04/13/2015 03:07 EDT | Updated 06/19/2015 10:59 EDT

Big banks dial back compensation for new CEOs

Canada's five big banks appear to be dialling back their compensation packages, according to a study from consultancy McDowall Associates.

The changes affect both the base salary for new chief executives and agreements about stock options, retirement packages, special perquisites and even severance agreements, the study found.

Four of Canada's five big banks have recently had a change of chief executive officer, which set the stage for banks to offer less.

Bank of Nova Scotia, Canadian Imperial Bank of Commerce and TD Bank each offered their incoming CEO 33 per cent less than the man who left the job. At Royal Bank, the new CEO earns 13 per cent less.

Bank of Montreal has not had a change of CEO . Its CEO, Bill Downe, has a base salary of $1.5 million and total target direct compensation of $10.5 million.

"It's very common for new incumbents in roles paid lower than their predecessors because in this case, they're new in the job and they don't have the five to 10 years experience doing it," said Bernie Martenson, senior consultant with McDowall Associates.

"It's premature to say if there's a trend or absolute change in the magnitude of pay over longer term," she added.

Overall drop in pay, for now

RBC, for example, has said it will phase in a higher pay scale for its new CEO, though other banks have not specified.

Overall target total compensation for 2014 — a term that reflects the average pay expected to be earned for average performance — fell anywhere from 11 per cent to 25 per cent.

But Martenson said the caps on retirement packages marks the real change in how CEOs are compensated, in addition to a new trend to giving fewer stock options.

Over the years, stock options have been an increasingly large part of CEO compensation pay at the banks, and had risen to half the value of most compensation packages, McDowall found in its study. Now banks have pulled back in this area, with stock options making up a median 20 per cent of compensation.

No promotional awards such as special bonuses or equity awards have been given to new chief executives, the report found. Only two of the five banks — CIBC and RBC — had outlined a severance figure for their new CEO if he should be terminated.

Scrutiny stepped up

The changes come at a time when increasing scrutiny is being placed on how much CEOs earn.

CIBC came in for criticism a few weeks ago when it revealed fat retirement packages for its former CEO Gerry McCaughey, who got $16.7 million, and former chief operating officer Richard Nesbitt, who was paid  $8.5 million as part of a retirement package.

The changes may also be motivated by pressure from the Canadian Coalition for Good Governance, from institutional investors, ethical investment advisers and others who have called for more accountability around levels of CEO compensation.

"All these representatives carry the same message to the companies," said Martenson. "We want better governance, we want transparency, we want more specifics around how those CEOs earn their pay — what are the performance targets.

Another factor is the provisions of the recently enacted Dodd-Frank act in the U.S., which is attempting to give shareholders more say on compensation for bank executives and will soon call for companies to divulge the ratio of CEO to worker pay.

Dodd-Frank has specific rules for banks that operate in the U.S., as do RBC, BMO, Scotiabank and CIBC.

"It's having an effect on Canadian companies listed on U.S. stock exchanges, but also for the banks because Dodd-Frank has a lot of regulations and practices that are being imposed on financial institutions that operate in the U.S," Martenson said.