Fernando Morales/The Globe and Mail
Canada's biggest bank, Royal Bank of Canada, is changing the way its investment bankers and traders are paid, according to a memo it sent to employees Tuesday.
The bank said it conducted a thorough assessment of the compensation plan in its capital markets business, and decided to make a number of revisions. Its internal announcement comes as G20 leaders wrestle with the contentious issue of bankers' pay, which will be a key topic at this week's summit in Pittsburgh.
Royal Bank told employees it is making the changes with good governance in mind, and it believes that they will enhance its risk management practices while helping it adhere to emerging regulatory principles.
The changes are in line with proposals from various regulatory groups and politicians seeking ways to prevent a repeat of the global financial crisis. The bank's aim is not to decrease the amount its employees are paid, but rather to ensure that their pay packages are structured in a way that does not encourage them to take excessive risks.
For instance, a greater proportion of Royal Bank employees' compensation will now be deferred, and managing directors will be required to own a certain amount of shares in the bank.
When it comes to calculating bonuses, the bank intends to pay more attention to how employees reached their results, not just what their results were. The bank is paying more attention to non-financial measures in part so it can take into account the amount of risk employees take on to achieve their financial goals.
ln addition, RBC told employees it is in the process of finalizing a claw back policy, for cases where misconduct or a failure to abide by proper procedures results in a loss or the need to restate financial results.
Royal Bank is only the second large Canadian bank to change the way its capital markets people are paid. The first was Bank of Nova Scotia, whose chief executive Rick Waugh co-headed an international banking committee that recommended such changes. Scotiabank later scaled back a small number of the compensation changes it had made, deciding - based on employee reaction - that it had gone a bit too far.
The changes that Scotiabank and RBC have made move in the same direction, but there continues to be large differences in the way each bank pays its employees.
For example, RBC is basing the amount of an employee's compensation that's deferred on the size of the person's bonus, while Scotiabank bases it on their job title.
Royal Bank's employees will see one-quarter of their deferred compensation vest in each of the following two years, and will be entitled to the other half of it in year three. Most employees at the other Canadian banks are either entitled to one-third of their deferred pay each year for three years, or they earn it all in the third year.