all of their Board and committee
meetings in 2017.

 

John Baird

     7 of 7        9 of 9        16 of 16        100      

Isabelle Courville

     7 of 7        9 of 9        16 of 16        100      

Keith Creel

     7 of 7        n/a        7 of 7        100      

Jill Denham

     7 of 7        10 of 10        17 of 17        100      

William Fatt(1)

     5 of 6        7 of 8        12 of 14        86      

E. Hunter Harrison(2)

     0 of 1 (3)       n/a        0 of 1        n/a        

Rebecca MacDonald

     7 of 7        9 of 9        16 of 16        100      

Matthew Paull

     7 of 7        10 of 10        17 of 17        100      

Jane Peverett

     7 of 7        9 of 9        16 of 16        100      

Andrew Reardon (Chair)

     7 of 7        19 of 19        26 of 26        100      

Gordon Trafton

     7 of 7        6 of 6        13 of 13        100      

Total

     68 of 70        88 of 89        156 of 159        99 %       

Notes:

(1)  Mr. Fatt resigned from the Board effective November 9, 2017 due to health reasons.

(2)  Mr. Harrison resigned from the Board effective January 31, 2017.

(3)  Mr. Harrison recused himself from this meeting as a result of a disclosed conflict of interest.

 

   

   

   

     

 

 

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Director profiles

 

All nine nominated directors are qualified and experienced, and have agreed to serve on our Board.

 

All are CP shareholders and must meet our director share ownership requirements within five years of joining the Board.

 

Share ownership listed here is as at March 15, 2018 and includes shares directors beneficially own or control, or hold directly or indirectly. Share ownership includes holdings under the Directors’ Deferred Share Unit (DDSU) plan.

 

 

  

 

 

 

 

Andrew F. Reardon

Chairman of the Board

 

LOGO  

Independent

Age: 72

Director since:

May 1, 2013

Residence: Marco

Island, Florida, U.S.A.

2017 voting results:

99.20% for

2017 attendance:

100%

 

Chairman of the Board since July 20, 2015. Brings extensive experience in executive management, law, corporate governance and the rail industry

BUSINESS EXPERIENCE

 

  Chairman and Chief Executive Officer (2001 to 2008), President and Chief Executive Officer from 2001 to 2008, and Vice-President, Law and Human Resources (1992 to 2000) of TTX Company, the leading railcar leasing company in North America
  Previously Senior Vice-President, Law and Administration for Illinois Central Railroad

PUBLIC COMPANY BOARD EXPERIENCE

 

  Appvion Inc. (2007 to 2015) (member of the Audit Committee, Compensation Committee and Chair of the Governance Committee)

OTHER EXPERIENCE

Other Boards

  TTX Company (2001 to 2008)
  Other rail industry boards: Terminal Railroad Association of St. Louis and Peoria and Pekin Union Railway
  Presidential appointee to the Railroad Retirement Board (1990 to 1992)
  Barriger Railroad Library (St. Louis) Board of Trustees (Board member (1998 to present), and President Emeritus (2009 to 2012)

Other experience

 

  Officer, United States Navy (1967 to 1971)

EDUCATION

 

  Bachelor’s degree, University of Notre Dame
  Juris Doctor degree, University of Cincinnati
  Master’s degree in Taxation, Washington University Law School

SHARE OWNERSHIP

Shares: 4,031

DDSUs: 10,463

Options: 0

Meets share ownership requirements

 

The Hon. John Baird, P.C.

 

LOGO  

Independent
Age:
48

Director since:

May 14, 2015

Residence: Toronto,

Ontario, Canada

2017 voting results:

97.94% for

2017 attendance:

100%

 

Brings senior level executive experience in public policy and regulatory affairs, especially in transport, environment and Canada-U.S. relations

BUSINESS EXPERIENCE

 

  Senior Advisor at the law firm of Bennett Jones LLP , Hatch Ltd. (an engineering firm) and Eurasia Group (a geopolitical risk consultancy) (2015 to present)
  Member of the International Advisory Board, Barrick Gold Corporation (2015 to present)
  President of Grantham Finchley Consulting Inc. (2015 to present)

PUBLIC COMPANY BOARD EXPERIENCE

 

  Canfor Corporation and Canfor Pulp Products Inc. (2016 to present) (member of Environmental, Health and Safety Committee; Capital Expenditure Committee and Corporate Governance Committee)

OTHER EXPERIENCE

Other Boards

  FWD Group Ltd./FWD Ltd. (2015 to present) (member of Audit Committee and Risk Management and Actuarial Committee)
  PineBridge Investments (2015 to present)
  Friends of Israel Initiative (2015 to present) (member of the Board)

Other experience

  Served as Canadian Foreign Minister, Minister of Transport and Infrastructure, Minister of the Environment, and President of the Treasury Board during his three terms as a Member of the Canadian Parliament (2006 to 2015)
  Appointed to the Privy Council in 2006
  Former Minister of Community and Social Services and Minister of Energy in Ontario provincial legislature
  Senior Advisor to Community Living Ontario, an organization that supports individuals with developmental disabilities
  Advisory Board member to Prince’s Charities Canada, the charitable office of His Royal Highness The Prince of Wales

EDUCATION

 

  Honours Bachelor of Arts (Political Studies), Queen’s University

SHARE OWNERSHIP

Shares: 0

DDSUs: 3,239

Options: 0

Has until May 2020 to meet the share ownership requirements

 

 

 

20  CANADIAN PACIFIC


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PROXY CIRCULAR

2.2 ABOUT THE NOMINATED DIRECTORS

 

 

 

 

 

 

Isabelle Courville

 

  LOGO    

Independent

Age: 55

Director since:

May 1, 2013

Residence: Rosemère, Québec, Canada

2017 voting results:

94.94% for

2017 attendance: 100%

 

Brings significant executive level management experience including financial and legal expertise

BUSINESS EXPERIENCE

 

  President of Hydro-Québec Distribution and Hydro-Québec TransÉnergie (2007 to 2013)
  20 years of experience in the Canadian telecommunications industry, including President of Bell Canada’s Enterprise Group (2003 to 2006) and President and Chief Executive Officer of Bell Nordiq Group (2002 to 2003)

PUBLIC COMPANY BOARD EXPERIENCE

 

  SNC Lavalin (2017 to present) (member of Governance and Ethics Committee)
  Laurentian Bank of Canada (2007 to present) (Chair of the Board and member of Human Resources and Corporate Governance Committee)
  Veolia Environment (2015 to present) (member of Audit Committee and Research and Development Committee)
  Gecina S.A. (2016 to April 2017) (member of Audit Committee)
  TVA Group (2013 to 2016)

OTHER EXPERIENCE

Other Boards

 

  Institute of Corporate Directors (ICD) (2013 to present)
  Institute for Governance of Private and Public Organizations (IGOPP) (2016 to present)

EDUCATION

 

  Bachelor’s degree in Engineering Physics, Ecole Polytechnique de Montréal
  Bachelor’s degree in Civil Law, McGill University
  Doctorate Honoris Causa, University of Montréal

SHARE OWNERSHIP

Shares: 900

DDSUs: 6,292

Options: 0

Meets share ownership requirements

 

 

 

 

Keith E. Creel

 

  LOGO    

Not Independent

Age: 49

Director since:

May 14, 2015

Residence: Wellington,

Florida, U.S.A.

2017 voting results:

99.61% for

2017 attendance: 100%

 

President and Chief Executive Officer of CP since January 31, 2017. Brings extensive railroad operating experience and expertise in executive management and marketing and sales

BUSINESS EXPERIENCE

 

  President and Chief Executive Officer of CP (2017 to present, President and Chief Operating Officer of CP (February 2013 to January 2017)
  Named “Railroad Innovator” for 2014 by Progressive Railroading in recognition of his leadership at CP
  Executive Vice-President and Chief Operating Officer of Canadian National Railway Company (2010 to 2013)
  Other positions at CN included Executive Vice- President, Operations, Senior Vice-President Eastern Region, Senior Vice-President Western Region, and Vice-President of CN’s Prairie division (2002 to 2010)
  Trainmaster and director of corridor operations at Illinois Central Railway prior to its merger with CN in 1999
  Superintendent and general manager at Grand Trunk Western Railroad (1999 to 2002)
  Began his railroad career in 1992 as an intermodal ramp manager at Burlington Northern Railway in Birmingham, Alabama

OTHER EXPERIENCE

Other Boards

  Member of the Board of TTX Company (2014 to present)
  Representative on American Association of Railroads

Other experience

  Commissioned officer in the U.S. Army and served in the Persian Gulf War in Saudi Arabia

EDUCATION

 

  Bachelor of Science in Marketing, Jacksonville State University
  Advanced Management Program, Harvard Business School

SHARE OWNERSHIP

Shares: 2,411

DSUs*: 31,218

Options*: 579,546

Meets executive share ownership requirements (see page 52)

 

*   Mr. Creel received a special make-whole DSU grant when he was hired in 2013 and a stand-alone stock option award as part of his executive compensation.

 

 

 

 

Gillian (Jill) H. Denham

 

  LOGO    

Independent

Age: 57

Director since:

September 6, 2016

Residence: Toronto, Ontario, Canada

2017 voting results:

99.30% for

2017 attendance: 100%

 

Brings significant experience in finance, corporate governance, human resources and executive management

BUSINESS EXPERIENCE

 

  Vice Chair Retail Markets for CIBC (2001 to 2005)
  Previously held senior positions at Wood Gundy and CIBC, including: Managing Director Head of Commercial Banking and E-Commerce; President of Merchant Banking/Private Equity and Managing Director Head responsible for the bank’s European Operations

PUBLIC COMPANY BOARD EXPERIENCE

 

  Morneau Shepell Inc. (2008 to present) (Chair of the Board and Chair of the Governance Committee)
  National Bank of Canada (2010 to present) (member of Human Resources Committee)
  Kinaxis Inc. (2016 to present) (member of Nominating and Governance Committee and Audit Committee)
  Markit Ltd. (2014 to 2016)
  Penn West Petroleum (2012 to 2016)
  Calloway Real Estate Investment Trust (2011 to 2012)

OTHER EXPERIENCE

Other Boards

  Munich Reinsurance Company of Canada (Chair) (2012 to present)
  Temple Insurance Company (Chair) (2012 to present)
  Centre for Addiction and Mental Health (CAMH) (Board member and Chair of the Investment Committee)

EDUCATION

 

  Honours Business Administration (HBA) degree, Ivey Business School, Western University
  MBA, Harvard Business School

SHARE OWNERSHIP

Shares: 0

DDSUs: 1,509

Options: 0

Has until September 2021 to meet the share ownership requirements

 

 

 

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Rebecca MacDonald

 

  LOGO    

Independent

Age: 64

Director since:

May 17, 2012

Residence: North York, Ontario, Canada

2017 voting results:

97.60% for

2017 attendance: 100%

 

Brings extensive executive management, marketing, sales and corporate governance experience

BUSINESS EXPERIENCE

 

  Founder and current Executive Chair of Just Energy Group Inc., a Toronto-based independent marketer of deregulated gas and electricity
  President and Chief Executive Officer of Just Energy (2001 to 2007)
  Founded Energy Savings Income Fund in 1997, another company which aggregated customers in the deregulation of the U.K. natural gas industry
  Founded Energy Marketing Inc. in 1989

PUBLIC COMPANY BOARD EXPERIENCE

 

  Just Energy Group Inc. (2001 to present) (Executive Chair since 2007)

OTHER EXPERIENCE

Other Boards

  Horatio Alger Association in both Canada and the United States

Other experience

  Founded the Rebecca MacDonald Centre for Arthritis and Autoimmune Disease at Mount Sinai Hospital in Toronto
  Previously Vice-Chair of the Board of Directors of Mount Sinai Hospital
  Previously a member of the Board of Governors of the Royal Ontario Museum

EDUCATION

 

  Honorary LLD degree, University of Victoria

SHARE OWNERSHIP

Shares: 0

DDSUs: 9,187

Options: 0

Meets share ownership requirements

 

 

 

 

Matthew H. Paull

 

  LOGO    

Independent

Age: 66

Director since:

January 26, 2016

Residence: Willmette, Illinois, U.S.A.

2017 voting results:

98.96% for

2017 attendance: 100%

 

Brings significant expertise in financial markets, corporate finance, accounting and controls, and investor relations and extensive experience in international operations and marketing

BUSINESS EXPERIENCE

 

  Senior Executive Vice-President and Chief Financial Officer of McDonald’s Corporation (2001 until his retirement in 2008)
  before joining McDonald’s in 1993, was a partner at Ernst & Young where he managed a variety of financial practices during his 18-year career and consulted with many leading multinational corporations

PUBLIC COMPANY BOARD EXPERIENCE

 

  Chipotle Mexican Grill Inc. (2016 to present)
  Air Products & Chemicals Corporation (2013 to present) (Chair of Audit Committee and member of Corporate Governance and Nominating Committee and Executive Committee)
  KapStone Paper and Packaging Corporation (2010 to present) (Chair of Audit Committee until 2018 and member of Compensation Committee)
  Best Buy Co. (2003 to 2013) (lead independent director and chair of Finance Committee)
  WMS Industries Inc. (2012 to 2013)

OTHER EXPERIENCE

Other Boards

  Pershing Square Capital Management, L.P. (member of Advisory Board)

EDUCATION

 

  Master’s degree in Accounting, University of Illinois
  Bachelor’s degree, University of Illinois

SHARE OWNERSHIP

Shares: 1,000

DDSUs: 3,350

Options: 0

Has until January 2021 to meet the share ownership requirements

 

 

 

 

Jane Peverett

 

  LOGO    

Independent

Age: 59

Director since:

December 13, 2016

Residence: Vancouver, British Columbia, Canada

2017 voting results:

99.31% for

2017 attendance: 100%

 

Brings significant Board and senior management experience and extensive knowledge and training in finance, accounting and corporate governance

BUSINESS EXPERIENCE

 

  President & Chief Executive Officer of BC Transmission Corporation (electrical transmission) (2005 to 2009)
  Vice-President, Corporate Services and Chief Financial Officer of BC Transmission Corporation (2003 to 2005)
  President of Union Gas Limited (a natural gas storage, transmission and distribution company) (2002 to 2003)
  Other positions at Union Gas Limited: President & Chief Executive Officer (2001 to 2002); Senior Vice-President Sales & Marketing (2000 to 2001) and Chief Financial Officer (1999 to 2000)

PUBLIC COMPANY BOARD EXPERIENCE

 

  CIBC (2009 to present) (Chair of Audit Committee)
  Hydro One Limited (2015 to present) (member of Human Resources Committee and Chair of Nominating, Corporate Governance, Public Policy & Regulatory Committee)
  Northwest Natural Gas Company (2007 to present) (member of Organization and Executive Compensation Committee and Public Affairs and Environmental Policy Committee)
  Encana Corp. (2003 to 2017)
  Postmedia Network Canada Corp. (2013 to 2016)

OTHER EXPERIENCE

Other Boards

  British Columbia Institute of Corporate Directors Executive Committee

EDUCATION

 

  Bachelor of Commerce degree, McMaster University
  Master of Business Administration degree, Queen’s University
  Certified Management Accountant
  A Fellow of the Society of Management Accountants
  Holds the ICD.D designation from the Institute of Corporate Directors

SHARE OWNERSHIP

Shares: 0

DDSUs: 1,275

Options: 0

Has until January 2021 to meet the share ownership requirements

 

 

 

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2.2 ABOUT THE NOMINATED DIRECTORS

 

 

 

 

 

 

Gordon T. Trafton II

 

  LOGO    

Independent

Age: 64

Director since:

January 1, 2017

Residence: Naperville, Illinois, U.S.A.

2017 voting results:

99.16% for

2017 attendance: 100%

 

Brings extensive experience in the rail industry including executive positions in rail operations, sales and marketing and risk management

BUSINESS EXPERIENCE

 

  Consultant, Brigadier Consulting (2013)
  Special Advisor to the Canadian National Railway leadership team (2009 to his retirement in 2010)
  Senior Vice-President Strategic Acquisitions and Integration, Canadian National Railway (2003 to 2009)
  Senior Vice-President, Southern Region, Canadian National Railway (2003 to 2009)
  held a number of leadership positions with Illinois Central Railroad and Burlington Northern Railroad

OTHER EXPERIENCE

Other Boards

  Leeds School of Business Board of Alumni and Friends, University of Colorado Boulder (Chair)

EDUCATION

 

  Bachelor of Science, Transportation Management from the Leeds School of Business, University of Colorado Boulder

SHARE OWNERSHIP

Shares: 0

DDSUs: 1,451

Options: 0

Has until January 2022 to meet the share ownership requirements

Notes:

Other than as disclosed below, none of the nominated directors is, or has been in the last 10 years:

 

(a) a director, chief executive officer or chief financial officer of a company that:

 

    was subject to a cease trade or similar order or an order that denied the issuer access to any exemptions under securities legislation for over 30 consecutive days, that was issued while the proposed director was acting in that capacity, or

 

    was subject to a cease trade or similar order or an order that denied the issuer access to an exemption under securities legislation for over 30 consecutive days, that was issued after the proposed director ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in that capacity

 

(b) a director or executive officer of a company that, while that proposed director was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets, or

 

(c) become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold their assets.

Ms. Denham served as a director of Penn West Petroleum from June 2012 to June 2016, which was subject to cease trade orders on its securities following the July 2014 announcement of the review of it accounting practices and restatement of its financial statements. Those cease trade orders ended on September 23, 2014.

Ms. Peverett was a director of Postmedia Network Canada Corp. (Postmedia) from April 2013 to January 2016. On October 5, 2016, Postmedia completed a recapitalization transaction under a court-approved plan of arrangement under the Canada Business Corporations Act. Approximately US$268.6 million of debt was exchanged for shares that represented approximately 98% of the outstanding shares at that time. Postmedia repaid, extended and amended the terms of its outstanding debt obligations.

 

 

 

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Committee reports

 

The Board has four standing committees to assist it in fulfilling its duties and responsibilities:

• audit

• corporate governance and nominating

• finance

• management resources and compensation.

 

Each committee has terms of reference approved by the Board that set out the committee’s responsibilities. Each committee is satisfied that it has fulfilled all their responsibilities in 2017.

 

Independence

 

Each committee is made up of independent directors, according to the independence criteria of the NYSE corporate governance rules and CSA corporate governance guidelines.

 

Meeting in camera

 

Time is available at each meeting for committees to meet in camera, without management present. In camera sessions are required at the end of each meeting of the audit committee and management resources and compensation committee.

 

You can read about each director in the profiles beginning on page 20. Copies of the terms of reference for the Board and committees are available on our website (www.cpr.ca).

 

 

  

 

Audit committee

 

Responsible for fulfilling all public company audit committee legal obligations, assists in overseeing the disclosure of annual and interim financial statements and information derived from them, the integrity and quality of our financial reporting and internal controls, our legal and regulatory requirements, and the qualifications, independence, engagement, compensation and performance of the external auditor and the internal audit function

The audit committee has been established in accordance with the Exchange Act and NYSE standards and CSA National Instrument 52-110 Audit Committees.

MEMBERS

Jane Peverett (chair)

Jill Denham

Andrew Reardon

All members of the audit committee are “financially literate” as required by the NYSE and CSA. Ms. Peverett and Mr. Reardon have been determined to meet the audit committee financial criteria prescribed by the SEC.

2017 HIGHLIGHTS

Seven (7) meetings in 2017

External auditor

  Completed a periodic comprehensive review of our external auditor, concluding our satisfaction with Deloitte and recommended its reappointment as auditor in 2018
  Reviewed the external auditor’s annual audit plan and recommended the audit plan and the auditor’s compensation to the Board for approval (see page 15 for details about its services and fees in 2017 and 2016)
  Reviewed the audit of our year-end financial statements and the external auditor’s report and formal opinion on our financial statements
  Reviewed the non-audit review reports of the auditor of our interim financial statements each quarter
  Received assurance from the external auditor that the audit was performed consistent with accepted standards
  Met with the external auditor to discuss independence and other required matters under the Public Company Accounting Oversight Board (PCAOB) standards governing communications with audit committees
  Received the external auditor’s written disclosure required by the PCAOB about its communications regarding independence

Risk oversight

  Reviewed and monitored our material financial disclosure
  Reviewed our insurance program to mitigate risk
  Met with Chief Legal Officer to review all legal and regulatory matters and claims that could have a material impact on our financial position

Financial disclosure review and internal controls

  Reviewed the internal auditor’s reports on our internal controls and procedures
  Met with management, internal auditors and the external auditor to review our financial reporting processes and internal controls and procedures
  Reviewed our procedures for receiving, addressing and retaining complaints on accounting, internal accounting controls or auditing matters
  Met with management and the external auditor to review our audited consolidated financial statements and then recommended them to the Board for approval and to be included in our annual report on Form 10-K
  Reviewed and approved the interim financial reports on Form 10-Q and quarterly earnings releases
  Reviewed management methodologies for critical accounting estimates
  Reviewed management progress on adoption of future accounting standards

Internal audit

  Reviewed and approved the internal auditor’s annual audit plan
  Reviewed reports and recommendations on internal audit issues, and monitored how management responded to any issues identified by the internal auditor

The audit committee has a written policy for pre-approving audit and non-audit services to be provided by the external auditor. See page 79 to read more about the policy.

You can read the audit committee charter on our website (www.cpr.ca).

 

 

 

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2.2 ABOUT THE NOMINATED DIRECTORS

 

 

 

Corporate governance and nominating committee

Responsible for developing and implementing good corporate governance practices, monitoring and assessing the functioning of the Board and committees, and identifying qualified director candidates and recommending director nominees for election to the Board

MEMBERS

Rebecca MacDonald (chair)

John Baird

Isabelle Courville

Andrew Reardon

Gordon Trafton

2017 HIGHLIGHTS

Four (4) meetings in 2017

Corporate governance

  Reviewed and confirmed our corporate governance principles and guidelines, code of business ethics and code of ethics for senior financial officers
  Reviewed our corporate governance disclosure and monitored best practices, legal and regulatory requirements
  Reviewed and confirmed the terms of reference for the Board and committees, revising as necessary
  Reviewed and confirmed the position descriptions for the Board Chair, CEO and committee chairs

Board effectiveness

  Set Board goals for 2018 relating to strategic planning, Board succession, shareholder engagement, director education and mentorship
  Evaluated the performance of the Board, committees, Board Chair, committee chairs and individual directors

Board composition

  Reviewed the director skills matrix to make sure that the current directors have the integrity, skills and experience to meet the Board’s needs
  Updated the Board on the process for identifying potential new director candidates who meet our needs
  Implemented a director assessment policy for potential and incumbent directors

Risk oversight

  Monitored the Board’s oversight of enterprise risk management

Director development

  Reviewed our director orientation and continuing education program and updated it with topical and relevant sessions for 2017

Director compensation

  Reviewed our director compensation program and recommended changes

 

Finance committee

Responsible for overseeing our financial position, financial plans and programs and dividend policy, as well as strategic options and opportunities, including acquisitions and divestitures, and pension plan oversight for CP and our subsidiaries

MEMBERS

Matthew Paull (chair)

Jill Denham

Jane Peverett

Andrew Reardon

2017 HIGHLIGHTS

Three (3) meetings in 2017

Finance matters

  Reviewed and recommended approval of our operating and capital budgets
  Oversaw our capital structure, cash flows and key financial ratios
  Reviewed our senior credit facilities and compliance with financial covenants and oversaw the extension of and amendment to the senior credit facilities
  Reviewed our credit ratings and relationships with credit rating agencies
  Reviewed major financings, financing plans, offering documents and strategic opportunities and oversaw the renewal of our Canadian and U.S. shelf prospectuses
  Recommended our share repurchase program and normal course issuer bid
  Recommended to the Board an increase in our quarterly dividend from $0.50 to $0.5625 per common share

Pension matters

  Completed the pension asset strategy review
  Reviewed pension plan performance
  Reviewed and approved changes to portfolio allocation and managers

Risk oversight

  Reviewed financial risks, including credit, commodity, M&A and interest rate risk, and contingent exposure
  Reviewed our policies for assessing and managing financial risk

 

Management resources and compensation committee

Responsible for fulfilling public company compensation legal obligations, assisting with the appointment, compensation and reporting relationships of executive officers, overseeing our compensation philosophy and program including incentive and retirement plans, establishing performance objectives and evaluating performance of our senior officers, and reviewing our organizational health and the succession plans for senior officers

MEMBERS

Isabelle Courville (chair)

John Baird

Rebecca MacDonald

Matthew Paull

Andrew Reardon

Gordon Trafton

2017 HIGHLIGHTS

Five (5) meetings in 2017

CEO performance and compensation

  Reviewed the assessment process and established performance objectives for the year
  Evaluated the CEO’s performance and recommended his compensation to the Board
  Reviewed CEO compensation

Executive compensation

  Reviewed the compensation philosophy and programs and recommended incentive plan metrics for 2017 and 2018
  Approved the 2017 short-term incentive and 2017 and 2018 long-term incentive plan awards
  Reviewed the CEO’s assessment of the named executives and other director reports and recommended their compensation to the Board
  Reviewed executive share ownership guidelines and monitored compliance

Succession planning

  Implemented the executive succession plan for former CEO Hunter Harrison with the appointment of Keith Creel
  Reviewed the succession plans for the CEO and other senior executive roles, including the process for identifying, developing and retaining executive talent

Risk oversight

  Oversaw compensation risk and reviewed our compensation plans to confirm they do not encourage inappropriate risk-taking

You can read about compensation governance on page 31 and executive compensation generally beginning on page 27.

 

 

 

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2017 director compensation

We paid directors a total of approximately $2,650,506 in 2017 as shown in the table below. Directors receive a flat fee retainer to cover their ongoing oversight and responsibilities throughout the year and their attendance at Board and committee meetings.

All of our directors are required to receive at least 50% of their compensation in director deferred share units (DDSUs). The total represents the approximate dollar value of DDSUs credited to each director’s DDSU account in 2017, based on the closing fair market value of our common shares on the grant date plus the cash portion paid where a director elected to receive a portion of compensation in cash.

Mr. Creel does not receive director compensation because he is compensated in his role as President and CEO (see pages 48 and 62 for details). Former director Hunter Harrison also received no director compensation as he was compensated as CEO during his tenure.

 

Name    Fees
earned
($)
     Share-based
awards
($)
     Option-based
awards
($)
     Non-equity incentive
plan compensation
($)
    

Pension

value
($)

     All other
compensation
($)
     Total
($)
 

John Baird

     -        235,987        -        -        -        1,000        236,987  

Isabelle Courville

     132,500        133,056        -        -        -        1,000        266,556  

Jill Denham

     -        235,987        -        -        -        1,000        236,987  

William Fatt

     -        228,846        -        -        -        1,000        229,846  

Rebecca MacDonald

     -        266,113        -        -        -        1,000        267,113  

Matthew Paull

     -        326,824        -        -        -        1,000        327,824  

Jane Peverett

     -        255,391        -        -        -        1,000        256,391  

Andrew Reardon

     -        518,392        -        -        -        1,000        519,392  

Gordon Trafton

     -        308,410        -        -        -        1,000        309,410  

 

  Ms. Courville elected to receive 50% of her annual director compensation in DDSUs with the remaining 50% paid in cash.
  The value of the share-based awards has been calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC 718) using the grant date fair value.
  Each director was provided with a $1,000 donation to the charity of their choice in December 2017 in gratitude for their year of service. This amount appears under All other compensation.
  Mr. Paull, Mr. Reardon and Mr. Trafton were paid in U.S. dollars and their share-based awards have been converted to Canadian dollars using the 2017 average exchange rate of $1.2986.

The Governance Committee reviews director compensation every two to three years based on the directors’ responsibilities and time commitment and the compensation provided by comparable companies. In 2017 the committee completed a review of our director compensation program and based on its recommendation, the Board amended the director compensation program to pay all directors fees in U.S. dollars instead of the past practice of paying directors in their local currency. As a result, the Board approved that, effective January 1, 2018, each director will be paid an annual retainer of US$200,000. Committee chairs receive an additional US$30,000 per year and the Board Chair receives an annual retainer of US$395,000. No other changes were made to the director compensation program in 2017.

You can read more about our director compensation program beginning on page 81.

 

 

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LOGO

 

2.3 EXECUTIVE COMPENSATION

 

Our executive compensation program is designed to pay for performance, and to align management’s interests with our business strategy and the interests of our shareholders.

The next section describes our compensation program and explains the 2017 compensation decisions for our named executives:

  Keith E. Creel, President and Chief Executive Officer
  Nadeem S. Velani, Executive Vice-President and Chief Financial Officer
  Robert A. Johnson, Executive Vice-President Operations
  Laird J. Pitz, Senior Vice-President and Chief Risk Officer
  Jeffrey J. Ellis, Chief Legal Officer and Corporate Secretary
  E. Hunter Harrison, former Chief Executive Officer (resigned on January 31, 2017)

The management resources and compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and on the discussion described above, on February 14, 2018, the Compensation Committee recommended to the full Board that the Compensation Discussion and Analysis be included in this circular.

Where to find it

 

Compensation discussion and analysis    28
Our approach to executive compensation    28
Compensation governance    31
Compensation program    36
2017 Executive compensation    37
Executive profiles    48
Share performance and cost of management    61
Executive compensation details    62
Summary compensation table    62
Incentive plan awards    65
Retirement plans    68
Termination and change in control    70

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

Our approach to executive compensation

We believe in the importance of paying for performance and aligning management’s interests with those of our shareholders.

Our executive compensation program supports our railroad-focused culture, is closely linked to the critical metrics that drive the achievement of our strategic plan without taking on undue risk, and is designed to create long-term sustainable value for our shareholders.

We have five key performance drivers designed to focus us on our goal of being the best railroad company in North America:

 

1. Provide customers with industry-leading rail service

 

2. Control costs

 

3. Optimize our assets

 

4. Remain a leader in rail safety

 

5. Develop our people

We implemented several changes to our compensation program in 2017, as disclosed in last year’s proxy circular. These changes were the result of an extensive shareholder engagement program and an extensive review of executive compensation by the Compensation Committee, the Board and our human resources group. You can read about the program changes starting on page 36, and in the letter of the Compensation Committee chair beginning on page 5.

We received a 71.11% vote for our 2017 advisory vote on executive compensation, compared to 49.9% in 2016. The Compensation Committee continues to focus on making sure our compensation program pays for performance, reflects sound principles, supports long-term sustainable value, is clear and transparent and aligns with shareholder interests.

Compensation mix

Attracting and retaining high calibre executives is key to our long-term success.

We believe strong performance should yield significant rewards. Our executive compensation includes fixed and variable (at-risk) pay and the proportion of at-risk pay increases by level. Executives earn more if we perform well, and less when performance is not as strong. A significant portion of executive pay is tied to the value of our shares, aligning with shareholder interests. We require our executives to own CP equity and our share ownership guidelines increase by executive level (see page 31).

Variable cash compensation is more focused on corporate results for executives (75% of target) than for other employees (50% of target) who have more emphasis placed on individual and departmental goals.

This supports our view that the short-term incentive plan should be tied to overall corporate performance and the areas of our business that each employee influences directly.

 

 

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2.3 EXECUTIVE COMPENSATION

 

 

The table below shows the pay mix for our current named executives based on their total target compensation.

 

LOGO

Benchmarking

We benchmark the compensation for our named executives against a peer group of companies that consists of BNSF Railway, CN, CSX Corporation, Kansas City Southern Railroad, Norfolk Southern Corporation and Union Pacific Corporation.

These companies are the Class 1 railroads, the North American railroad companies that we compete with for executive talent. Benchmarking against this peer group ensures that each component of our compensation program is competitive and in line with our strongest competitors, so we can attract and retain experienced railroad executives with highly specialized skills. We reviewed the peer group in 2017 to make sure it is still a relevant and appropriate benchmark in the context of our growth strategy and operations and do not plan to make changes to the comparator group for 2018.

 

 

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Compensation pays out over time

 

LOGO

Variable pay includes short and long-term incentive awards to drive annual and longer-term performance and align with shareholder interests.

Incentive awards are cash and equity-based. Equity-based awards vest at the end of three years for performance share units and over four years for stock options. Stock options expire at the end of seven years.

The Compensation Committee ensures the performance objectives for the incentive plans align directly with our strategic plan, which is reviewed and approved by the Board.

Executives are CP shareholders

We require executives and senior management employees to own equity in the company so they have a stake in our future success. Share ownership requirements are set as a multiple of base salary and increase by level. Executives must satisfy the requirement within five years of being appointed to their position and can meet the requirements by holding common shares or deferred share units (DSUs). The CEO must maintain the ownership level of six times his base salary for one year after he retires or leaves CP.

DSUs are redeemed for cash no earlier than six months after the executive retires or leaves the company or until the end of the following calendar year for Canadian executives. Payment to U.S. executives who participate in the DSU plan is made after the six-month waiting period to be in compliance with U.S. tax regulations.

 

 

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2.3 EXECUTIVE COMPENSATION

 

 

The table below shows the ownership requirement by level, which applied to approximately 77 executives and senior management employees in 2017.

 

     

Ownership requirement

(as a multiple of base salary)

 

CEO

     6x  

Executive Vice-President

     3x  

Senior Vice-President

     2x  

Vice-President

     1.5 to 2x  

Senior management

     1x  

We use the acquisition value or our closing share price on the last trading day of the year (whichever is higher) to value the holdings.

Mr. Creel, Mr. Velani, Mr. Johnson, Mr. Pitz and Mr. Ellis are expected to meet their requirement within the five-year period following their appointment. We used our closing share price on December 29, 2017 to value their share ownership: $229.66 for the TSX or US$182.76 on the NYSE, depending on whether the executive is paid in Canadian or U.S. dollars. You can read about each executive’s share ownership in the profiles beginning on page 48.

Compensation governance

Disciplined decision-making process

Executive compensation decisions involve management, the Compensation Committee and the Board. The Compensation Committee also receives advice and support from an external consultant from time to time.

 

LOGO

The Board has final approval on all matters relating to executive compensation. It can also use its discretion to adjust pay decisions as appropriate.

 

 

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Qualified and experienced Compensation Committee

The Compensation Committee is responsible for our compensation philosophy and strategy, and for program design. The Compensation Committee consists of six independent directors.

The Compensation Committee has the relevant skills, background and experience for carrying out its duties. The table below shows the key skills and experience of each member:

 

     

Human resources/
compensation/

succession planning

     CEO/senior
management
     Governance
and policy
development
    

Transportation

industry

     Risk
management
     Engagement
(shareholders
and others)
 

Isabelle Courville

(Committee Chair)

                                 

John Baird

                                 

Rebecca MacDonald

                                     

Andrew Reardon

(Chairman of the Board)

                             

Matthew Paull

                                 

Gordon Trafton

                                 

Compensation Committee members also have specific human resources and compensation-related experience, including:

  direct responsibility for executive compensation matters
  membership on other human resources committees
  compensation plan design and administration, compensation decision-making and understanding the Board’s role in the oversight of these practices
  understanding the principles and practices related to leadership development, talent management, succession planning and employment contracts
  engagement with investors on compensation issues
  oversight of financial analysis related to compensation plan design and practices
  oversight of labour matters and a unionized workforce
  pension benefit oversight
  recruitment of senior executives

The Compensation Committee has no interlocks or insider participation. None of the members were employed by or had any relationship with CP during 2017 requiring disclosure under Item 404 or Item 407(e)(4) of Regulation S-K of the Exchange Act. You can read about the background and experience of each member in the director profiles beginning on page 20.

 

 

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2.3 EXECUTIVE COMPENSATION

 

 

Independent advice

The Compensation Committee and management retain separate independent executive compensation advisors to avoid any conflicts of interest:

 

Committee advisor    Management advisor

• The Compensation Committee retained Meridian Compensation Partners LLC (Meridian) as its independent compensation consultant for early 2017

• In 2017 Meridian advised the Compensation Committee on various matters relating to executive compensation and assisted the Compensation Committee with the 2016 compensation risk review

• The Compensation Committee has also engaged Kingsdale Advisors as a compensation consultant on an as needed basis

• The Compensation Committee chair approves all fees and work performed by the external consultant

  

• Management engages Willis Towers Watson to provide market survey data and advice relating to executive compensation

The next table shows the fees paid to Meridian and Willis Towers Watson in 2016 and 2017. Fees paid to Meridian in 2017 reflect work conducted early in the year, prior to ending the engagement. Any fees paid to Kingsdale for executive compensation services in 2017 were part of the overall retainer described on page 13.

 

     2017             2016  
      Meridian      Willis Towers Watson              Meridian      Willis Towers Watson  

Executive compensation-related fees

   $ 50,751      $ 78,923               $ 170,267      $ 59,264  

Other fees

     -      $ 1,975,629                 -      $ 2,215,142  

Total fees

   $ 50,751      $ 2,054,552               $ 170,267      $ 2,274,406  

Fees paid

In 2016, $170,267 was paid to Meridian for executive compensation advisory fees provided to the Compensation Committee. This is 100% of the total fees paid to Meridian in 2016. In 2017, $50,751 was paid to Meridian for executive compensation advisory fees. This is 100% of the total fees paid to Meridian in 2017.

In 2017, $78,923 was paid to Willis Towers Watson for executive compensation advisory fees provided to management. The total executive compensation fees represent 4% of the $2,054,552 paid in total to Willis Towers Watson for all services provided to management including actuarial, pension and benefits consulting, corporate risk and insurance broking services.

Compensation risk

Effective risk management is integral to achieving our business strategies and to our long-term success.

The Board believes that our executive compensation program should not increase our risk profile. The Compensation Committee is responsible for overseeing compensation risk. It reviews the executive compensation program, incentive plan design and our policies and practices to make sure they encourage the right decisions and actions to reward performance and align with shareholder interests.

Incentive plan targets are linked to our corporate objectives and our corporate risk profile. The Compensation Committee believes that our approach to goal setting, establishing performance measures and targets and evaluating performance results helps mitigate risk-taking that could reward poor judgment by executives or have a negative effect on shareholder value.

All of the Compensation Committee members other than Mr. Paull are also a member of the Governance Committee. Mr. Reardon and Mr. Paull are also members of the finance committee and Mr. Reardon is a member of the audit committee. This cross-membership strengthens risk oversight because it gives the directors a broader perspective of risk oversight and a deeper understanding of our enterprise risks.

 

 

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Regular risk review

The Compensation Committee conducts a comprehensive compensation risk review every two years to make sure that we have identified the compensation risks and have appropriate measures in place to mitigate those risks. An independent consultant assists the Compensation Committee with the review, which includes looking at:

  the targets for the short-term incentive and performance share unit plan, anticipated payout levels and the risks associated with achieving target performance
  the design of the long-term incentive awards, which rewards sustainable financial and operating performance
  the compensation program, policies and practices to ensure alignment with our enterprise risk management practices.

The last review was completed at the end of 2016 in conjunction with all the changes that were being proposed to the 2017 compensation plans. Based on the findings of the review, the Compensation Committee concluded that our compensation program, policies and practices are not reasonably likely to have an adverse effect on our business or the company overall.

Managing compensation risk

We mitigate risk in three ways:

 

1. Plan design   

• We use a mix of fixed and variable (at-risk) compensation and a significant proportion is at-risk pay

• Short and long-term incentive plans have specific performance measures that are closely aligned with the achievement of our business strategy and performance required to achieve results in accordance with guidance provided to the market

• The payout curve for the short-term incentive plan is designed asymmetrically to reflect the significant stretch in target performance

• The payout under the short-term incentive plan is capped and not guaranteed, and the Compensation Committee has discretion to reduce the awards

• The long-term incentive plan has overlapping vesting periods to address longer-term risks and maintain executives’ exposure to the risks of their decision-making through unvested share based awards

2. Policies   

• We promote an ethical culture and everyone is subject to a code of business ethics

• We have share ownership requirements for executives and senior management so they have a stake in our future success

• We have a disclosure and insider trading/reporting policy to protect our interests and ensure high business standards and appropriate conduct

• Our anti-hedging policy prohibits directors, officers and employees from hedging our shares and share-based awards

• Our anti-pledging policy prohibits directors and senior officers from holding our shares in a margin account or otherwise pledging them as security

• We also have a policy that prohibits employees from forward selling shares that may be delivered on the future exercise of stock options, or otherwise monetizing their option awards, other than through exercising the options and subsequently selling the shares through a public venue or the company’s cashless exercise option

• Our clawback policy allows us to recoup incentive pay from current and former senior executives as appropriate (see below)

• DSUs held by the CEO and executives are not settled for cash until six months after leaving the company

• Our whistleblower policy applies to all employees and prohibits retaliation against anyone who makes a complaint acting in good faith

3. Mitigation measures   

• More senior roles have a significant portion of their compensation deferred

• We must achieve a specific threshold of operating income, otherwise no short-term incentive awards are granted

• Financial performance is verified by our external auditor (completion of annual financial statement audit) before the Board makes any decisions about short-term incentive

• The Compensation Committee adopted principles for adjusting payout under the short-term incentive plan, and provides them to the Board as part of their review of the Compensation Committee’s recommendations and performance overall

• Environmental principles are fundamental to how we achieve our financial and operational objectives, and the Compensation Committee takes them into account when exercising discretion and determining the short-term incentive awards

• Safety is considered as part of individual performance under the short-term incentive for the CEO and executives in operations roles in addition to being a specific STIP measure

• We regularly benchmark executive compensation against our comparator group of companies

• Different performance scenarios are stress tested and back tested to understand possible outcomes

 

 

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Key policies

In addition to CP’s code of business ethics, a number of other policies act to mitigate compensation risk. You can read more about ethical behaviour at CP and our code of business ethics and other policies beginning on page 84.

Clawbacks

Our clawback policy allows the Board to recoup short and long-term incentive compensation paid to a current or former senior executive if:

  the incentive compensation received was calculated based on financial results that were subsequently materially restated or corrected, in whole or in part;
  the executive engaged in gross negligence, fraud or intentional misconduct that caused or contributed to the need for the restatement or correction, as admitted by the executive or as reasonably determined by the Board; and
  the incentive compensation would have been lower based on the restated or corrected results.

The Board has sole discretion to determine whether it is in our best interests to pursue reimbursement of all or part of the incentive compensation and these actions would be separate from any actions by law enforcement agencies, regulators or other authorities.

Anti-hedging

Our disclosure and insider trading and reporting policy prohibits directors, executive officers and employees from buying financial instruments that are designed to hedge or offset a decrease in the market value of equity awards or CP shares they hold directly or indirectly.

Anti-pledging

Our anti-pledging policy prohibits directors and executive officers from holding any CP securities in a margin account or otherwise pledging the securities as collateral for a loan.

 

 

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Compensation program

Total direct compensation consists of salary, an annual short-term incentive and a long-term incentive award that focus executives on driving strong financial, operational and customer satisfaction results and building shareholder value. Executives also receive pension benefits and perquisites as part of their overall compensation.

 

     Element    Purpose    Risk mitigating features  

Link to business and

talent strategies

   New in 2017

 

LOGO

 

 

Salary

Cash

(see page 37)

  

•  competitive level of fixed pay

•  reviewed annually

  

•  external advisor benchmarks against our comparator group to ensure appropriate levels and fairness

 

•  attract and retain talent

•  no automatic or guaranteed increases to promote a performance culture

  

 

LOGO

 

 

Short-term incentive

Cash bonus

(see page 37)

  

•  annual performance incentive to attract and retain highly qualified leaders

•  set target awards based on level

  

•  set target performance at the beginning of the year to assess actual performance at the end of the year

•  actual payouts are based on the achievement of pre-determined corporate and individual objectives

•  corporate performance has an operating income hurdle

•  payouts are capped

•  no guarantee of a minimum payout

 

•  attract and retain highly qualified leaders

•  motivate high corporate and individual performance

•  use metrics that are based on the strategic plan and approved annually

•  align personal objectives with area of responsibility and role in achieving operating results

  

New measures and weightings:

 

•  operating ratio reduced from 50% to 40%

•  operating income increased from 25% to 40%

•  added a safety measure at 10%

•  added an operational
measure at 10%

 

Deferred compensation

Deferred share units

(see page 69)

  

•  encourages share ownership

•  executives can elect to receive the short-term incentive in DSUs if they have not yet met their share ownership requirement

•  company provides a 25% match of the deferral amount in DSUs

  

•  deferral limited to the amount needed to meet the executive’s share ownership guidelines

•  aligns management interests with growth in shareholder value

•  helps retain key talent

•  company contributions vest after three years

 

•  sustained alignment of executive and shareholder interests because the value of DSUs is tied directly to our share price

•  cannot be redeemed for cash until six months after the executive leaves CP

  
 

Long-term incentive (LTIP)

(see page 41)

        New allocation
 

Performance share units

(see page 43)

  

•  equity-based incentive aligns with shareholder interests and focuses on three-year performance

•  accounts for 60% of an executive’s long-term incentive award (up from 50% in 2016)

  

•  use pre-defined market and financial metrics

•  the number of units that vest is based on a performance multiplier that is capped

•  no guarantee of a minimum payout

 

•  focuses the leadership team on achieving challenging performance goals

•  ultimate value based on share price and company performance

•  attract and retain highly qualified leaders

  

Represents 60% of LTIP award for executives (100% for other levels of management)

 

New measures and weightings:

 

•  return on invested capital replaces operating ratio

•  update of peer group for assessing relative TSR

•  increased the weighting of TSR from 20% to 40%

 

Stock options

(see page 44)

  

•  accounts for 40% of an executive’s long-term incentive award (down from 50% in 2016)

•  vest over four years, term is now seven years

  

•  focuses on appreciation in our share price, aligning with shareholder interests

•  only granted to executives

 

•  focuses the leadership team on creating sustainable long-term value

  

Represents 40% of LTIP award for executives

 

Grants in 2017 and later have a seven-year term, down from
10 years

LOGO

 

 

Pension

Defined contribution pension plan

(see page 68)

  

•  pension benefit based on pay and service and competitive with the market

•  supplemental plan for executives and senior managers

  

•  balances risk management of highly performance-focused pay package

 

•  attract and retain highly qualified leaders

  
 

Perquisites

Flexible spending account

(see page 63)

  

•  competitive with the market

  

•  new restrictions for the CEO

 

•  attract and retain highly qualified leaders

  

No tax equalization for the CEO

 

Use of aircraft limited to corporate travel and family visits within North America

 

 

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2017 Executive compensation

Salary

Salaries are set every year based on the executive’s performance, leadership abilities, responsibilities and experience as well as succession and retention considerations. The Compensation Committee also considers the economic outlook and the median salary and practices of the comparator group before making its decisions.

The table below shows the annual salaries the named executives were paid as at December 31, 2017.

 

      2017    % change from 2016  

Keith Creel

   US$1,125,000      17.6%  

Nadeem Velani

   $460,000      10.8%  

Robert Johnson

   US$435,000      0%  

Laird Pitz

   US$366,000      4.6%  

Jeff Ellis

   $445,000      0%  

Mr. Creel received a 17.6% increase when he became CEO on January 31, 2017. Mr. Velani received a step increase to bring his salary closer to the market median as a result of his appointment as Executive Vice-President and CFO. Mr. Pitz received an increase in 2017 when he was promoted to Senior Vice-President and Chief Risk Officer.

Short-term incentive plan

The short-term incentive award is an annual incentive that focuses executives on achieving strong financial, safety and operational results.

 

What it is   

• Cash bonus for achieving pre-determined annual corporate and individual performance objectives that are tied directly to our strategy and operational requirements

• Target awards are based on the executive’s level, benchmarked at the 50th percentile of our peer group and expressed as a percentage of base salary

Payout   

• Corporate performance is assessed against financial, safety and operational measures

• Individual performance is assessed against individual performance objectives

• No guarantee of a minimum payout

Restrictions   

• Must meet minimum level of performance

• Must achieve corporate operating income hurdle for any payout on individual or corporate performance to occur

• Performance multiplier is capped for exceptional performance

• Actual award is capped as a percentage of base salary

If the executive retires   

• Executive must give three months’ notice

• Award for the current year is pro-rated to the retirement date

 

 

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The table below shows the 2017 short-term incentive awarded to the named executives. Salaries in U.S. dollars have been converted into Canadian dollars using an average exchange rate of $1.2986.

 

LOGO

We use financial and non-financial measures to assess corporate performance. Individual performance is assessed against individual performance objectives for the year and other pre-determined goals that reflect the strategic and operational priorities critical to each executive’s role.

Corporate and individual performance factors are at capped at 200% to limit payouts and avoid excessive risk-taking.

An employee’s payout on the individual component of the STIP may be zero or range from 50% to 200%. Any award payable under the individual component is subject to a minimum level of corporate performance. No award is payable unless the minimum corporate hurdle is achieved.

 

Actual STIP awards are also capped as a percentage of base salary, as shown in the table to the right.

Assessing corporate performance

Last year we announced a number of changes to the

     Payout as a % of base salary  
Level    Below
hurdle
    Minimum     Target     Maximum  

CEO

     0     60     120     240

Other named executives

     0     30-37.5     60-75     120-150
 

measures for 2017 to reflect CP’s transition to focus on sustainable growth.

 

We created a balanced scorecard to assess performance and support our focus on growth by:

• increasing the emphasis on operating income and reducing the emphasis on cost reduction so the two metrics have equal weighting

• introducing two non-financial measures to the scorecard: safety and operating performance.

 

Safety and operating performance had previously formed part of the individual performance assessment. Including the two measures in the scorecard with specific targets and weightings creates more rigour and transparency in the performance assessment.

 

 

New in 2017

We changed the weightings of two core financial measures to support our growth strategy and introduced two non-financial measures to create a more balanced assessment of performance.

 

Free cash flow was removed as a metric given its volatility from year to year. The weighting of ROIC was increased as a long-term measure to ensure we deploy free cash flow in a responsible manner.

 

 

 

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Corporate performance

The table below shows the 2017 scorecard and results. The targets were set with adequate stretch to motivate strong performance.

The Board sets a corporate hurdle for operating income. There is no payout if we do not achieve that corporate hurdle. If we achieve the hurdle but corporate performance is below threshold for all measures, then only the individual performance factor is used to calculate the awards. Corporate results between 50% and 200% of target are interpolated. For 2017, the operating income hurdle was set at $2 billion.

 

Performance measure

  Why it’s important   

Threshold

(50%)

   

Target

(100%)

   

Exceptional

(200%)

    2017
reported
result
   

2017

STIP result

    Weighting     Score  

Financial measures

                                                            

STIP Operating ratio

Operating expenses divided by total revenues based on an assumed fuel price and foreign exchange rate

 

Continues our focus on driving down costs while focusing on growth strategy

     57.50     57.25     56.75     57.4     adj. 57.1    



40% (new)

(reduced
from 50%
in 2016)

 

 
 
 

    137

STIP Operating income

($ millions)

Total revenues less total operating expenses based on an assumed foreign exchange rate

 

Highlights the importance of revenue growth to our corporate strategy

     2,705       2,745       2,865       2,793      
adj.
2,816
 
 
   



40% (new)

(increased
from 25%
in 2016)

 

 
 
 

    159

Safety measure (new)

                                                            

Federal Railroad Administration’s (FRA) frequency of train accidents per million train miles relative to Class 1 railroads

 

Safety is our top priority, and the measure pays out at maximum only if we achieve the stretch target and remain the best in the industry

 

Introducing this measure recognizes the feedback we received from shareholders who asked for safety to be explicitly included as a performance measure

     1.30       1.19       1.15       0.99       0.99       10%       200

Operating measure (new)

                                                            

Train speed measures the time and movement of trains in miles per hour from origin to destination

It is a key component of trip plan compliance and critical to the service we provide customers and to our growth strategy. Trip plan compliance, as a stand-alone measure, is a relatively new measure at CP. In 2018, now that we have built up enough historical data, we plan to use it as an operating performance measure for STIP rewards.

 

Train speed reflects our operating performance and is a key measure for improved asset utilization and delivery times, leading to an enhanced customer experience

 

Introducing this measure incorporates feedback from shareholders and provides a more balanced scorecard of performance criteria

     23.7       24.0       24.6       23.4       23.4       10%       0

Corporate performance factor

                                                     138

Notes:

  The measurement of train speed excludes bulk trains, local trains, passenger trains and trains used for repairing track. Hours of delay caused by customer and foreign railroad issues are removed from the transit time. For all mainline trains, total train hours (excluding foreign railway and customer delays), divided by total train miles.
  The target for train speed recognized that 2016 was a record year supported by an environment with softer volumes. Maintaining the target reflected an expectation that speed would be maintained as the network gained more volume.
  The 2017 target for the frequency of train accidents per million train miles relative to Class 1 railroads was based on the three-year average. CP has been a leader in safety for over a decade, and 2016 was a record safety year by CP and industry standards. The 2017 target reflected an expectation that CP would maintain its industry-leading safety performance.

 

 

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CP delivered record financial performance in 2017. A growing top line coupled with disciplined cost control measures produced record operating income and adjusted earnings for the company. The reported operating ratio came in at 57.4% and reported operating income was $2,793 million – both are all-time bests for the company. From a safety perspective, CP’s personal injury rate improved one percent and our train accident frequency led the industry in this key safety metric. In 2017, CP continued to invest significantly in the capital program with an overall investment of $1.34 billion during 2017 while at the same time maintaining its strong commitment to shareholders by returning $691 million through share buybacks and dividends.

The Compensation Committee may adjust the results for unusual or non-recurring items that are outside our normal business and do not accurately reflect our ongoing operating results or business trends and affect the comparability of our financial performance year over year. Results under the short-term incentive plan may therefore differ from our reported GAAP results. Significant items that were adjusted so that they do not impact, either favourably or unfavourably, the assumptions made when the STIP targets were planned include: a management transition recovery related to the retirement of Hunter Harrison as CEO; foreign exchange; fuel price; and land sales, all of which were adjusted to reflect assumptions made in our 2017 budget in order to incent good business decisions, made at the right time, to receive the best return.

Assessing individual performance

Executives set individual performance objectives before the start of every financial year.

The individual performance factor is based on the executive’s performance against those objectives and other pre-defined quantitative and qualitative goals that reflect the strategic and operational priorities critical to each executive’s role, including operational management, safety, financial and other objectives.

Each objective has a minimum, target and maximum. The individual performance factor ranges from 0% to 200%.

 

      2017 individual performance factor                   

 

In response to shareholder feedback,

in 2016 we introduced a cap on the
individual performance factor for the
CEO, so his individual performance
factor cannot exceed the corporate
performance factor.

 

This makes sure that the payout factor
for the CEO aligns with the CEO’s
overall responsibility for CP’s
performance.

Keith Creel

     138%           

Nadeem Velani

     155%           

Robert Johnson

     150%           

Laird Pitz

     150%           

Jeffrey Ellis

     150%           
           
The Compensation Committee sets the individual performance factor for the CEO. The CEO reviews the performance of his direct reports against their objectives, and recommends their individual performance factors to the Compensation Committee.        
     
     
     
     

See the profiles beginning on page 48 to read about each executive’s individual performance in 2017.

Compensation Committee Discretion

The Compensation Committee has developed principles for the use of discretion. Adjustments should not relieve management from the consequences of their decision-making. Adjustments should also neither reward nor penalize management for decisions on discretionary transactions, events outside their control (such as foreign exchange rates and fuel prices that are beyond the assumptions used in the planning process) or transactions outside normal corporate planning and budgeting.

As a result, the Compensation Committee can reduce the corporate performance factor for any executive officer as it deems appropriate, as long as it follows the principles. The Board can also use its discretion to adjust the targets and payouts up or down, following the principles set out by the Compensation Committee.

 

 

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Long-term incentive plan

 

Long-term incentive awards focus executives on medium and longer-term performance to create sustainable shareholder value.

 

Target awards are set based on the competitive positioning of each executive’s compensation and the practices of companies in our peer group in order to attract and retain experienced railroad executives with highly specialized skills.

 

 

New in 2017

To ensure a stronger link between pay and performance, the allocation of performance share units was increased to 60% and the allocation of stock options was reduced to 40% (previously the weighting was 50% for each).

 

The stock option term was shortened from ten years to seven years

 

 

      Performance share units (60%)    Stock options (40%)
What they are   

• Notional share units that vest at the end of three years based on absolute and relative performance and the price of CP common shares

  

• Rights to buy CP shares at a specified price in the future

Vesting and

payout

  

• Cliff vest at the end of three years based on performance against three pre-defined financial and market metrics

 

• No guarantee of a minimum payout

  

• Vest 25% every year beginning on the anniversary of the grant date

 

• Expire at the end of seven years (down from ten years)

 

• Only have value if our share price increases above the exercise price

Dividend equivalents   

• Earned quarterly and compound over the three-year period

  

• Do not earn dividend equivalents

Restrictions   

• Must meet minimum level of performance

 

• Performance multiplier is capped for exceptional performance

  

• Cannot be exercised during a blackout period

If the

executive retires

  

• Must give three months’ notice

 

• Award continues to vest and executive is entitled to receive the full value as long as they have worked for six months of the performance period, otherwise the award is forfeited

  

• Must give three months’ notice

 

• Options continue to vest, but expire five years after the retirement date or on the normal expiry date, whichever is earlier

Stock options are usually granted in January immediately after the fourth quarter financial statement blackout period ends, while performance share units (PSUs) are awarded in February after the Compensation Committee has reviewed the year-end financial results in detail.

At the CEO’s recommendation, the Board may eliminate or adjust an executive’s actual grant (but may not increase a grant more than 25% above an executive’s target). In determining adjustments, the Compensation Committee considers the competitive positioning of each individual’s compensation, among other factors.

The Board does not take into consideration the amount or terms of previous awards when making grants because:

  it could encourage an option holder to exercise their options earlier than planned to avoid a reduction in future grants because of a significant number of outstanding options
  it might disadvantage long-serving employees and others who are committed to the stock
  long-term incentive awards are granted to motivate and the value is contingent on strong future performance

 

 

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Grants are also made for special situations like retention or new hires. Special grants can include PSUs, RSUs, DSUs or options. These grants are made on the first Tuesday of the month following approval. If we are in a blackout period, the grant is made after the blackout has been lifted.

2017 long-term incentive awards

To determine the appropriate value of long-term incentive grants provided to the named executives, the Compensation Committee considers the practices of our comparator group and external market data as well as internal factors including executive retention, dilutive impact and long-term value creation. The CEO did not recommend any adjustments to the 2017 awards.

The table below shows the 2017 long-term incentives awarded to the named executives.

 

      Target as a % of base salary  

Keith Creel

     400%  

Nadeem Velani

     225%  

Robert Johnson

     225%  

Laird Pitz

     115%  

Jeffery Ellis

     115%  

 

    

2017

long-term

                                         
     incentive       >      Allocation  
     award              Performance share units            Stock options  
     (grant value)                              $                          #            $      #  
                  

Keith Creel

     14,924,418                4,407,788        22,294          10,516,630        229,871  

Nadeem Velani

     985,045                782,395        3,903          202,650        4,644  

Robert Johnson

     1,514,778                958,705        4,849          556,073        11,557  

Laird Pitz

     622,931                394,237        1,994          228,694        4,753  

Jeffrey Ellis

     604,199                386,888        1,930          217,311        4,980  

Notes:

  See the summary compensation table on page 62 for details about how we calculated the grant date fair values of the performance share units and stock options. Both were calculated in accordance with FASB ASC Topic 718.
  The amount for Mr. Creel includes the performance stock option grant that he received in 2017 as described below.
  The grant value of the awards based on the NYSE trading price has been converted to Canadian dollars using a 2017 average exchange rate of $1.2986.

 

As disclosed in last year’s proxy, when Mr. Creel became CEO on January 31, 2017, he received a special grant of performance stock options, designed to motivate strong CEO performance, build his equity ownership and retain him during a period of significant change in the railroad industry. To make the upfront grant, the Compensation Committee reduced Mr. Creel’s target long-term incentive award to 400% of salary for the next five years (from the market median of 500% among the Class 1 railroads), and used the difference (5 years x 100%) to make the award, which was allocated 100% to performance stock options (see page 44 for details about the vesting and performance conditions).

 

 

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Performance share units (PSUs)

 

PSU awards focus executives on achieving medium-term goals within a three-year performance period.

 

The Board sets performance measures, thresholds and targets at the beginning of the performance period.

 

The number of units that vest is based on our performance over the three-year period. We must achieve threshold performance on a measure, otherwise the payout factor for that measure is zero and a portion of the award is forfeited. If performance is exceptional on a measure, the Board may approve a payout of up to 200%.

 

 

New in 2017

We are putting more emphasis on return on invested capital and total shareholder return to better align incentive pay with shareholder interests.

 

Based on shareholder feedback, we eliminated operating ratio as a long-term measure to reduce overlap with the STIP measures.

 

PSUs earn additional units as dividend equivalents at the same rate as dividends paid on our common shares.

The award is paid out in cash based on the number of units that are earned and the average closing share price for the 30 trading days prior to the end of the performance period on the TSX or NYSE, as applicable. The award may be paid out in shares, on the CEO’s recommendation, using the after-tax value.

2017 PSU awards

The performance period for the 2017 PSU awards is January 1, 2017 to December 31, 2019. Performance will be assessed against the measures in the table below. Awards will be prorated if results fall between threshold and exceptional.

 

  2017 PSU performance measures    Why the measure is important   

Threshold

(50%)

    

Target

(100%)

    

Exceptional

(200%)

     Weighting  

PSU three-year average return on invested capital (ROIC)

Net operating profit after tax divided by average invested capital

  

Focuses executives on the effective use of capital as we grow. Ensures shareholders’ capital is employed in a value-accretive manner

     14.5%        15%        15.5%       



60% (new)

(increased
from 20% in
2016)

 

 
 
 

Total shareholder return

Measured over three years. The percentile ranking of CP’s CAGR relative to the companies that make up the S&P TSX Capped Industrial Index

  

Compares our TSR to a broad range of Canadian investment alternatives

Aligns long-term incentive compensation with long-term shareholder interests

 

    

25th

percentile

 

 

    

50th

percentile

 

 

    

75th

percentile

 

 

    



20% (new)

(increased
from 10% in
2016)

 

 
 
 

Total shareholder return

Measured over three years. The percentile ranking of CP’s CAGR relative to the companies that make up the S&P 1500 Road and Rail Index

  

Compares our TSR to the companies that make up the S&P 1500 Road and Rail Index, a broad range of transportation peers, rather than the narrow group of publicly traded Class 1 peers making the payout less volatile and more consistent with the broader industry

 

Aligns long-term incentive compensation with long-term shareholder interests

    

25th

percentile

 

 

    

50th

percentile

 

 

    

75th

percentile

 

 

    



20% (new)

(increased
from 10% in
2016)

 

 
 
 

At the end of the three-year performance period, the starting point for determining relative TSR will be the 10-day trading average of the closing price of CP shares on the two indices prior to January 1, 2017 and the closing point will be the 10-day trading average of the closing price of CP shares on the two indices prior to December 31, 2019. TSR is adjusted over the period to reflect dividends paid and the multiplier is interpolated if our performance falls between the ranges. If results are below the threshold level for any of the performance measures, units for that specific measure will be forfeited.

 

 

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Stock options

 

Stock options focus executives on longer-term performance. Options have a seven-year term and vest 25% each year beginning on the anniversary date of the grant. The grant price is the last closing price of our common shares on the TSX or the NYSE on the grant date. Options only have value for the holder if our share price increases above the grant price.

 

2017 stock option awards

 

The table below shows the details of the 2017 annual option award grant.

 

 

New in 2017

We reduced the term of stock options granted in 2017 and later to seven years from ten years.

 

 

      Grant value ($)        # of options        Grant price  

Keith Creel

     1,630,352          33,884          US$150.99 (NYSE)  
     896,816          18,762          US$151.14 (NYSE)  

Nadeem Velani

     202,650          4,644          $201.49 (TSX)  

Robert Johnson

     556,073          11,557          US$150.99 (NYSE)  

Laird Pitz

     228,694          4,753          US$150.99 (NYSE)  

Jeffrey Ellis

     217,311          4,980          $201.49 (TSX)  

The grant value of the stock option awards based on the NYSE trading price have been converted to Canadian dollars using a 2017 average exchange rate of $1.2986.

As disclosed in last year’s proxy, when Mr. Creel became CEO on January 31, 2017, he received a special grant of performance stock options, designed to motivate strong CEO performance, build his equity ownership and retain him during a period of significant change in the railroad industry (see below and the details on page 50). Mr. Creel also received an annual option award of $1,630,352 that was granted on January 20, 2017, and his grant of $896,816 on February 1, 2017 reflects the additional options he received to bring him to the CEO level of 400% of salary. See summary compensation table on page 62 for more information.

We calculated the number of options to be granted to each executive by dividing the grant value by the theoretical value of an option (using the Willis Towers Watson binomial option pricing methodology), applied to our 30-day average closing share price on the TSX or the NYSE prior to the day of the grant.

CEO performance stock options

Mr. Creel’s performance stock options cliff vest on February 1, 2022 (five years from the grant date) based on our five-year total shareholder return relative to two equally weighted measures:

  50% of the options will vest if our TSR is at or above the 60th percentile of the companies that make up the S&P/TSX Capped Industrial Index
  the other 50% of the options will vest if our TSR is at or above the 60th percentile of the companies that make up the S&P 1500 Road and Rail Index.

Performance will be assessed over a five-year period. The starting point for determining relative TSR will be the 10-day trading average of the closing price of CP shares and the two indices prior to February 1, 2017 and the closing point will be the 10-day trading average of the closing price of CP shares and the two indices prior to January 31, 2022. The options expire on February 1, 2024. The table below shows the details of the special, upfront grant of performance stock options.

 

        Grant value ($)        # of options      Exercise price     

Keith Creel

       7,989,462          177,225      US$151.14 (NYSE)   

The performance stock options

expire after seven years.

The grant value of the performance stock options is based on our shares traded on the NYSE and have been converted to Canadian dollars using a 2017 average exchange rate of $1.2986.

 

 

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About the stock option plan

The management stock option incentive plan (stock option plan) was introduced in October 2001.

Regular stock options granted before 2017 expire 10 years from the date of grant and generally vest 25% each year over four years, beginning on the anniversary of the grant date.

Stock options awarded January 1, 2017 and later have a seven-year term (reduced from 10 years). If the expiry date falls within a blackout period, the expiry date will be extended to 10 business days after the end of the blackout period date. If a further blackout period is imposed before the end of the extension, the term will be extended another 10 days after the end of the additional blackout period.

The table below sets out the limits for issuing options under the plan:

 

      As a % of the number of shares outstanding

Maximum number of shares that may be reserved for issuance to insiders as options

   10%

Maximum number of options that may be granted to insiders in a one-year period

   10%

Maximum number of options that may be granted to any insider in a one-year period

   5%
      As a % of the number of shares outstanding at
the time the shares were reserved

Maximum number of options that may be granted to any person

   5%

We measure dilution by determining the number of options available for issuance as a percentage of outstanding shares. Our potential dilution at the end of 2017 was 2%. The maximum dilution allowed by the Board is 7%.

The option grant price is the last closing market price of shares on the grant date on the TSX or the NYSE (for grants after December 15, 2014 depending on the currency of the grant).

The table below shows the burn rate for the last three fiscal years, calculated by dividing the number of stock options granted in the fiscal year by the weighted average number of outstanding shares for the year.

 

(as at December 31)      2015        2016        2017  

Number of options granted

       317,202          403,740          396,980  

Weighted number of shares outstanding

       159,733,222          149,565,498          145,863,318  

Burn rate

       0.20%          0.27%          0.25%  

The table below shows the options outstanding and available for grant as at December 31, 2017.

 

        Number of options/shares        Percentage of outstanding shares  

Options outstanding (as at December 31, 2017)

       1,361,950          0.94  

Options available to grant (as at December 31, 2017)

       1,555,922          1.07  

Shares issued on exercise of options in 2017

       319,403          0.22  

Options granted in 2017

       369,980          0.26  

Since the launch of the management stock option incentive plan in October 2001, a total of 18,078,642 shares have been available for issuance under the plan and 15,160,770 shares have been issued through the exercise of options.

A stand-alone option award was granted to Mr. Creel in 2013, as disclosed in prior proxy circulars. The award was not granted under the management stock option incentive plan.

We do not provide financial assistance to option holders to facilitate the purchase of shares under the plan.

 

 

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Other things to know

There is a double trigger on options so that if there is a change of control and only if an option holder is terminated without cause, all of his or her stock options will vest immediately according to the change in control provisions in the stock option plan.

If an employee retires, the options continue to vest and expire on the original expiry date or five years from retirement, whichever is earlier.

If an employee is terminated without cause, the employee has six months to exercise any vested options. If the employee resigns, the employee has 30 days to exercise any vested options. If an employee is terminated with cause all options are cancelled.

Options will continue to vest and expire on its normal expiry date if the holder’s employment ends due to permanent disability.

If an option holder dies, the options will expire 12 months following his death and may be exercised by the holder’s estate. Options can only be assigned to the holder’s family trust, personal holding corporation or retirement trust, or a legal representative of an option holder’s estate or a person who acquires the option holder’s rights by bequest or inheritance.

The CEO, the Chairman of the Board and the Compensation Committee chair have authority to grant options to certain employees based on defined parameters, such as the position of the employee and the expected value of the option award:

  In 2016, the Compensation Committee authorized a pool of 100,000 options for allocation by the CEO, who granted 3,150 options to one employee to recognize performance and for retention.
  The Compensation Committee reduced the approved amount in 2017 to 50,000 for allocation by the CEO and 3,998 were granted from this pool.

The Compensation Committee has again approved 50,000 options that the CEO may allocate at his discretion in 2018.

Making changes to the plan

The Board can make the following changes to the plan without shareholder approval:

  changes to clarify information or to correct an error or omission
  changes of an administrative or a housekeeping nature
  changes to eligibility to participate in the plan
  terms, conditions and mechanics of granting stock option awards
  changes to vesting, exercise, early expiry or cancellation
  amendments that are designed to comply with the law or regulatory requirements.

The Board must receive shareholder approval to make other changes, including the following, among other things:

  an increase to the maximum number of shares that may be issued under the plan
  a decrease in the exercise price
  a grant of options in exchange for, or related to, options being cancelled or surrendered.

The Board has made two amendments to the plan since it was introduced in 2001:

  On February 28, 2012, the plan was amended so that a change of control would not trigger accelerated vesting of options held by a participant, unless the person is terminated without cause or constructively dismissed
  On November 19, 2015, the plan was amended to provide net stock settlement as a method of exercise, which allows an option holder to exercise options without the need for us to sell the securities on the open market, resulting in less dilution.

 

 

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Payout of 2015 PSU award

The 2015 PSU grant for the period of January 1, 2015 to December 31, 2017 was paid out on February 23, 2018. The named executives received a payout of 160% on the award which includes dividends earned up to the payment date. The table below shows the difference between the actual payout value and the grant value for each named executive.

 

LOGO

For Mr. Velani, the market share price was calculated using $225.47, the average 30-day trading price of our shares prior to December 31, 2017 on the TSX. For Mr. Creel, Mr. Johnson and Mr. Pitz, the market share price was US$176.56, the average 30-day trading price of our shares prior to December 31, 2017 on the NYSE, and the value of these shares were converted to Canadian dollars using the year-end exchange rate of $1.2545. For comparability, for Mr. Creel, Mr. Johnson and Mr. Pitz, the 2015 grant value was converted using an exchange rate of 1.2787.

Mr. Ellis was not eligible for the 2015 Performance Plan payout as he was not an employee of CP at the time of grant.

How we calculated the 2015 PSU performance factor

The PSU performance factor for the three-year period from January 1, 2015 to December 31, 2017 is 160%, as shown in the table below. The payout value has been calculated in accordance with the terms of the performance share unit plan and the 2015 award agreement.

 

PSU measures   

Threshold

50%

    

Target

100%

    

Maximum

200%

    

PSU

Result

     Weighting      Factor  

PSU Operating ratio

Operating expenses divided by total revenues

     64%        62%        60%        adj. 57.1%        50%        200%  

PSU 2015 to 2017 average ROIC

Net operating profit after tax divided by average invested capital

     13%        14%        15%        adj. 15.1%        30%        200%  

Total shareholder return

Three-year CAGR relative to the S&P/TSX 60 Index

     0%        1%        5%        -5.6%        10%        0%  

Total shareholder return

Ranking at the end of the three years relative to Class 1 Railroads

     4        3        1        5        10%        0%  

PSU performance factor

                                                  160%  

We make certain assumptions when we set the plan targets. Results under the PSU plan are adjusted to reflect changes to those assumptions so we measure the true operating performance of the business. Operating ratio was adjusted to reflect the following items: foreign exchange, the impact of a higher than forecast on-highway diesel (OHD) and land sales. ROIC was adjusted for the performance of the pension plan as its impact on the balance sheet was not a good indication of management’s ability to deliver returns from the core business on its invested capital.

 

 

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KEITH E. CREEL  PRESIDENT AND CHIEF EXECUTIVE OFFICER

 

 

LOGO

 

Mr. Creel was appointed as the President and Chief Executive Officer (CEO) on January 31, 2017. Mr. Creel was previously CP’s President and Chief Operating Officer (COO).

 

Prior to joining Canadian Pacific, Mr. Creel had a very successful operating career which began at Burlington Northern as a management trainee in operations and eventually led to his becoming the EVP and COO at CN in 2010.

 

Mr. Creel obtained a Bachelor of Science in marketing from Jacksonville State University and has completed the Advanced Management Program at the Harvard Business School. He served as a commissioned officer in the U.S. Army during which time he served in the Persian Gulf War.

2017 performance

Keith Creel was appointed President and CEO on January 31, 2017, a planned transition that had been in place since he was recruited to CP in February 2013 as President and COO. As President and CEO, Mr. Creel is responsible for providing leadership and strategic vision for CP leading CP’s transition from a corporate turnaround to a growth-focused company.

In 2017 Mr. Creel focused on the following key areas:

 

1. Strategic direction

 

2. Employee engagement and team development

 

3. Business development

 

4. Operating and safety performance

 

5. Stakeholder engagement

2017 highlights

CP delivered record financial and safety performance in 2017.

Our total revenues grew by 5% to $6.55 billion which, combined with our disciplined operating model, produced record operating income and an all-time best operating ratio.

We invested $1.34 billion in our capital program and demonstrated our commitment to shareholders by returning approximately $691 million through share buybacks and dividends. We also increased our quarterly dividend by 12.5%, from $0.50 to $0.5625, and announced a new share repurchase program. Our total shareholder return for 2017 was 21%.

Throughout, we remained steadfast in our commitment to safety. We improved our train accident frequency rates by 12%, which marked the 12th consecutive year that we have led the industry on this key safety metric.

Strategic direction

Mr. Creel’s planned succession to the President and CEO role began when he arrived at CP in 2013 to work alongside the late legendary railroader Hunter Harrison and lay out a path for CP. CP achieved an extraordinary turnaround under the leadership of Mr. Harrison and Mr. Creel.

As President and CEO, Mr. Creel quickly began setting the direction for the next chapter of the CP story. CP has spent the last five years right sizing the organization and our asset base and improving our operations and service using CP’s precision railroading model. Our network now has the fastest and shortest transit times in the key markets we serve. Mr. Creel is leveraging those strengths and applying his 20-plus years of railroading experience and the talent of his leadership team to grow our top line and achieve long term sustainable growth.

Our focus on safety, service and innovation, combined with our financial strength and our ability to capitalize on our network and deliver in a disciplined and cost-effective way, are key elements for achieving our strategy.

Employee engagement and team development

Building on his commitment to our people when he joined CP, Mr. Creel has devoted a significant amount of time in 2017 to deepen our relationship with employees in all areas of the business and support retention to help our future growth. He hosted a series of town halls and implemented CEO round tables to hear first-hand from employees across our network and respond to their questions, concerns and ideas about our strategy and our business. Under Mr. Creel’s leadership, CP conducted an employee engagement survey for non-union employees, to solicit feedback and identify areas for opportunity. Mr. Creel is leading our efforts to increase diversity throughout the organization. At Mr. Creel’s direction we are also introducing new programs and tools to strengthen leadership and accountability, improve retention and outreach, and support the recruitment of women and indigenous peoples.

 

 

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Significant work was done in 2017 to collaborate proactively with our union partners to reach a number of long-term labour agreements before expiry. Ratification of the new five-year agreements with the Canadian Pacific Police Association, the United Steelworkers (USW) and the Teamsters Canada Rail Conference Maintenance of Way Employees Division (TCRC-MWED) bring labour stability for the company and our employees and align employees’ interests with our growth objectives, while supporting a common vision that was in the best interest of all stakeholders.

As part of his appointment as President and CEO, Mr. Creel established a new leadership team and structure that better leverages our best-in-class service to meet the needs of current and future customers and support our long term sustainable growth strategy in the years ahead. These changes include the appointment of John Brooks as Chief Marketing Officer and the recruitment of two new vice-presidents in sales and marketing.

Business development

CP is creating the foundation for top line growth by focusing on new business opportunities and enhancing service. In 2017 we expanded our market reach through initiatives such as our sales presence in Asia, daily service from Vancouver to Detroit, and expansion into the Ohio Valley. CP is the first railroad to offer a direct route from Vancouver to the Ohio Valley. We are already experiencing gains in market share through these enhanced offerings.

Additionally, we enhanced our service offerings such as our new “live” lift operation at Portal, North Dakota, our new large-scale, multi-commodity transload facility in Vancouver, and the roll out of our Auto Grate technology at all of our intermodal terminals. These initiatives makes it easier and faster for our customers to do business, provide more efficient transload services and increase network fluidity which provides our customers with a strategic advantage.

Operating and safety performance

We remain grounded in our foundations of precision railroading and continue to fine-tune our operations in our constant pursuit of operational, service and safety excellence while controlling costs. In 2017, CP moved 5% more volume, while sustaining key operating metrics and improving overall safety performance. CP ended 2017 with an industry-leading FRA train accident rate of 0.99. This result not only represents a 12% improvement over 2016, but also represents the 12th consecutive year that CP has led the industry on this metric. CP’s FRA personal injury rate was 1.65, a 1% improvement over 2016.

In 2017, CP continued to roll out its Home Safe program – an initiative designed to take CP’s safety culture to the next level. Home Safe is a commitment to be vigilant about personal safety and the safety of co-workers. It is based on 100% compliance to operating rules and safety practices, partnering with all employees, and treating each other with mutual respect. It is the commitment each employee makes to watch out for each other and to let someone know if they are at risk.

Mr. Creel also championed our trip plan effort. His leadership has involved setting clear direction and expectations on how to set and measure trip plans, and hold Operations accountable for execution. In 2017, CP continued to develop and refine our ability to measure trip plan. Trip plan is a detailed schedule for a shipment that has become CP’s cornerstone operating principle. It aligns our service plan and customer expectations, from cut-off to local service, through to the delivery at destination. Through trip plan, CP is generating superior service that is consistent and aligned with market requirements, while controlling costs through improved efficiencies. CP will continue to refine and enhance our trip planning processes in 2018, by modifying schedules and business rules to ensure we meet market needs.

Stakeholder engagement

Mr. Creel led a range of engagement activities in 2017 with a broad group of external stakeholders, including shareholders, senior legislators and policy makers, regulators, First Nations, and industry associations. Mr. Creel had numerous meetings in Ottawa and other locations to advocate for a balanced approach to industry regulation and legal changes to allow the proactive use of locomotive voice and video recorders to prevent incidents and improve rail safety. He had discussions with senior government officials in Canada and the U.S. to discuss the importance of the North American Free Trade Agreement to the North American economy. In addition, Mr. Creel met with current and prospective shareholders to thoroughly communicate our growth strategy and build confidence in the new management team.

All of these initiatives support our efforts to build on our operating efficiency, customer service and safety record, without compromise, and focus on growing CP into the future and creating long-term value for our customers, our employees and our shareholders. The Compensation Committee completed the assessment of CEO performance, which was discussed with and approved by the Board. Mr. Creel was assessed as exceeding his overall individual performance objectives and leading the company to achieve strong corporate performance.

 

 

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2017 compensation

The table below shows the compensation awarded to Mr. Creel for 2017, compared to the previous two years.

 

 

LOGO

  Compensation ($’000)    2017        2016        2015  
 

Fixed

            
 

Base earnings

     1,437          1,261          1,164  
 

Variable

            
 

Short-term incentive

     2,419          1,901          1,602  
 

Long-term incentive

            
 

- PSUs

     4,408          2,404          1,959  
 

- Stock options

     10,517          2,131          2,130  
 

Total direct compensation

     18,781          7,697          6,855  
 

Total target direct compensation

     9,058          6,336          5,836  
 

 

Notes:

Salary is the actual amount received that year. Payments made in U.S. dollars have been converted to Canadian dollars using an average exchange rate for the year: $1.2986 for 2017, $1.3248 for 2016 and $1.2787 for 2015.

 

In 2017, Mr. Creel received 177,225 performance stock options that cliff vest in five years based on our relative TSR against the companies that make up the S&P/TSX Capped Industrial Index and the companies that make up the S&P 1500 Road and Rail Index (see the 2017 Long-term incentive – CEO grant on page 44 and the summary compensation table on page 62 for details).

 

 

 

We signed a new employment agreement with Mr. Creel effective January 31, 2017, which sets out the terms of his compensation as CEO. The new agreement was designed to align his compensation closer to the market median of our peer group, does not include tax equalization and limits his use of the corporate aircraft to corporate travel and family visits within North America.

Salary

Mr. Creel received a 17.6% increase to US$1.125 million when he became CEO on January 31, 2017.

Short-term incentive

Based on our 2017 corporate performance and the assessment of his individual performance, Mr. Creel received a cash bonus of $2,419,292 for 2017, calculated as follows:

 

LOGO

Year-end salary and the 2017 STIP award were paid in U.S. dollars and have been converted to Canadian dollars using an average exchange rate of $1.2986 for 2017.

Long-term incentive

Mr. Creel received annual 2017 long-term incentive awards with a total grant value of $6,934,956, 100% of his target award. The grant was allocated 60% PSUs and 40% stock options.

 

As disclosed in last year’s proxy, when Mr. Creel became CEO on January 31, 2017, he received a special grant of performance stock options, designed to motivate strong CEO performance, build his equity ownership and retain him during a period of significant change in the railroad industry. To make the upfront grant, the Compensation Committee reduced Mr. Creel’s target long-term incentive award to 400% of salary for the next five years (from the market median of 500% among the Class 1 railroads), and used the difference (5 years x 100%) to make the award, which was allocated 100% to performance stock options (see page 44 for details about the vesting and performance conditions).

 

 

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Realized and realizable pay

The value of Mr. Creel’s incentive compensation is based on our performance over the period and, for the long-term incentive, our share price when the awards vest.

The graph below shows the three-year average of Mr. Creel’s granted and realized and realizable pay from 2015 to 2017.

 

LOGO

Notes:

Summary compensation table: average of salary earned, actual cash bonus received, and long-term incentives granted (using the grant date fair value from 2015 to 2017 as disclosed in the summary compensation table on page 62). The compensation figures have been converted to Canadian dollars using the following average exchange rates: $1.2787 for 2015, $1.3248 for 2016 and $1.2986 for 2017.

Realized and realizable: average of salary earned, actual cash bonus received, the value of long-term incentive awards that have vested or been exercised, and the estimated current value of unvested long-term incentive awards granted from 2015 to 2017:

  vested PSUs and stock options are valued at the time of vesting or exercise
  the value of vested 2015 PSUs payable in February 2018 was calculated using the 30-day average trading price of our shares prior to December 31, 2017 of US$176.56 on the NYSE with a performance multiplier of 1.6 and includes dividends earned up to the payment date
  the value of unvested 2016 and 2017 PSU’s are based on the closing price of our shares on December 29, 2017 of US$182.76 on the NYSE with a performance multiplier of 1.0. PSUs include reinvestment of additional units received as dividend equivalents
  the value of unvested/unexercised stock options is based on the closing price of our shares on December 29, 2017 of US$182.76 on the NYSE
  the compensation figures for salary earned and actual bonus received have been converted to Canadian dollars using the following average exchange rates: $1.2787 for 2015, $1.3248 for 2016 and $1.2986 for 2017.
  the value of any realized and realizable PSUs and Options have been converted into Canadian dollars using the 2017 year-end exchange rate of $1.2545

We also compare the realized and realizable value of $100 awarded in total direct compensation to Mr. Creel in each year to the value of $100 invested in CP shares on the first trading day of the period, assuming reinvestment of dividends, to show a meaningful comparison of shareholder value.

 

 

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Pay linked to shareholder value

The table below shows Mr. Creel’s total direct compensation in Canadian dollars in each of the last three years, compared to its realized and realizable value as at December 31, 2017. We also compare the realized and realizable value of $100 awarded in total direct compensation to Mr. Creel in each year to the value of $100 invested in CP shares on the first trading day of the period, assuming reinvestment of dividends, to show a meaningful comparison of shareholder value.

 

(Cdn$)                        Value of $100  
      Compensation
awarded
    Realized and realizable value
of compensation as at
December 31, 2017
     Period      Keith Creel      Shareholder  

2015

   $ 6,855,631     $ 6,288,021        Jan 1, 2015 to Dec 31, 2017        92        105  

2016

   $ 7,696,926     $ 11,193.523        Jan 1, 2016 to Dec 31, 2017        145        132  

2017

   $ 18,780,304     $ 18,131,928        Jan 1, 2017 to Dec 31, 2017        97        121  

Mr. Creel’s compensation awarded is as disclosed in the summary compensation table. He receives his compensation in U.S. dollars. Annual compensation figures have been converted to Canadian dollars using the following average exchange rates: $1.2787 for 2015, $1.3248 for 2016 and $1.2986 for 2017.

Mr. Creel’s realized and realizable value for salary earned and actual bonus received have been converted to Canadian dollars using the following average exchange rates: $1.2787 for 2015, $1.3248 for 2016 and $1.2986 for 2017. The value of any realized and realizable long-term incentive is converted into Canadian dollars using the 2017 year-end exchange rate of $1.2545.

Equity ownership (at December 31, 2017)

 

Requirement

(as a multiple of salary)

   Minimum
ownership value ($)
     Shares ($)    Deferred share
units ($)
   Total ownership
value ($)
  

Total ownership

(as a multiple of salary)

 

6x

   $ 8,467,875      552,707    7,157,512    7,710,219      5.46x  

Mr. Creel is on track to meeting his share ownership requirements by January 2022. Values are based on US$182.76, the closing price of our common shares on the NYSE on December 29, 2017 and have been converted using a year-end exchange rate of $1.2545.

Mr. Creel received a special make-whole DSU grant when he was hired in 2013. These vested in 2016, but he cannot redeem them until six months after he retires or leaves the company.

 

 

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NADEEM S. VELANI   EXECUTIVE VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER

 

 

LOGO

  

Mr. Velani was appointed Vice-President and Chief Financial Officer on October 18, 2016 and was appointed Executive Vice-President and Chief Financial Officer on October 17, 2017. Mr. Velani is a key member of the senior management team responsible for the long-term strategic direction of the Company. Other responsibilities include financial planning, reporting and accounting systems, as well as pension, treasury, investor relations and tax functions.

 

Mr. Velani joined CP in March 2013 and most recently served as Vice-President Investor Relations. Prior to CP, Mr. Velani spent approximately 15 years at CN where he worked in a variety of positions in financial planning, sales and marketing, investor relations and the Office of the President and CEO.

2017 performance

The CEO assessed Mr. Velani’s performance in 2017 against his individual performance objectives, which included developing a culture and organizational structure in finance better aligned to support an operations-focused company, building a strong team of financial leaders, reviewing the pension plan investment strategy and improving the financial planning, budgeting and forecasting process. In addition, Mr. Velani was responsible for leading an update of the company’s strategic multi-year plan.

All aspects of these functions were taken into consideration as part of the assessment. Mr. Velani was assessed as exceeding his individual performance objectives for the year.

The assessment was reviewed by the Compensation Committee, and approved by the Board.

2017 compensation

The table below is a summary of the compensation awarded to Mr. Velani for 2017, compared to the two previous years.

 

LOGO

  Compensation ($’000)    2017        2016        2015  
 

Fixed

            
 

Base earnings

     451          299          224
 

Variable

            
 

Short-term incentive

     491          374        153  
 

Long-term incentive

            
 

- PSUs

     782          132          87  
 

- Stock options

     203          105          72  
 

- DSUs

     24          -          15  
 

Total direct compensation

     1,951          910          551  
 

Total target direct compensation

     1,840          1,141          576  

Salary

Mr. Velani received a 10.8% step increase in 2017 to bring his salary closer to the market median and as a result of his appointment as Executive Vice-President and CFO on October 17, 2017.

2017 short-term incentive

Based on our 2017 corporate performance and the assessment of his individual performance, Mr. Velani received a cash bonus of $490,763 for 2017, calculated as follows:

 

LOGO

 

 

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2017 long-term incentive

Mr. Velani also received annual 2017 long-term incentive awards in the form of PSUs and Options with a total grant value of $985,045. When options were granted on January 20, 2017, Mr. Velani’s target was 115% of base salary of $415,000. This grant was allocated at 40% of target in stock options. When PSUs were granted, Mr. Velani’s target increased to 225% of base salary. This grant was allocated at 60% of target in PSUs.

Equity ownership (at December 31, 2017)

 

Requirement

(as a multiple of salary)

   Minimum
ownership value ($)
     Shares ($)      Deferred share
units ($)
     Total ownership
value ($)
    

Total ownership

(as a multiple of salary)

 

3x

     1,380,000        184,354        368,825        553,179        1.20x  

Mr. Velani is on track to meeting his share ownership requirements by February 2022. Values are based on $229.66, the closing price of our common shares on the TSX on December 29, 2017.

 

 

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ROBERT A. JOHNSON   EXECUTIVE VICE-PRESIDENT, OPERATIONS

 

 

LOGO

 

Mr. Johnson was appointed as Executive Vice-President, Operations in April of 2016. In this role, Mr. Johnson has overall operational responsibility for CP’s rail network, including aspects of operational safety, service, engineering and mechanical services in both Canada and the U.S. with a focus on train performance and overall fluidity of the network.

 

Prior to this appointment, Robert was CP’s Senior Vice-President Operations, Southern Region.

 

Mr. Johnson’s railroad career spans over 36 years. He spent 32 of those years were spent with BNSF where he held successively more responsible roles in operations, transportation, engineering, and service excellence. His most recent position at BNSF was General Manager, Northwest Division, overseeing day-to-day operations for that region.

2017 performance

The CEO assessed Mr. Johnson’s performance in 2017 against his individual performance objectives in the areas of operational performance, cost control and safety. Mr. Johnson was instrumental in the implementation of our new “live” lift operation which enhances our cross-border operations at Portal, North Dakota for our intermodal traffic moving between Western Canada and the U.S. Midwest. Live lift allows us to lift single containers off trains for inspection by Canadian and U.S. authorities rather than having intermodal cars set-off. Mr. Johnson led the development of our new large-scale, multi-commodity transload facility in Vancouver as well as the implementation of operational efficiencies within that region to provide customers with more efficient services for imported and exported goods. Mr. Johnson championed our operational safety in 2017 which lead to a new all-time low train accident frequency. Mr. Johnson was assessed as having exceeded his overall individual performance objectives.

The assessment was reviewed by the Compensation Committee and reviewed and approved by the Board.

2017 compensation

The table below is summary of the compensation awarded to Mr. Johnson for 2017, compared to the two previous years.

 

 

LOGO

  Compensation ($’000)    2017        2016        2015  
 

Fixed

            
 

Base earnings

     565          532          425  
 

Variable

            
 

Short-term incentive

     597          648          362  
 

Long-term incentive

            
 

- PSUs

     959          359          300  
 

- Stock options

     556          318          327  
 

Total direct compensation

     2,677          1,857          1,414  
 

Total target direct compensation

     2,260          2,305          1,203  
 

Notes:

Salary is the actual amount received that year. Payments made in U.S. dollars have been converted to Canadian dollars using an average exchange rate for the year: $1.2986 for 2017, $1.3248 for 2016 and $1.2787 for 2015.

 

 

Salary

Mr. Johnson did not receive a salary increase in 2017. Variances are due to foreign exchange.

2017 short-term incentive

Based on our 2017 corporate performance and the assessment of his individual performance, Mr. Johnson received a cash bonus of $597,372 for 2017, calculated as follows:

 

LOGO

 

 

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Year end salary and the 2017 STIP award were made in U.S. dollars have been converted to Canadian dollars using an average exchange rate of $1.2986 for 2017.

2017 long-term incentive

Mr. Johnson received 2017 long-term incentive awards in the form of PSUs and Options with a total grant value of $1,514,778, 100% of his target award. The grant was allocated 60% PSUs and 40% stock options.

Equity ownership (at December 31, 2017)

 

Requirement

(as a multiple of salary)

   Minimum
ownership value ($)
     Shares ($)      Deferred share
units ($)
     Total ownership
value ($)
    

Total ownership

(as a multiple of salary)

 

3x

     1,637,123        52,649        1,275,641        1,328,290        2.43x  

Mr. Johnson is on track to meeting his share ownership requirements by April 2021. Values are based on the US$182.76 closing price of our shares on the NYSE on December 29, 2017 and have been converted using a year-end exchange rate of $1.2545.

 

 

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LAIRD J. PITZ   VICE-PRESIDENT AND CHIEF RISK OFFICER

 

LOGO   

Mr. Pitz was promoted to Senior Vice-President and Chief Risk Officer in October of 2017. This was part of the overall realignment of the risk and insurance functions for succession purposes, and to retain Mr. Pitz for the necessary developments of the succession candidates. He is responsible for all aspects of risk-management in Canada and the U.S., including police services, casualty and general claims, environmental risk, field safety and systems, operational regulatory affairs and training, disability management and forensic audit investigations. Mr. Pitz joined CP on April 2, 2014, as Vice-President of Security and Risk Management.

 

Mr. Pitz, a Vietnam War veteran and former FBI special agent, is a 40-year career professional who has directed strategic and operational risk-mitigation, security and crisis-management functions for companies operating in a wide range of fields including defence, logistics and transportation.

2017 individual performance

The CEO assessed Mr. Pitz’s performance in 2017 against his individual performance objectives, which focused mainly on reducing risk and liability for the company. This included mitigating risk in several key areas: safety, environmental, police security, casualty management, regulatory/operating practices, forensic and internal audit and disability management. Under Mr. Pitz’s leadership, CP has made significant progress in mitigating its overall risk, including the following results in 2017: $200,000 settlement of a $250 million class action lawsuit, claims recoveries in excess of $40 million including a 40% reduction in CP’s Federal Employers Liability Act (FELA) liability ($4.8 million). Mr. Pitz was assessed as having exceeded his overall individual performance objectives.

The assessment was reviewed by the Compensation Committee, and reviewed and approved by the Board.

2017 compensation

The table below is a summary of the compensation awarded to Mr. Pitz for 2017, compared to the two previous years. Mr. Pitz was promoted to Senior Vice-President & Chief Risk Officer on October 17, 2017, and received a 4.6% increase in base salary and an increase in short-term and long-term incentive awards to recognize his increased areas of responsibility.

 

LOGO   Compensation ($’000)      2017        2016        2015  
 

Fixed

              
 

Base earnings

       458          438          406  
 

Variable

              
 

Short-term incentive

       436          417          331  
 

Long-term incentive

              
 

- PSUs

       394          315          265  
 

- Stock options

       229          279          288  
 

- DSUs

       -          83          83  
 

Total direct compensation

       1,517          1,531          1,373  
 

Total target direct compensation

       1,331          1,275          1,126  
 

Notes:

Salary is the actual amount received that year. Payments made in U.S. dollars have been converted to Canadian dollars using an average exchange rate for the year: $1.2986 for 2017, $1.3248 for 2016 and $1.2787 for 2015.

 

Mr. Pitz received a company matching contribution of DSUs in 2016 and 2015 as a result of deferring 100% of his 2015 and 2014 short-term incentive (see page 69 for information about deferred compensation).

 

 

 

Salary

Mr. Pitz received a 4.6% increase in base salary when he was promoted to Senior Vice-President and Chief Risk Officer on October 17, 2017.

 

 

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2017 short-term incentive

Based on our 2017 corporate performance and the assessment of his individual performance, Mr. Pitz received a cash bonus of $435,601 for 2017, calculated as follows:

 

LOGO

Year-end salary and 2017 STIP award were made in U.S. dollars and have been converted to Canadian dollars using an average exchange rate of $1.2986 for 2017.

2017 long-term incentive

Mr. Pitz also received 2017 annual long-term incentive awards in the form of PSUs and Options with a total grant value of $622,931, 100% of his target award. The grant was allocated 60% PSUs and 40% stock options.

Equity ownership (at December 31, 2017)

 

Requirement

(as a multiple of salary)

   Minimum
ownership value ($)
     Shares ($)      Deferred share
units ($)
     Total ownership
value ($)
    

Total ownership

(as a multiple of salary)

 

2x

     918,294        7,107        996,557        1,003,664        2.19x  

Mr. Pitz has met his share ownership requirements. Values are based on US$182.76, the closing price of our shares on the NYSE on December 29, 2017 and have been converted using a year-end exchange rate of $1.2545.

 

 

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JEFFREY J. ELLIS  CHIEF LEGAL OFFICER AND CORPORATE SECRETARY

 

 

LOGO

 

Mr. Ellis was appointed Chief Legal Officer and Corporate Secretary effective November 23, 2015.

 

Mr. Ellis is accountable for the overall strategic leadership, oversight and performance of the legal, corporate secretarial, government relations and public affairs functions of CP in Canada and the U.S.

 

Prior to joining CP in 2015, Mr. Ellis was the U.S. General Counsel at BMO Financial Group. Before joining BMO in 2006, Mr. Ellis was with the law firm of Borden Ladner Gervais LLP in Toronto, Canada.

 

Mr. Ellis has B.A. and M.A. degrees from the University of Toronto, J.D. and LL.M. degrees from Osgoode Hall Law School, and an MBA from the Richard Ivey School of Business, University of Western Ontario. He is a member of the bars of New York, Illinois and Ontario.

2017 performance

The CEO assessed Mr. Ellis’ performance in 2017 against his individual performance objectives, which included managing the company’s legal risk to achieve optimal outcomes across a variety of litigation matters, helping CP’s business achieve its goals through legal support on transactions and commercial contracts and creating conditions for success in communication and public affairs, marketing and government affairs by providing executive leadership and support on key issues such as brand awareness, rail safety and other external affairs priorities, while encouraging a balanced, fair and market-driven regulatory environment in Canada and the U.S. Mr. Ellis was assessed as having exceeded his overall individual performance objectives.

The assessment was reviewed by the Compensation Committee, and reviewed and approved by the Board.

2017 compensation

The table below is summary of the compensation awarded to Mr. Ellis for 2017, compared to the two previous years.

 

 

LOGO

  Compensation ($’000)      2017        2016        2015  
 

Fixed

              
 

Base earnings

       443          422          27  
 

Variable

              
 

Short-term incentive

       376          401          29  
 

Long-term incentive

              
 

- PSUs

       387          269          -  
 

- Stock options

       217          215          -  
 

Make Whole Hiring Costs

              
 

- Cash Payment

       -          -          244  
 

- PSU

       -          126          -  
 

- Stock options

       -          101          -  
 

- DSU

       -          60          -  
 

Total direct compensation

       1,423          1,594          300  
 

Total target direct compensation

       1,224          1,224          1,018  

Salary

Mr. Ellis did not receive an increase in salary in 2017. Salary as shown above reflects actual salary earned in the year. Mr. Ellis’ last salary increase was effective April 1, 2016.

2017 short-term incentive

Based on our 2017 corporate performance and the CEO’s assessment of his individual performance, Mr. Ellis received for a cash bonus of $376,470 for 2017, calculated as follows:

 

LOGO

 

 

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2017 long-term incentive

Mr. Ellis also received 2017 long-term incentive awards with a total grant value of $604,199, 100% of his target award. The grant was allocated 60% PSUs and 40% stock options.

Equity ownership (at December 31, 2017)

 

Requirement

(as a multiple of salary)

   Minimum
ownership value ($)
     Shares ($)      Deferred share
units ($)
     Total ownership
value ($)
    

Total ownership

(as a multiple of salary)

 

2x

     890,000        73,154        84,596        157,750        0.35x  

Mr. Ellis is on track to meeting his share ownership requirements by November 2020. Values are based on $229.66, the closing price of our shares on the TSX on December 29, 2017.

 

 

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Share performance and cost of management

The graph below shows the total shareholder return of $100 invested in CP shares compared to the two major market indices over the last five years ending December 31, 2017 and assumes reinvestment of dividends.

CP shares have outperformed the S&P/TSX Composite Index and the S&P 500 Index over the last five years. It shows a strong correlation between shareholder value and the total direct compensation paid to our named executives over the same period. Our share price on the TSX was $160.65 at the beginning of the performance period (US$151.32 on the NYSE) compared to $229.66 at the end of 2017 (US$182.76 on the NYSE), a growth in share appreciation of 43.0%, creating significant value for shareholders. Our total shareholder return over the five year period was 48.2%, assuming reinvestment of dividends.

 

LOGO

Notes:

  Total direct compensation is the total compensation awarded to the named executives, as reported in the summary compensation table in prior years. In years where there were more than five named executives, we used the following to calculate total direct compensation in the table above:
  2017: Keith Creel, Nadeem Velani, Robert Johnson, Laird Pitz and Jeffrey Ellis
  2016: Hunter Harrison, Nadeem Velani, Keith Creel, Robert Johnson and Laird Pitz
  2015: Hunter Harrison, Mark Erceg, Keith Creel, Laird Pitz and Mark Wallace
  2014: Hunter Harrison, Bart Demosky, Keith Creel, Robert Johnson and Anthony Marquis
  2013: Hunter Harrison, Keith Creel, Brian Grassby, Paul Guthrie and Jane O’Hagan
  Mr. Harrison, Mr. Creel, Mr. Johnson and Mr. Pitz are paid in U.S. dollars and their amounts have been converted using the following average exchange rates: $1.2986 for 2017, $1.3248 for 2016, $1.2787 for 2015, $1.1045 for 2014 and $1.0299 for 2013.
  Actual total direct compensation after resignations are the net amounts after Mr. Harrison, Mr. Erceg and Mr. Demosky left CP and forfeited amounts reported in the summary compensation table in prior proxy statements.

 

 

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EXECUTIVE COMPENSATION DETAILS

Summary compensation table

The table below shows compensation for our six named executives for the three fiscal years ended December 31, 2017. Keith Creel succeeded Hunter Harrison as Chief Executive Officer on January 31, 2017, when Mr. Harrison resigned from CP.

All of the named executives except Mr. Velani and Mr. Ellis were paid in U.S. dollars. Their compensation has been converted to Canadian dollars using the average exchange rates for the year: $1.2986 for 2017, $1.3248 for 2016 and $1.2787 for 2015.

 

                            Non-equity Incentive
plan compensation

($)
                   
Name and principal position   Year     Salary ($)     Share-based
awards
($)
    Option-based
awards
($)
    Annual
incentive
plans
    Long-term
incentive
plans
    Pension
value
($)
    All other
compensation
($)
    Total
compensation
($)
 

Keith E. Creel

    2017       1,436,594       4,407,788       10,516,630       2,419,292       -       398,894       926,402       20,105,600  

President and Chief

    2016       1,261,123       2,403,912       2,131,126       1,900,765       -       348,529       833,257       8,878,712  

Executive Officer

    2015       1,164,270       1,959,244       2,130,228       1,601,889       -       328,426       486,557       7,670,614  

E. Hunter Harrison

    2017       361,369       -       -       -       -       -       6,452,479       6,813,848  

Former Chief

    2016       2,904,595       -       4,999,757       6,557,760       -       -       4,367,682       18,829,794  

Executive Officer

    2015       2,803,522       4,887,846       5,314,137       6,002,537       -       13,492       1,173,789       20,195,323  

Nadeem S. Velani

    2017       451,355       806,073       202,650       490,763       -       101,027       49,523       2,101,391  

Executive Vice-President

    2016       298,838       131,634       105,305       373,500       -       49,682       42,015       1,000,974  

and Chief Financial Officer

    2015       223,972       102,039       78,833       152,819       -       33,308       30,457       621,428  

Robert A. Johnson

    2017       564,891       958,705       556,073       597,372       -       114,037       54,819       2,845,897  

Executive Vice-President,

    2016       532,056       358,674       317,991       648,324       -       86,189       54,931       1,998,165  

Operations

    2015       425,160       300,454       326,539       362,141       -       88,425       57,035       1,559,754  

Laird J. Pitz

    2017       457,901       394,237       228,694       435,601       -       82,361       41,137       1,639,931  

Senior Vice-President

    2016       437,720       397,394       279,071       417,312       -       74,178       41,203       1,646,878  

and Chief Risk Officer

    2015       406,126       347,920       287,967       331,166       -       70,499       37,901       1,481,579  

Jeffrey J. Ellis

    2017       443,479       386,888       217,311       376,470       -       101,277       50,540       1,575,965  

Chief Legal Officer and

    2016       421,918       455,239       316,312       400,500       -       50,275       50,638       1,694,882  

Corporate Secretary

    2015       26,946       -       -       28,922       -       2,964       247,468       306,300  

Notes:

Salary

Salary earned during the year. Salary differs from annualized salary because annual increases generally go into effect on April 1.

Share-based awards

PSUs were granted on February 21, 2017. The grant date fair value of share awards granted to each named executive has been calculated in accordance with FASB ASC Topic 718: Compensation – Stock Compensation, which represents the grant date fair value (with reference to the Shares underlying the awards), measured using a latticed-based valuation model assuming the probable outcome of the applicable performance conditions and excluding the effect for estimated forfeitures during the applicable vesting periods. The 2017 grant date accounting fair value of the awards is $200.46 per share granted on the TSX or $152.25 per share granted on the NYSE. See Item 8, Financial Statements and Supplementary Data, Note 21: Stock-based compensation filed with the SEC on February 16, 2018 for more details.

We value our PSUs using the binomial lattice model methodology. The grant date expected fair value was $162.37 on the TSX and US$123.32 on the NYSE.

Mr. Velani’s amount includes the value of matching DSU’s granted in 2017.

Mr. Harrison forfeited his 2015 PSU grant when he resigned from CP.

Option awards

Stock options were granted on January 20, 2017. The grant date fair value of stock option awards granted to each named executive has been calculated in accordance with FASB ASC Topic 718: Compensation – Stock Compensation. We used the Black-Scholes option-pricing model (with reference to the shares underlying the options). The grant date accounting fair value of the awards is $43.64 per share granted on the TSX or $37.05 per share granted on the NYSE. Additional options were granted to Mr. Creel on February 1, 2017 to bring him to the CEO level. The grant date accounting fair value is US$36.81 per

 

 

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share. For the special performance grant made on February 1, 2017, the grant date accounting fair value is US$34.72 per share. See Incentive plan awards on page 65 for details about the 2018 awards. See Item 8, Financial Statements and Supplementary Data, Note 21: Stock-based compensation filed with the SEC on February 16, 2018 for more details.

To calculate the number of options that an executive receives, we use Willis Towers Watson’s binomial Option pricing methodology which is fundamentally similar to the methodology used to determine the accounting fair value; however, some of the underlying assumptions are different. For example, the binomial methodology assumes a slightly lower historical volatility, a higher risk-free rate and includes a discount to account for vesting restrictions. The grant price on January 20, 2017 was $201.49 on the TSX with an underlying value of $42.31 and was US $150.99 on the NYSE with an underlying value of US$34.73.

Mr. Harrison forfeited his option awards when he resigned from CP.

Non-equity incentive plan compensation

Cash bonus earned under our short-term incentive plan for 2017 and paid in February 2018.

Pension value

Mr. Creel, Mr. Velani and Mr. Ellis participate in the Canadian defined contribution plan (DC plan) and in the defined contribution supplemental plan (DC SERP).

Mr. Creel, Mr. Johnson and Mr. Pitz participate in the U.S. defined contribution plan and the U.S. supplemental executive retirement plan.

See Retirement plans on page 68 for more details.

All other compensation

The named executives also receive certain benefits and perquisites. The table below shows the breakdown of all other compensation for 2017:

 

    Perquisites     Other compensation  
Name   Personal
use of
company
aircraft
    Auto
benefits
    Housing
allowance
    Financial
and tax
planning
    Additional
medical
    Club
memberships
    401K
Plan
    Employer
share
purchase
plan
match
    Tax
reimbursement
    Post-
employment
payments
    Total  

Keith Creel

    570,649       28,387       77,270       29,708       -       33,023       7,012       27,843       152,510       -       926,402  

Hunter Harrison

    83,361       -       3,921       -       42,286       -       -       -       -       6,322,911       6,452,479  

Nadeem Velani

    -       20,432       -       -       -       11,200       -       8,937       8,954       -       49,523  

Robert Johnson

    -       22,091       -       -       -       14,544       8,863       9,321       -       -       54,819  

Laird Pitz

    -       17,178       -       -       -       14,544       9,415       -       -       -       41,137  

Jeffrey Ellis

    -       19,679       -       -       -       11,200       -       8,781       10,880       -       50,540  

 

 

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Notes:

 

Use of company aircraft    The value is calculated by multiplying the variable cost per air hour by the number of hours used for travel and includes costs for fuel, maintenance, landing fees and other miscellaneous costs. As an executive of a Calgary-based company, enabling the CEO to visit his family in the Eastern and Southern United States is an important retention tool. Non-corporate use of the corporate jet has been limited to personal and family visits for Mr. Creel only.
Auto benefits    Includes a company-leased vehicle and reimbursement of related operating costs.
Housing allowance    For reasonable accommodation for Mr. Creel and Mr. Harrison in Calgary. The value is based on the total incremental operating costs for condo fees, housekeeping and other miscellaneous costs paid by us.
Financial and tax planning    For Mr. Creel, financial and tax planning services according to his current contract.
Additional medical    For executive physical examinations and other fees related to medical expenses for Mr. Harrison that are not covered under our group health plans.
Club memberships    Included in the perquisites program available to all executives.
401K plan    Mr. Creel, Mr. Johnson and Mr. Pitz also receive matching contributions to the 401k plan.
ESPP match   

Includes company contributions to the employee share purchase plan (ESPP). The named executives participate in the ESPP on the same terms and using the same formulas as for other participants.

 

The ESPP is available to all employees and provides the opportunity to purchase common shares on the open market through payroll deductions. Employees contribute between 1% and 10% of their base salary to the plan every pay period. We match 33% on the first 6% of non-unionized employees’ contributions that vest after four consecutive quarters. Employees must be participants in the plan at the time of vesting in order to receive the company match. As of December 31, 2017, approximately 34% of our employees participated in the plan.

Tax reimbursements    Includes automobile-related gross-ups (if the executive is eligible). As well, Mr. Creel received a tax equalization payment for taxes incurred in 2016. He is no longer eligible for such payment in 2017.
Post-employment payments    Mr. Harrison received a lower cash payout in lieu of the vested 2014 PSUs.

Employment agreements

Except for Mr. Creel, employment agreements for executive officers are set out in a standard offer letter template. The letters contain the standard terms as described in the CD&A and include an annual salary, participation in the short and long-term incentive plans as approved annually by the Compensation Committee, participation in the benefit plans or programs generally available to management employees, and modest perquisites.

Mr. Creel’s 2017 employment agreement includes:

  reasonable living accommodation in Calgary
  use of the corporate jet for business commuting and family visits within North America
  non-disclosure, non-solicitation covenants
  severance provisions as described on page 70
  reimbursement for club memberships of up to US$25,000 annually
  reimbursement for financial services of up to US$25,000 annually

As of the 2017 tax year, Mr. Creel no longer receives tax equalization benefits as a result of working for CP in Canada, and cannot use the corporate jet for purposes other than for corporate travel and family visits within North America.

Mr. Ellis has an offer letter that also includes a modest severance package for a termination without cause. The letter also includes a non-compete/non-solicit agreement.

 

 

64  CANADIAN PACIFIC


Table of Contents

PROXY CIRCULAR

2.3 EXECUTIVE COMPENSATION

 

 

Incentive plan awards

Outstanding share-based awards and option-based awards

The table below shows all vested and unvested equity incentive awards that are outstanding as of December 31, 2017. See Long-term incentives beginning on page 41 for more information about our stock option and share-based awards.

 

          Option-based awards         Share-based awards  
Name   Grant date    

Number of

securities
underlying
unexercised
options
(#)

    Option
exercise
price
($)
   

Option
expiration

Date

   

Value of
unexercised

in-the-money
options
($)

    Grant
type
  Number of
shares or units
of shares that
have not
vested
(#)
    Market or
payout value of
share-based
awards that
have not vested
($)
    Market or payout
value of vested
share-based
awards not paid
out or distributed
($)
 

Keith Creel

    4-Feb-2013       119,325       115.78       4-Feb-2023       13,588,731          
    22-Feb-2013       53,350       119.18       22-Feb-2023       5,894,108          
    31-Jan-2014       39,900       168.84       31-Jan-2024       2,426,718          
    24-Jul-2014       47,940       210.32       24-Jul-2024       927,160          
    23-Jan-2015       33,910       175.92       23-Jan-2025       290,974          
    22-Jan-2016       55,250       116.80       22-Jan-2026       4,571,762          
    20-Jan-2017       33,884       150.99       20-Jan-2024       1,350,463          
    1-Feb-2017       18,762       151.14       1-Feb-2024       744,238          
    1-Feb-2017       177,225       151.14       1-Feb-2024       7,030,035          
    6-Feb-2013             DSU         7,157,512  
    23-Jan-2015             PSU         3,230,887  
    23-Feb-2016             PSU     15,091       3,459,873    
    21-Feb-2017             PSU     22,468       5,151,306    

Total

            579,546                       36,824,189           37,559       8,611,179       10,388,399  

Nadeem Velani

    2-Apr-2013       2,310       126.34       2-Apr-2023       238,669          
    31-Jan-2014       1,820       168.84       31-Jan-2024       110,692          
    23-Jan-2015       1,539       218.78       23-Jan-2025       16,744          
    22-Jan-2016       2,927       165.74       22-Jan-2026       187,094          
    20-Jan-2017       4,644       201.49       20-Jan-2024       130,821          
    26-Feb-2014             DSU         152,164  
    23-Jan-2015             PSU         149,157  
    19-Feb-2015             DSU     67       15,397       61,589  
    23-Feb-2016             PSU     796       182,733    
    21-Feb-2017             PSU     3,933       903,367    
    24-Feb-2017             DSU     122       27,935       111,741  

Total

            13,240                       684,020           4,918       1,129,432       474,651  

Robert Johnson

    2-Jul-2013       3,640       129.54       2-Jul-2023       364,437          
    31-Jan-2014       5,870       168.84       31-Jan-2024       357,013          
    23-Jan-2015       5,198       175.92       23-Jan-2025       44,603          
    22-Jan-2016       8,244       116.80       22-Jan-2026       682,165          
    20-Jan-2017       11,557       150.99       20-Jan-2024       460,610          
    24-Jun-2013             DSU         1,275,641  
    23-Jan-2015             PSU         495,554  
    23-Feb-2016             PSU     2,252       516,228    
    21-Feb-2017             PSU     4,887       1,120,422    

Total

            34,509                       1,908,828           7,139       1,636,650       1,771,195  

Laird Pitz

    3-Jun-2014       3,150       187.00       3-Jun-2024       134,379          
    23-Jan-2015       4,584       175.92       23-Jan-2025       39,334          
    22-Jan-2016       5,426       116.80       22-Jan-2026       448,984          
    20-Jan-2017       4,753       150.99       20-Jan-2024       189,433          
    19-Feb-2015             DSU     351       80,374       321,498  
    23-Jan-2015             PSU         436,852  
    23-Feb-2016             DSU     519       118,937       475,748  
    23-Feb-2016             PSU     1,976       453,012    
    21-Feb-2017             PSU     2,010       460,739    

Total

            17,913                       812,130