Five years ago, I wrote a column on executive pay at Bank of Montreal. In it, I said a "company can say all it wants about aligning pay with performance, but it can undo that talk pretty easily with its actions. To wit: Identify four key performance measures that drive executive pay, admit you fell short of the goal in three of them, then give your chief executive officer a raise anyway because you think he's underpaid."
I'm disclosing this because I could have just as easily pulled those sentences from the archives, slapped them into this column, and run it in today's paper. Because it's happened again at BMO.
The bank discloses the situation in its proxy circular, in which it reported that CEO Bill Downe's total compensation went from $9.48-million in 2013 to $9.94-million in 2014. A big part of the gain was an increase in his bonus of nearly 35 per cent, from $1.3-million in 2013 to $1.75-million last year.
Here's the problem, again: The bank missed three of the four goals it says it uses to calculate Mr. Downe's short-term incentive pay.
BMO lists four "bank performance measures" that determine how much money goes in to the bonus pool. The company easily beat its goal for revenue growth, with an actual 7.5 per cent versus 6.4 per cent. But it missed on earnings-per-share growth (5.2 per cent versus 6 per cent), return on capital (14.7 per cent versus 14.9 per cent) and efficiency ratio, a measure of the bank's expenses that is better when it's lower (64.3 per cent versus 61.8 per cent). (BMO adjusted all of these numbers to leave out certain acquisition-related expenses, so don't try to verify these numbers from the bank's financial statements.)
"We continued to set challenging financial targets this year, and while performance was better than 2013 and compared favourably to our peers, the Bank performed slightly below its targets for the year," the company says in its proxy circular.
Before we continue, let's acknowledge that BMO is doing some things right on the compensation front. It's cutting back on the use of stock options, which can reward executives with millions of dollars even when the company's shares don't outperform their peers. The value of the options in Mr. Downe's package has gone from more than 20 per cent of pay to less than 10 per cent in just two years.
BMO is also now attaching performance requirements to all of the stock awards it gives executives, rather than allowing them to vest, or become salable, each year an executive stays with the company.
Commendable. But, there's the thing where the bank misses its goals and the bonus rises. How's that work, exactly?
Well, start with the fact that BMO said that it once again undertook a study and determined Mr. Downe was underpaid compared with other Canadian bank CEOs. So, the circular says, BMO "increased Mr. Downe's compensation target for 2014 to recognize his excellent leadership, strategic vision and seasoned judgment, and also to bring his compensation in line with the market."
A bank spokesman added that "Under his leadership, BMO drove record net income and adjusted revenue growth of 9 per cent in 2014."
So while Mr. Downe's total direct compensation increased 5 per cent from 2013 levels, it was actually 6 per cent below his new target, the company says. That was in part because the BMO board's human resources committee "reviewed other financial and non-financial considerations and recommended to the board a lower amount than was calculated by the formula."
That's kind of how this is supposed to work. But the final numbers suggest a couple of things.
One is that the formulas BMO is using to calculate pay aren't penalizing Mr. Downe enough for missing the goals. The other is that the human resources committee, which apparently has the power to set pay lower than the formulas, doesn't believe that incentive pay should be cut sharply (or even eliminated – imagine!) when the goals aren't met.
I've had this kind of discussion with the banks before, and the idea is that they don't want to create an all-or-nothing system that encourages taking on excess risk to hit a target. A partial payout of performance pay after a missed target, some say, discourages risk. Others might say, however, that it rewards failure.
David Milstead