BANKS’ NEW CEOs PLAY PAY CATCH- UP

Only RBC’s McKay on par with predecessor

• T he ne west crop of bank CEOs are starting to see their compensation catch up to their predecessors, helped by rising share prices and strong f i nancial per f ormance, with Royal Bank of Canada’s chief being the first to match it, a new report shows.

RBC’s Dave McKay was the only one among the newer Big Five bank chief executive officers whose pay package in fiscal 2016 was on par with the CEO before him, said the report from Toronto- based consultant Gallagher McDowall Associates, released Tuesday.

McKay was the highest paid CEO among Canada’s biggest banks, receiving $ 11.52 million in actual total direct compensation ( including incentives and stock options) for 2016, the report showed. Meanwhile, Canadian Imperial Bank of Commerce and Bank of Nova Scotia awarded their CEOs incentives for fiscal 2016 that pushed their salaries far beyond the total direct compensation target set by their boards, the consultants found.

CIBC’s Victor Dodig was awarded $8.79 million in actual total direct compensation, 117 per cent of the $ 7.5 million target set, while Scotiabank’s Brian Porter was given $ 10.11 million, marking 112 per cent of the $ 9 million target.

“When t hey were appointed, that was the whole point. Give these guys a lot of variable compensation, if the share price does well, then they’ll catch up to their predecessor,” said Robert Levasseur, managing director at Gallagher McDowall. “That’s what’s happening. At RBC, that’s happening even faster.”

Gallagher McDowall’s calculations of these CEOs total direct compensation includes base salary, annual and long- term incentives, as well as stock options and deferred stock unit grants.

The other Big Five bank executive to step up to the helm between November 2013 and November 2014, Toronto- Dominion Bank CEO Bharat Masrani, received $ 8.95 million in actual total direct compensation last year, slightly under target.

Bank of Montreal’s Bill Downe, who has served as its CEO since 2007 but is retiring at the end of this fiscal year, was awarded $ 10.62 million, slightly above target.

It’s not unexpected that McKay would end up being paid what his predecessor, Gordon Nixon, had ( albeit with a lower pension cap), said Levasseur. Nixon pulled in a target salary and incentives of $ 11.25 million prior to his retirement in 2014. RBC’s board increased McKay’s target to that same level in January 2016.

Both CIBC and TD recently announced increases to their CEO’s compensation for 2017, with neither reaching that of Gerald McCaughey or Ed Clark, the report added.

All four of the new CEOs were promoted from within, which typically results in lower compensation levels than if hiring an outside candidate, said Ray Murill, senior consultant at Gallagher McDowall.

Under normal circumstances, it would take about five years for someone to fully understand the com- plex role of CEO of a major Canadian bank, and for salary to catch up, Levasseur said.

“So much of their compensation is based on how share prices is moving, and when the markets are experiencing a bump — whether you’re new as the CEO or not — you’re going to experience that bump,” he added.

For example, RBC’s share price rose more than 12 per cent over the course of fiscal 2016, ended Oct. 31.

Overall, 2016 was a good year to be a Canadian bank chief executive, with a median of $10.11 million in actual total direct compensation awarded, up 9 per cent from fiscal 2015, according to the report.

However, what has grown even faster was the value of the bank CEOs’ unrealized stock options, the consultants f ound. The median amount of unrealized equity by these executives was $ 35.9 million in fiscal 2016, up 52 per cent from $ 23.6 million in 2015.

As well, the total financial stake each of the Big Five bank CEOs have has similarly swelled. The consultants tabulated the value of the common shares owned outright, and the actuarial value of accrued pension benefits and found that these CEOs had a $ 50.3 million median financial stake of the banks they lead.

“Boards have been encouraging their CEOs, and that spans all industries, to have a much higher ownership stake,” said Levasseur.

The CEO with the highest stake was BMO’s Downe, with a total value of $ 124.9 million, or 63 times his base salary, the report said. Among the newest crop of executives, TD’s Masrani had the largest stake, at $105 million or 105 times his base salary.