Executive Compensation Program

University of Waterloo – Executive Compensation Program – six designated executives, exclusively.
Effective September 1, 2017

Contents:

• Executive Compensation Philosophy
• Executive Compensation Frameworks
• Salary and Performance-Related Pay Frameworks
• Salary and Performance-Related Pay Envelope
• Other Elements of Compensation
• Special Arrangements for Incumbents of Positions in the Academic Stream
• Perquisites
• Other Limits
• Effective Date

Introduction

The University of Waterloo’s (the “University”) Executive Compensation Program has been designed to support our strategic goal of being recognized as one of the top innovation universities in the world. In addition, the Executive Compensation Program has been designed to be compliant with the Broader Public Sector Executive Compensation Act, 2014 (BPSECA).

Canada’s Innovation University

With six faculties, four federated institutions, 11 faculty-based schools, and an overriding emphasis on teaching and research excellence, the University is home to the world’s largest co-operative education system of its kind. Our unmatched entrepreneurial culture, combined with an intensive focus on research, powers one of the top innovation hubs in the world.

As of October 31, 2017, we have 32,467 undergraduate 5,465 graduate full-time and part-time students, 1,233 full-time faculty, 354 term limited full-time and part-time sessional instructors, an academic support staff of 2,377, and 195,000 alumni. Our 2016-2017 operating revenue is $748.7 million, with $1.82 billion in net assets as of 2015-2016, and $205.7 million in sponsored research funding as of 2016-2017.

Executive Leadership

The value we place on teaching, research and entrepreneurial excellence is evident in the collective strength of the members of our executive leadership team. The President and Vice Chancellor is responsible for administering the affairs of the University, including operational management, policies and academic leadership. The Vice President, Academic and Provost, the Vice President, University Research, the Vice President, Administration and Finance, the Vice President, University Relations and the Vice President, Advancement work closely with the President in achieving the University’s goals.

Executive Compensation Governance

The Governance Committee of the Board of Governors is responsible for administering the compensation of the President and the five Vice President positions. As such, final approval of the Executive Compensation Program, and any updates to the framework and guidelines, will be made by the Governance Committee on behalf of the full Board of Governors.

To ensure compliance with the BPSECA and to draw on the most up-to-date market compensation data, the compensation consulting firm Gallagher McDowall Associates was engaged by the University to assist in the development of the University’s Executive Compensation Program.

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Executive Compensation Philosophy

As a public institution, the overall policy of the University is to pay competitive salaries to our employees within the limits of our financial situation.

In this context, the Executive Compensation Program of the University is intended to:

• attract, retain and motivate high calibre senior executives,
• maintain internal pay equity,
• compensate employees fairly relative to their responsibilities,
• encourage high performance as a team,
• provide an appropriate balance between cash compensation and non-cash compensation, including pension benefits, group insurance benefits, paid time off, work/life balance, and personal development opportunities,
• take into account the value of the security provided to faculty members who accept administrative positions when setting compensation for non-faculty member executives,
• be transparent, both internally and externally, and
• comply with the applicable federal and provincial government legislation.

These practices are governed by our desire to provide competitive and fair compensation, while considering the University’s current financial requirements and longer-term goals.

Performance-related pay is provided through the annual merit programs (i.e. the Faculty Salary Increase process for positions in the academic stream and the Staff Salary Increase process for positions in the non-academic stream), which consider performance ratings as factors in salary adjustment calculations; we do not pay bonuses to our executives, nor do we have annual or long-term incentive plans.

Executive Compensation Frameworks

Under the Executive Compensation Program, each executive’s remuneration is administered within a set of compensation frameworks. As required by the Regulation 304/16 under the BPSECA, and as amended by Regulation 187/17, the compensation frameworks are subject to annual maximums or caps which do not exceed the 50^th percentile of the comparator organizations – that is, the median, which is no greater than the point in the range below which half the values fall.

In developing the University compensation frameworks, the following 5-step process was used:

1. groups of potential comparator organizations were first selected based on student enrolment, academic programs, research profile, and international alliances,
2. for each of the selected comparator groups, an assessment was made based on past hiring practices of the probability of recruiting a future incumbent, or retaining a current incumbent, from that group for each executive position,
3. at least eight positions comparable to each executive position were identified from within each of the selected comparator groups,
4. maximum cash compensation levels were determined for each of the comparable positions, and
5. the 50^th percentile of the maximum cash compensation was then determined for each University position. For illustration purposes, the table below shows possible salaries for the same position across 5 comparator universities. The 50^th percentile across the five salaries equates to $295,000 and this would be the maximum salary cap for the equivalent executive position at Waterloo:

*Note: with an even number of values, the average of the two middle numbers is the 50^th percentile

The following criteria were used in Step 1 to select the comparable organizations:

• universities located within Ontario and across Canada
• research intensive Canadian universities, based on membership within the Ontario (U6) or Canada (U15) consortia plus comparably sized research revenue and total student enrolment

The U15 Group of Canadian Research Universities (U15) is a collective of Canada’s leading research-intensive universities. Although each institution advances its own research and education mandate, the U15 works for the collective interest of their members by participating in national discussions concerning research enterprise and government programs supporting research and development. Although not as formal in its structure, as a subset of the U15, the U6 represents a similar collective of research intensive universities in Ontario.

Sixteen research intensive Canadian universities were selected based on availability of compensation data, their level of research funding and student enrolment:

*Total sponsored research source: 2014/2015 financial information of universities and colleges www.caubo.ca

**Total student enrolment source: 2017 Council of Ontario Universities Executive Compensation Survey

Although a member of the consortia, the University’s level of research funding in comparison with other members is lower. As such, in addition to the national (U15) and provincial (U6) research universities’ consortia, three universities (i.e. University of Guelph, Memorial University of Newfoundland, and Simon Fraser University) were selected as appropriate comparators to add balance within the comparator group; the impact places the University closer to the median of all comparators with respect to research funding.

In addition, the requirement to have at least eight position matches (i.e. similarity of the nature of the job based on responsibilities and overall accountability) for each designated executive position necessitates the inclusion of both the largest two consortia members as well as the two comparator universities with the least amount of research funding. Each of these comparator institutions is considered a competitor for executive talent.

Although institutions outside of Canada are also competitors for our executive talent, we limited our review to Canadian post-secondary institutions.

It should be noted that Laval University was considered as a comparator due to its U15 consortium membership, but could not be included as they chose not to disclose their executive compensation arrangements through the 2017 Council of Ontario Universities Executive Compensation Survey.

In Step 2, the selected organizations were grouped into potential markets for executive talent. These markets were then weighted based on an assessment of the probability that a future incumbent could be recruited from, or a current incumbent could be lost to one or more of these markets. The University’s hiring history suggests that the probability of recruiting (or losing) a designated executive from within Ontario versus outside of Ontario is equal and therefore, regardless of the number of comparators within, a 50/50 weighting was used for the two markets.

Positions comparable to the University’s designated executive positions were then identified in Step 3 for the organizations within each comparator group, based on the scope of their responsibilities.

In Step 4, maximum potential cash compensation levels were determined for each of the comparable positions, based on the maximums of their salary ranges (if applicable) and their maximum potential performance-related compensation payouts (if applicable). In most of the universities, no salary ranges and no performance-related pay apply. In these situations, the current annual salaries were used as the maximums. All comparator salary data is effective January 1, 2017 and sourced from the Council of Ontario Universities Executive Compensation survey conducted by Gallagher McDowall Associates.

The 50^th percentile of the maximum potential cash compensation for each comparator group in Step 4 was determined in Step 5 for each University position. The comparators used for each position, and the position-to-position comparisons, are as follows:

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Salary and Performance-Related Pay Frameworks

Based on the foregoing process and analysis, the following maximums or caps apply, as of the date the Executive Compensation Program becomes effective on September 1, 2017, to the salary of the University’s designated executive positions:

Going forward, the cash compensation maximums or caps may be increased by the Board of Governors, as delegated to the Governance Committee, in subsequent years by a rate that does not exceed the lesser of the following:

1. The average rate of increase in salary and performance-related pay of the non-executive managers that report to the designated executives, or
2. The public sector wage settlement trend in Ontario as set out in public documents.

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Salary and Performance-Related Pay Envelope

All current and future salary increases to the designated executive team (including any competitive adjustments related to the compensation caps) are subject to an annual “pay envelope” maximum rate of increase, which in turn is based on the total annualized cash compensation of the designated executive team in the previous pay year. The pay envelope was $1,826,036 prior to the Program's effective date. With the implementation of the Program, the pay envelope increases by 3.3% to $1,886,570 for the 2017-2018 (May to April) pay year and then by 5.0% to $1,980, 899 for the 2018-2019 pay year. After the increases, the resulting pay envelope is still 8% and 3% below the overall sum of the framework maximum compensation caps for the 2017-2018 and 2018-2019 pay years, respectively.

The pay envelope will be recalculated no earlier than May 1, 2019.

The increases are required to facilitate the University's ability to continue to attract and retain the calibre of leadership and to address talent pool competitive pressures required to ensure the continued success of the University and its important research initiatives. Prior to the Program's effective date, the total cash compensation of five of the six designated executives was between -6% to -20% below the comparator market, before any adjustments; the proposed adjustments to the pay envelope enable this differential to change to between -5% to -13% effective September 1, 2017.

It is anticipated that increases will decrease in subsequent years as compensation issues are addressed and salaries move closer to or reach the salary maximums or caps; however, increases will still be required to address compensation issues such as salary compression and inversion that have resulted from the previous executive compensation constraint legislation. In particular, because salaries for designated executive positions have been frozen for several years as per legislation, the salaries of some non-designated executives have surpassed some of the salaries of designated executives.

As required per the Regulation, the following factors that were considered in determining the increases to the pay envelope:

• Ontario’s financial and compensation priorities – As indicated in the April 2017 Provincial Budget, the Government of Ontario wishes to ensure that broader public sector organizations are accountable for compensation decisions and are able to attract and retain the necessary talent to deliver high-quality public services, while managing public dollars responsibly. The pay envelope increase balances these important Government priorities.

• Canadian universities’ trends in executive compensation – Based on published salary planning surveys conducted by Gallagher McDowall in addition to other consulting firms, the average salary increase budget is projected at 2.6% for 2018 within the public sector in Canada. It should be noted that competitive adjustments, such as those which we included in our increases to the pay envelope, are normally over and above salary survey estimates.
• Pay envelope as a percentage of operating budget – The current pay envelope of $1,826,036 represents 0.24% of the $748.7 million in operating revenue for the University for the 2016-2017 fiscal year. In the unlikely event of no changes to the operating budget, the increases in the pay envelope result in an increase to 0.25% and 0.26% for the 2017-2018 and 2018-2019 pay years, respectively.

Due consideration could not be given by us to this particular factor in developing the pay envelope increase, as the required information across other universities in our comparator group is not currently available. Data related to this factor is expected to be more readily available in the future, as more information regarding pay envelopes becomes provided in public-facing executive compensation programs.

• Effect on the Ability to Attract and Retain Talent – The rate of turnover of executives amongst Canadian universities is very high at the present time, as evidenced for example by the number of appointments reported by University Affairs on a regular basis.

In this market for key talent, it is extremely important for us to be able to provide compensation that is sufficient to attract qualified candidates from within our University, and make us less reliant on costly external hires.

Further, as the salaries of the positions in the management levels below the designated executives have continued to increase while the designated executives’ salaries have remained frozen, the differential between the executives and the level below has continued to erode leading to difficulties in filling executive roles from within the University. Between 2011 and 2017, the average rate of increase through the annual increase processes has ranged between 1.57% and 5.53% per year. The increases to the pay envelope are necessary to avoid further compression between management roles and mitigate inversion between executives and bargaining unit faculty members.

• Expansion of our operations – We have not experienced a significant expansion of our operations in recent years that is the result of a significant organizational restructuring. However, both the size, as measured by student enrolment, and complexity, as measured by research funding, of the University has increased significantly between the 2012-2013 and 2016-2017 fiscal years. Student enrolment has increased by 9% during this time, and research funding has increased by 6%.

As required by the Regulation, the maximum rate of increase of the executive team pay envelope going forward shall be determined by the Board of Governors as delegated to the Governance Committee by taking into account only the following criteria:

• The financial and compensation priorities of the Government of Ontario as expressed in its public documents,
• Recent executive compensation trends amongst Canadian universities with which we compete for executives,
• A comparison of the percentage of our operating budget that our pay envelope represents with the corresponding percentages of the universities that are in our comparator group;
• The effect on attracting and retaining the executive talent that we need based on the difference between the salary ranges of our executives and the salary ranges of the employees who report directly to them, and
• Any significant expansion of our operations that is not the result of a significant organizational restructuring.

Effective May 1, 2019, the University plans to apply the annual salary increase programs (i.e. Faculty Salary Increase for positions in the academic stream and Staff Salary Increase for positions in the non-academic stream) to the designated executives with the understanding that the aggregate calculated adjustments cannot exceed the lesser of the provincial public sector wage settlement trend and the average rate of increase that applies through the University’s annual salary increase programs.

Notwithstanding the foregoing, the maximum rate of increase in the pay envelope shall not exceed 5% per annum after April 30, 2019 for the duration of the Program.

All designated executive salary adjustments require the approval of the Board of Governors as delegated to the Governance Committee.

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Other Elements of Compensation

With the exception of the President, each of the executives participates in the University’s benefit and pension programs on the same basis as all of our faculty and staff, including:

• Group life insurance benefits
• Group extended health and dental benefits
• Sick leave and long-term disability benefits
• Pension benefits
• Vacation, leaves of absence, and holiday pay
• Tuition benefit

As is a present and common practice in the higher education sector, the President is entitled to supplementary retirement income benefits which is considered a necessary compensation component in order to attract talent to a very challenging role. Since it is a challenge for an individual to resume a regular faculty position after holding this top executive role, capable and interested individuals tend to be approaching their retirement and as such, are focused on their pension at the time of appointment. The special arrangement is not unlike the pension plan that is extended to employees within the government and as such, is not considered to be overly generous. Under this arrangement, the President is credited with benefits over and above those provided to him under the University’s pension plans with respect to his period of service as President. The President’s supplementary retirement formula for each year of his service as President is 2% of his final average salary as determined under the University’s Registered Pension plan (RPP), less the annual pension benefits credited to him with respect to that period of service under the RPP and the Payroll Pension Plan (PPP). No additional retirement income benefits over and above those received by all staff under the RPP and the PPP are provided to the other designated executives.

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Special Arrangements for Incumbents of Positions in the Academic Stream

Designated executives within the academic stream hold faculty positions during their period of administrative appointment. As such, these individuals are faculty members and qualify for administrative leave credits that they can take at the end of their terms in order to provide them with an opportunity to update their research and prepare to resume their regular faculty duties. The maximum rate of administrative leave accrual is 10.4 paid weeks per year.

Perquisites

Perquisites are privileges that are not generally available to other employees. The use of perquisites is subject to the requirements of the August 2, 2011 Broader Public Sector Perquisites Directive. They are only provided by the University where it can be demonstrated to be a business-related requirement for the effective performance of an individual’s job.

In this context, the University provides the President and the Vice President, Academic & Provost with car allowances, as their roles frequently require them to travel to many meetings and functions on the University’s behalf as a critical business requirement. It is estimated that the President and Vice Chancellor spends 50% of his time travelling, with frequent trips to Toronto to manage responsibilities and to ensure representation within the sector. Both incumbents need to be able to travel on University business, often with short notice. Providing these executives with a car allowance is a more efficient manner of managing the cost in comparison with a mileage reimbursement process.

In addition, the President is provided with a $705,000 housing loan at a 1% interest rate in recognition of the need to make his home available on an ongoing basis for University functions for the purposes of Advancement and other important initiatives. The University of Waterloo does not have a comparable venue on campus for those functions.

It should be noted that, as required by Regulation 304/16, the University’s Executive Compensation Program shall not provide any of the following elements to the executives (even though they might be provided by some of the organizations in the University’s comparator group):

• Payments or other benefits provided in lieu of perquisites
• Signing bonuses or retention bonuses
• Cash housing allowances
• Insured benefits that are not generally provided to non-executive managers.

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Other Limits

Under the Executive Compensation Program, the following elements of executive compensation are capped:

• Subject to any entitlement under the Employment Standards Act, 2000, termination pay to an executive shall not exceed two years’ base salary, and shall not be payable in the event of termination for cause.
• No paid administrative leave shall be provided to an executive (unless provided to an executive who is part of or will return to the University’s faculty, in which case the paid administrative leave cannot exceed 10.4 paid weeks per year of service as an executive), nor shall the executive receive pay in lieu of administrative leave that is not taken.

Effective Date

The Executive Compensation Program is effective September 1, 2017 as approved by the Ministry of Advanced Education and Skills Development of the Province of Ontario on February 27, 2018 and posted on the University’s website on March 2, 2018.

The Program continues to be in effect for a period of three full pay years ending on April 30, 2021, at which time it will be reviewed by the Board of Governors, as delegated to the Governance Committee, to ensure that it supports the total compensation strategy of the University.

If an existing element of a current designated executive’s compensation on September 1, 2017 exceeds the maximum compensation applicable compensation framework for the designated executive’s position, or is otherwise inconsistent with such limits as are mandated by regulation under the BPSECA, the excess or inconsistency shall be brought in line with the 50th percentile salary caps no later than on September 1, 2020 (i.e. three years after the Effective Date).

For purposes of the Broader Public Sector Executive Compensation Act, 2014, these senior positions are considered “designated executives”.

Perquisites not allowed by the Broader Public Sector Perquisites Directive include club memberships for personal use, seasons tickets, clothing allowances, access to private health clinics, and professional advisory services for personal matters, such as tax or estate planning.

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