Bank of Nova Scotia’s compensation plan for top executives is facing resistance from investors after an influential shareholder adviser flagged a perceived gap between the bank’s performance and the CEO’s pay.
Scotiabank’s advisory resolution on executive compensation, a non-binding vote commonly called “say on pay,” passed with only 60.8-per-cent support at the bank’s annual shareholder meeting Tuesday. Last year, 93.8 per cent voted in favour of the resolution.
Some institutional investors pushed back after Institutional Shareholder Services Inc. (ISS) recommended voting against the resolution. The formula ISS uses to screen company performance relative to executive pay highlighted that Scotiabank had the lowest total shareholder return of any major Canadian bank over one, three and five years, “while the CEO’s compensation was ranked near the top.”
Chief executive officer Brian Porter received total compensation of $12.22-million in 2020, down from $12.63-million in the previous fiscal year, as his cash bonus and the value of his stock and option awards declined. The bank fell short on all three financial metrics it uses to calculate incentive pay – in large part because of the economic upheaval caused by the pandemic – but the board decided it had exceeded its goals for customer satisfaction in confronting the crisis.
In total, Mr. Porter’s incentive pay was 12-per-cent below his target.
Scotiabank’s say-on-pay support is among the lowest any large Canadian bank has tallied since 2015, when 57 per cent of Canadian Imperial Bank of Commerce shareholders voted against its compensation plan. Earlier this month, each of Scotiabank’s four largest competitors – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal and CIBC – received at least 95-per-cent support for their say-on-pay resolutions. (National Bank of Canada will hold its annual shareholder meeting on April 23.)
Since ISS published its advice, Scotiabank’s board chair, Aaron Regent, and the chair of the board’s human resources committee, Scott Thomson, have met with a number of large shareholders to discuss the proxy adviser’s concerns. The bank disagreed with ISS in those meetings, emphasizing that it has taken a long-term approach to creating value for shareholders by undertaking a major transformation plan that reshaped the bank’s operations outside Canada. That strategy was backed by the board, which sets Mr. Porter’s pay.
“Scotiabank’s repositioning of its business aimed to improve its earnings quality and lower its risk profile by materially changing its geographic footprint and business mix,” Mr. Regent said in a statement. “This repositioning was intended to improve long-term returns to shareholders.”
Over three years, Scotiabank’s total shareholder return – which considers the sum total returned to investors, including dividends – was minus 7.8 per cent, whereas its five largest peers averaged minus 0.9 per cent. In 2020, as the pandemic battered the global economy, that gap was wider, with Scotiabank at minus 22.1 per cent against a group average of minus 8.2 per cent. Over those same periods, Mr. Porter’s pay ranked second or third among Big Six bank CEOs, according to ISS.
So far this fiscal year, which began Nov. 1, Scotiabank has outperformed its peers with total shareholder return of 43.8 per cent, with dividends reinvested, compared with an average of 36.9 per cent for an index of Canadian banks, according to Bloomberg data.
In his statement, Mr. Regent said “2020 was an exceptional year, and the Bank took a patient longer-term view in the face of the unforeseeable extenuating circumstances stemming from the COVID-19 pandemic.”
Another proxy advisory firm, Glass Lewis & Co., came to a different conclusion than that of ISS, encouraging shareholders to vote for the say-on-pay resolution. Though it acknowledged a “sustained disconnect between executive pay and performance,” Glass Lewis said Mr. Porter’s pay “is largely in line” with the median amount paid to peers and that Scotiabank executives were held to account because performance share units were paid out last year at 68 per cent of their value when they were granted.
Scotiabank’s total shareholder return lagged those of its rivals in 2020 partly because it gave up $587-million in profits when it sold a number of smaller, higher-risk businesses in countries stretching from Thailand to El Salvador. By the end of the bank’s first fiscal quarter, which ended Jan. 31, it “has managed to grow earnings sufficiently to absorb this reduction and produce year over year earnings growth,” Mr. Regent said.
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