Executive compensation: Bank slips

Financial CEOs reap millions while shareholders count their losses.

It hasn’t been a good year for investors at Canada’s largest banks. The current financial crisis, along with the global economic downturn, has savaged the earnings, profits and share prices of just about all of our major financial institutions. But judging from the compensation the banks’ boards of directors planned to hand out to CEOs, you’d think it had been a banner year. The compensation was so over the top that senior managers at three of Canada’s big banks announced they were turning the cheques down.

Ed Clark of the Toronto-Dominion Bank (TSX: TD) is the latest CEO to renounce the whopping bonus he was awarded by his board. Earlier this month, Clark announced that he would be donating $3 million in bonus payments to charity after TD’s board awarded him $11 million in total direct compensation for the year. That $11 million was down 19% from the $13.5 million Clark was awarded in 2007, according to the bank’s annual proxy circular. “While the Board stands behind its original compensation award decision, we respect Ed’s wishes,” TD chairman John Thompson said in a release. TD stock is trading at around $33 per share — less than half what it was worth last year.

Earlier this year, Royal Bank of Canada (TSX: RY) CEO Gordon Nixon announced that he was declining to accept $2.75 million in deferred shares and another $2.2 million in stock options. The Bank of Montreal (TSX: BMO) announced that its new CEO, William Downe, would receive nearly $6 million — up from $5.5 million paid in 2007 — after the bank “performed well in challenging times.” After other Canadian bankers began turning down bonus money, however, Downe announced he would not be accepting $4.1 million of that compensation package.

Rick Waugh, CEO at the Bank of Nova Scotia (TSX: BNS), took a 20% cut in his compensation to $7.5 million. Canadian Imperial Bank of Commerce (TSX: CM) chief executive Gerald McCaughey’s compensation dropped to $5.3 million from more than $9 million last year. According to the bank’s annual proxy, however, McCaughey would have been eligible for a paycheque worth nearly $13 million because of a one-year lag in setting CIBC bonuses. McCaughey also received a sweetener to his pension plan that could increase its value to $1.6 million per year — up $300,000. In December, CIBC posted a loss of $2.1 billion for the year.

To justify their generous compensation awards, most bank boards cited the relatively strong performance of our banks compared to their international rivals, many of which loaded their balance sheets up with subprime mortgages, collateralized debt obligations and other now-toxic assets. And while the Canadian banks should be commended for not playing Russian roulette with shareholders’ capital, outperforming Wall Street’s mortgage markets this year is a little like being “taller than pygmies,” said Ian de Verteuil, an analyst at BMO Capital Markets in a recent research note. “It isn’t a harsh yardstick against which to be judged.”

Canadian banks may have fared better than their U.S. counterparts, but that has less to do with the individual performance of the company CEOs and more to do with restrictive Canadian banking regulations and the federal government’s rejection of proposed bank mega-mergers, says J. Richard Finlay, the founder of the Toronto-based Centre for Corporate & Public Governance. While Canadian banks are not experiencing the same crisis as Wall Street banks, the plunging value of Canadian financial stocks shows that investors are still wary. “It does not assist in rebuilding confidence to see that Canadian bank boards are still prepared to play the compliant senate of ancient Rome to the modern CEO banking Caesar,” says Finlay. “Boards appear to be afraid of asserting their own role as compensation decision-makers-in-chief. This just adds to the existing impression that CEOs pay themselves what they want and that bank boards, composed mainly of past and current CEOs, are little more than an accommodating ATM.”