Banks: Compensation Renovation

A new CIBC compensation model means no cash bonuses this year for senior execs.

On Dec. 1, officials at the Canadian Imperial Bank of Commerce (TSX: CM) announced senior executives would receive no cash bonus and see their incentive compensation deferred, after a year of net financial losses. They also unveiled a new CEO compensation model aimed at fostering longer-term thinking.

According to spokespersons, the new pay scheme originated from CEO Gerry McCaughey himself. The new arrangement stipulates he must maintain share holdings equivalent to six times his salary for two years after retirement. Also, McCaughey's incentive compensation for any given year will be determined at the end of the following fiscal year. “This new compensation model…allows for the assessment of performance with the benefit of a longer-term view,” McCaughey told analysts on a conference call.

McCaughey made no mention of the controversy surrounding his predecessor. Former CEO John Hunkin ran the bank from 1999 until this summer, collecting about $50 million in compensation. He handed the reins to McCaughey on Aug. 1. The following day, CIBC announced it would pay a stunning US$2.4 billion to settle class action lawsuits arising from its involvement in the infamous Enron debacle. The Globe and Mail dubbed it “the largest one-time hit in Canadian banking history.” Here's the hitch: CIBC had previously set aside just $300 million to cover a potential settlement. A provision that was closer to the mark may have had a significant bearing on Hunkin's pay.

Some felt CIBC should have sought repayment from Hunkin, given the fuse on the Enron bomb was lit during his watch. Experts, however, say there's no legal basis for a board to make such a request. “[This has] brought alive an issue I've been talking about for years,” says Luis Navas, managing partner at Executive Risk Services, which provides governance and compensation advice to corporations. “In Canada, there is no law that allows a board to claw back funds from an executive if it was deemed to have been paid out due to inadequate information.” Navas says examples of such challenges include CIBC, Hollinger and Nortel.

Major shareholders wanted CIBC's board to make changes in the settlement's wake. But asked about the Hunkin controversy's influence on the new structure by Canadian Business, Rob McLeod, senior director of communications and public affairs, said, “I wouldn't be in a position to characterize that.”

Navas says the changes to McCaughey's compensation, while hardly revolutionary, are an improvement. “They're doing the right thing,” he says. But he questions how effective the new scheme will be at keeping money out of executives' pockets when it's unclear whether they really earned it. “Had you [applied the new scheme] in John Hunkin's situation,” he says, “he still would have got that much money.” That's because problems started today can take longer than a year to surface. “A lot of things can come out of the woodwork,” he says. “What if something is discovered three years after Gerry retires? The current scheme doesn't cover it.”