Bankers’ pay in shareholder’s spotlight

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Three of Canada's biggest banks have agreed to consider whether they should stop benchmarking their CEO pay levels to other banks as a way to halt the steady increase in executive compensation.

NEI Investments, which operates the Ethical Funds mutual fund group, filed shareholder proxy resolutions with the five largest banks in Canada, calling on them to considering ending the practice of setting CEO pay by benchmarking it against pay at rival banks.

NEI vice-president Robert Walker said his firm filed the proposal to draw attention to the practice of constantly comparing pay levels to those of other CEOs, which he argues is driving pay levels increasingly higher as companies try to top their peers.

"Executive compensation levels are out of control, and quite divorced from where the lowest-paid employees are being paid," Mr. Walker said in an interview. "Executive pay levels are contributing to income inequality in our society, which is imposes a systemic risk to our economy."

Three banks – Royal Bank of Canada,Bank of Nova Scotia and Toronto-Dominion Bank – agreed up front to study the proposal, Mr. Walker said, so his firm has withdrawn the resolutions and they will not be on the ballot for a vote at the banks' next annual meetings.

He said NEI is still in talks with Canadian Imperial Bank of Commerce and Bank of Montreal. Only Royal has so far published its proxy circular for its 2013 annual meeting. Royal Bank said NEI withdrew its request "in light of the bank's commitment to consider the issues raised in the proposal."

Mr. Walker said NEI applauds the banks "for taking on an issue that presents a systemic risk to our economy and obviously to these institutions."

A Globe and Mail analysis of executive pay in 2012 found the typical CEO at one of Canada's 100 largest companies was paid $5.2-million on average in 2011, an increase of 6 per cent over 2010. The five big banks all paid their CEOs within a narrow band ranging from $10.6-million to $11.4-million.

Proxy resolutions are proposals filed by investors for a vote at a company's annual meeting. While most shareholder resolutions receive low levels of support, they attract the attention of boards and other investors by highlighting emerging new topics of concern.

NEI asked the banks to study and report back to shareholders on the risks of basing executive pay on "horizontal" comparisons to other banks, and asked the banks to report on alternative measures they can add to the mix, such as using internal "vertical" comparisons to the average employee wage within the companies.

Laura O'Neill, policy director at Vancouver-based advocacy group SHARE, which advises shareholders on proxy voting issues, said NEI is just one of a growing minority of shareholders who are getting more concerned about the fact that CEO pay is set in a bubble inhabited only by other CEOs without any relation to other people in society or even other workers at their own companies.

"We take these executives out of the economy the rest of us operate in and we put them over on this cloud and just compare them to each other," she says. "That's what is being challenged here."

While proxy resolutions rarely receive high levels of support, Ms. O'Neill said her tracking of other proxy resolutions in recent years shows small signs of growing willingness by shareholders to support calls for compensation reform.

For example, a resolution filed repeatedly by Quebec shareholder group Médac, which calls on the banks to compare the ratio of CEO pay to the pay for average workers, got an average of 9.5-per-cent support in 2011 at the five biggest banks, up from average 4-per-cent shareholder support in 2007.

Corporate director Ian Bourne, who chairs the compensation committee on the board of Canadian Oil Sands Ltd., said the introduction of full disclosure of CEO pay has ratcheted up compensation as companies compare their pay to the compensation at rival firms. Mr. Bourne said he believes it is most important to ensure executive pay is linked to the company's performance, rather than basing it on comparisons to others.

"I think ultimately the key to success on this is if you can correlate the performance of the compensation system to the performance of the company," Mr. Bourne said.

"If all you're trying to do is keep up with the compensation levels of some group of other companies, I'm not sure that's particularly healthy."