Canada's new bank CEOs are being paid less than their predecessors as shareholders apply pressure for moderation and demand clearer proof that pay is linked to exceptional performance.
A review of pay for chief executive officers at Canada's five largest banks by Toronto-based consulting firm Gallagher McDowall Associates shows CEOs were paid median total direct compensation of $9.28-million in 2015, a 14-per-cent decline from $10.75-million in 2012. (Total direct compensation includes cash and equity-linked pay, but excludes pension costs and other perquisites.)
Four of the five big banks changed CEOs in 2013 and 2014, with only Bank of Montreal's Bill Downe remaining in the top job since his appointment in 2007.
Bob Levasseur, executive compensation practice leader at Gallagher McDowall, said the new CEOs may eventually see their pay ratchet higher once they build more tenure in their jobs.
But he also said it is a telling break from recent practice that they are earning less on average than their predecessors in their early years on the job. "In the old days, they would just keep going," he said. "They would just come in at the old rate and continue ratcheting it up. … One guy retired, the next one came in and if there was any difference, it was marginal."
He believes the data suggest public concerns and shareholder pressure have helped to moderate compensation and influenced pay levels for the new round of CEOs.
Mr. Levasseur said it is especially telling that target pay – or the proposed pay that is disclosed at the beginning of the year as a target level if performance hurdles are met as expected – no longer automatically becomes the actual pay awarded during the year. Mr. Levasseur said real pay now shows more variation above or below target, which he said is a sign that boards are applying performance metrics.
"It suggests to me that boards are actually looking at the guy's performance and they are saying, 'Okay we have this benchmark, which is the target, but we're going to give you a little more or a little less.' Personally I think it is healthy."
The variation between target pay and actual pay awards is not large, however.
For the five big bank CEOs, the median target level for total incentive-based compensation (including annual bonuses and equity grants) was $8-million for 2015, while the median actual incentive pay awarded was $8.27-million, or 3.4 per cent more.
Two CEOs – David McKay at Royal Bank of Canada and Victor Dodig at Canadian Imperial Bank of Commerce – were paid 111 per cent of their incentive targets, with total incentive awards of $9.6-million and $7.1-million respectively, the review shows.
Mr. Downe at Bank of Montreal was paid just 92 per cent of his targeted total incentive awards, but his cash bonus payouts were reduced by the board to offset the impact of being paid his salary in U.S. dollars in a year when the U.S. dollar rose in value against the Canadian dollar.
Including all compensation elements, such as base salaries and pensions, pay for bank CEOs ranged between $8.5-million and $11.7-million in 2015.
The big banks are not the only companies in Canada showing signs of at least some pay moderation. Onex Corp. CEO Gerry Schwartz, who is often at the top of Canada's CEO pay chart, took home a total of $9.2-million in 2015, a far cry from $125-million in 2014 when he reaped $106-million in payouts from his co-ownership stake in Onex investments.
Barrick Gold Corp. chairman John Thornton had a $10-million pay cut last year, while the CEOs of both Magna International Inc. and Shaw Communications Inc. – who also both often make the top tiers of CEO pay charts – saw their pay fall modestly in 2015.
Mr. Levasseur said he has become convinced that the best way to look at CEO pay is through a long-term view that adds up all payouts from equity grants or stock options over the tenure of the CEO. He said annual pay charts only show what was granted to a CEO in one year, and do not spell out how much was ultimately earned after all the equity elements paid out over the subsequent decade.
"I think looking at it year by year is like looking at a snapshot of a movie," he said. "I think you have to look at the full tenure of that person."
His firm's review also looked at the accumulated wealth held by the five CEOs, including the value of the bank shares they hold, their unexercised stock options and their pension plans.
Mr. Downe leads the list with $94-million in holdings after nine years in the CEO job, followed by Bharat Masrani of Toronto-Dominion Bank, who was appointed CEO in 2014 but has $79-million in total wealth after a long career at TD. Mr. Dodig of CIBC has the lowest holdings so far at $14-million.
Australian banks famously rode out the 2008 financial crisis with barely a scratch, but no longer are they the exemplar of success, as a commodity rout ravages the economy and a growing storm of accusations over misconduct threatens to tar their name. Last week, Westpac Banking Corp became the second Australian lender after ANZ Banking Group to be dragged to court by regulators over suspected rigging of benchmark interest rates. Both have denied any wrongdoing, saying they would vigorously defend themselves.
While increased regulatory scrutiny will eventually promote greater compliance, banks could face medium-term financial penalties, denting earnings and shareholder returns in a sector battling stricter capital rules and higher loan losses.
The industry has already been unsettled by probes into wealth mismanagement and insurance scams, and public pressure is piling on Prime Minister Malcolm Turnbull to order a sector-wide inquiry into bank conduct as he campaigns for a federal election in July.
In a speech at Westpac's 199th birthday lunch last week, Turnbull accused banks of sometimes taking advantage of customers but stopped short of seeking a high-level inquiry. In contrast, Australia's main opposition Labour Party on Friday promised a Royal Commission into the financial sector if it wins July's election.
"We are not denying there have been problems, we are not denying there has to be ongoing scrutiny of the industry," Australian Bankers' Association CEO Steven Münchenberg said on Friday. "The question is do we need a Royal Commission to do that? No, we do not."