Top executives in Cana-da’s financial services industry collectively took home considerably more than half a billion dollars in compensation last year — with the big financial institutions and investment dealers leading the way in pay.

Investment Executive’s 2007 survey of executive compensation in the financial services industry shows that the managers named in the proxy circulars of the sector’s publicly traded companies were awarded an estimated $577 million in total compensation in the companies’ latest fiscal years. This figure includes all forms of compensation paid to named executive officers during the year, from simple salary and cash bonuses to options, restricted shares and all other forms of pay and perks that firms are required to disclose.

IE values options grants in the year in which they are awarded using a conservative formula that assumes simple share price appreciation at the Toronto Stock Exchange’s historical rate of return over the life of the grant, which is then discounted to its present value. As for restricted shares and other forms of equity-linked compensation that have a definitive value at the time they are granted, IE includes those in the year in which they are awarded.

This year’s survey reveals that it’s in all these other forms of compensation that many industry executives are increasingly making their money. (See table, page 28.) Options have become a relatively marginal factor (see page 30), and mere salary, too, is often a modest component of the NEOs’ pay packets. For example, the median CEO salary in 2007 was about $500,000, which is unchanged from 2005, the last year in which IE surveyed financial services executives’ compensation. (This comparison includes only companies that reported in both years; it disregards new firms and those that have disappeared over the past two years.) Moreover, aggregate CEO salary paid is up a mere 2% from 2005.

While CEO salaries haven’t changed much, the other parts of their compensation packages have expanded noticeably over the past two years. In 2005, median liquid compensation for CEOs — including salary, bonuses, restricted share awards and other perks and payouts — was slightly more than $1 million. This year, the median liquid compensation is more than $1.5 million. Aggregate liquid compensation for CEOs is up about 21% in 2007 from 2005.

The increase in CEOs’ liquid compensation, other than salary, also flows over into their estimated total compensation, including the projected value of options and stock appreciation rights. Aggregate compensation paid to industry CEOs is up by almost 17% in 2007 from 2005. The median total compensation for a financial services sector CEO is up to more than $2 million this year from $1.2 million in 2005.

Pay packets for the rest of firms’ NEOs have also grown significantly over the past two years, although not as quickly as they have for CEOs. Estimated total compensation for all NEOs (including the CEO) is up 11.8% in the two years; the aggregate liquid component has grown a bit faster over the period, up 12.5%. The median liquid compensation for NEO groups is slightly more than $4.8 million in 2007, up from $3.7 million in 2005. And, median total NEO compensation rose to more than $6.3 million this year, from $4.1 million in 2005.

The fact that median executive compensation has grown so much faster than aggregate compensation reflects the fact that the real growth in pay is coming from the middle and lower pay ranges, not the very top. Indeed, the CEO with the most liquid compensation in 2007 garnered less than the top liquid earner in 2005. For the very highest-paid CEOs, their compensation has increased at only single-digit rates over the past two years.

So, it’s not the elite gaining at the expense of everyone else, but the mid-market CEO that is seeing his pay (with the exception of Co-operators General Insurance Co. CEO, Kathy Bardswick, they are all men) ratcheted up to higher levels.

The big gains aren’t coming from those earning $8 million-$9 million a year; it’s the CEOs in the $1-million to $3.5-million range that are enjoying real pay inflation. That’s why aggregate liquid CEO compensation is up just 21%, while the median is up 45% over the two years. Similarly, estimated total CEO pay is up 16.9% in aggregate over the past two years; yet, the median has jumped by 66.9%.

@page_break@While the growth in CEO compensation isn’t coming from the top end, the bar for the best-paid financial services sector CEO overall was set much higher in the latest survey. The top-paid CEO in 2007 isn’t part of the comparative calculation because the firm wasn’t public in 2005. Yet, by far, the biggest paycheques in the industry went to the executive team at the newly public asset-management firm. Gluskin Sheff & Associates Inc. In its latest fiscal year, its NEOs took home more than $81 million as a group; the top executives collected bonuses of more than $28 million each.

These numbers are deceptive, however. They reflect Gluskin Sheff’s pay practices as a private firm, when it essentially paid out all of its earnings to its employees. Since going public, it has changed its compensation practices. Instead, its employee bonus pool now includes 20% of its operating income and up to 20% of its performance fees. However, its compensation disclosure for its first year as a public company relies on the old compensation methodology. Additionally, as the proxy explains, the company recently changed its financial yearend, so its 2006 fiscal year includes two performance yearends.

Notwithstanding these caveats, for the time being, CEO Gerald Sheff’s $29.5 million in annual total pay sets a new standard to which the big banks’ CEOs can aspire. In comparison, they are mere pikers, with only a couple pulling in more than $10 million.

Indeed, while the principals of Gluskin Sheff may not be reaching these heights again in the near future, their $81-million total payday for the latest fiscal year puts them far ahead of second-place Royal Bank of Canada, which had an estimated $48 million in NEO total pay in the fiscal year ended Oct. 31, 2006. And RBC’s figure is inflated by the timing of some large long-term payouts that were received during the year.

From RBC, there’s a significant drop to third-place Canaccord Cap-ital Inc., with an estimated $35 million in NEO total pay. Manulife Fi-nancial Corp. is the only other firm that paid out more than $30 million in total pay to executives in the latest fiscal year, with its top managers collecting just shy of $32 million. Both TD Bank Financial Group and Bank of Montreal come in slightly under the $30 million mark.

Among of the Big Five banks, Bank of Nova Scotia is the stingiest with its NEOs, paying them slightly more than $20 million in total compensation collectively; which ranks it 11th in the executive compensation league, well below the leading firms in the industry. CIBC is in 10th spot, with just $21.3 million going into its executives’ pockets in fiscal 2006.

Amid all of this largesse, straight salary hardly figures into the equation. The top CEO salary in the sector, $3.7 million, was paid to Power Financial Corp. ’s Robert Gratton. But it’s a steep drop from there to second-place Ed Clark, president and CEO of TD, at slightly less than $1.5 million. The heads of the other big banks and the two large life insurers are the only others receiving salaries of at least $1 million.

For many top executives in the financial services sector, the salary is almost an afterthought, as most of their compensation is performance-based — and delivered in a dazzling array of forms. Big bonuses are still the way to go at the investment dealers, whereas the big banks and insurers indulge in every form of compensation imaginable.

What has seemingly fallen out of favour with firms is options. Of the $577 million that was awarded to industry executives last year, only an estimated $82.3 million of that is attributable to forecast options gains. Similarly, options only account for a projected $31.8 million of the estimated $200 million that CEOs collected in 2006.

In the past, firms used options extensively to compensate their executives, ostensibly to align their interests with those of shareholders. Now that options have fallen out of favour — whether that’s due to perception problems or changing accounting treatment — shareholders have to decide if the types of instruments that are being used are doing an adequate job of keeping executives focused on shareholders’ interests.

Using net income as a proxy for shareholder interests, it would appear that executives are indeed being pushed in the right direction by their pay packets. While estimated total NEO compensation rose about 12% from 2005 to 2007 across comparable firms, aggregate net income for the same time period was up 43.1% to almost $31 billion. Moreover, the S&P/TSX financial services index is up about 39% over the period. So, markets are rewarding shareholders.

Also, as was the case for executive pay, median net income rose even more sharply than the aggregate — rising 65% to about $94 million. This suggests that mid-market CEOs’ big pay gains reflect their ability to generate big profit gains.

There’s no question that financial services industry executives are richly compensated for their efforts. But, for the most part, it appears that they are doing right by shareholders, too. IE