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.
Such is life at Bank of Montreal, which so far has the booby prize in this year's say on pay derby.
While its competitors are racking up 'yes' votes in the 90- to 95-per-cent range, or higher, BMO is the only bank to fall short of 90- per-cent approval in its shareholder vote on its pay practices. In this environment, its 89.2-per-cent is practically an "F."
Executive pay is not a new issue at BMO. Just last year, the Ontario Teachers' Pension Plan publicly said it was withholding its votes for the directors on BMO's compensation committee because of its displeasure at CEO Bill Downe's pay. Mr. Downe gave back a big chunk of the money, but Teachers said BMO shouldn't have awarded the cash to begin with.
The BMO board's stubborn insistence on richly paying Mr. Downe continued in 2009 despite the bank's failure to meet its primary goals.
In its proxy circular to shareholders, BMO said its board compensation committee has "four key factors [that]form the foundation" for aligning pay to performance.
The good news for BMO in 2009 was revenue growth, where its 8.4-per-cent figure topped its target of 5.6 per cent. But in the other three measures, BMO swung and missed.
Cash earnings per share fell 18 per cent, rather than growing 3.9 per cent. Return on equity was 9.9 per cent instead of 12.3 per cent. And its two-year total shareholder return was 3.8 percentage points below the average of its peer group; the target was to be at or above its peer group's number (BMO says its independent compensation adviser "confirmed that these targets were challenging.")
How, then, to calculate Mr. Downe's "variable" compensation? Most ordinary folk would consider missing three out of four targets unacceptable and suspect that part of his paycheque might "vary" down by 75 per cent or more.
BMO said Mr. Downe's variable compensation "reflects the board's assessment of all aspects of his performance." It reduced compensation to account for the shortfalls in cash earnings per-share growth, return on equity and shareholder return. "Accordingly, Mr. Downe's actual compensation was 83 per cent of his established target," BMO said.
And, I should add, Mr. Downe's "target" was raised in 2009 to $9-million because the previous one (which BMO did not disclose) was apparently too small. BMO said the prior year target "reflected his short tenure as CEO," as Mr. Downe was promoted in 2007.
So a bigger target, combined with a formula that only deducted 17 per cent for BMO's misses, yielded total direct compensation of $7.45-million. That was up from $2.43-million in 2008 (after taking into consideration $3.55-million in equity awards Mr. Downe returned as part of a widespread pay giveback among Canadian CEOs that year.)
Mr. Downe was not the only Canadian bank CEO to see a pay increase in 2009. Royal Bank of Canada CEO Gordon Nixon's pay was also up (although he received no cash bonus), and Toronto-Dominion Bank CEO Ed Clark also got a raise (even after the board cut his target by 20 per cent because it had the "view that market competitive target compensation levels for CEOs at large financial institutions would likely decrease in the short to medium term in response to the recent turmoil in the financial markets.").
Let's pause to say something nice about BMO: Teachers actually voted "yes" this year in its say on pay vote at the bank. Teachers says the bank made a number of improvements in its plan, such as adding a clawback policy to retrieve ill-gotten gains and allowing for zero bonus to be awarded when performance is below expectations. And in years past, BMO has had performance-based criteria for the vesting of its stock options, so the company knows how to do the right thing if it tries.
There is, however, a looming test. When BMO promoted Mr. Downe, it gave him a special five-year incentive: If, by March, 2012, the company's stock outperforms the average of its peers (the other five major banks) and achieves a 25-per-cent return, Mr. Downe will get $10-million. If it has the best total shareholder return of its peers, Mr. Downe will get $12.5-million.
BMO calls these performance hurdles "aggressive," although it should be noted that BMO's dividend yield at the time of Mr. Downe's hiring - 3.84 per cent - guarantees a 20-per-cent return over the five years even if the stock remains flat. Nonetheless, BMO's performance compared to its peers lags such that Mr. Downe may not qualify for the payout.
If and when that happens, will BMO's board find a different, and perhaps more subtle, way to confer millions of dollars on Mr. Downe?
David Milstead