Executive compensation practices in Canada’s financial services industry have experienced some sea changes over the years — from the rise and fall of options to ongoing efforts to tie pay to performance and the struggle to find ways to disclose it to investors. But despite that ebb and flow and the seeming failure to crack these basic compensation conundrums, the one thing that hasn’t changed is the direction of executive pay.
Over the past 10 years, executive pay in the financial services industry has risen sharply, far faster than inflation and faster than wages in general. These large, fast-growing executive pay packages have long attracted critics who see them as symbols of rampant greed and harbingers of dangerously rising income inequality. Shareholder advocates have likewise griped that excessive executive compensation cuts into shareholders’ returns, and that efforts to link pay and performance have largely failed. Yet, none of this has stemmed the tide of growing managerial riches.
Comparing the pay for executives of the financial services firms that were in Investment Executive’s 1997 survey with the compensation at those same firms in 2007, it’s clear how much more executives are taking home.
For example, in 1997, CEOs collectively were paid slightly less than $21 million in aggregate liquid compensation (including salary, bonuses, restricted shares and other payouts and perks). Fast-forward to today, and CEOs at the same firms are collecting $55.7 million. When you factor in the variable component of their pay packages, the CEOs’ take has more than doubled over the past 10 years — to almost $75 million in 2007 from slightly less than $35 million in 1997.
Even adjusting for inflation, executive pay has ballooned over the past decade. That same $21 million of aggregate CEO cash compensation in 1997 is worth about $26 million in current dollars. So, notwithstanding the impact of inflation, the take for top executives has more than doubled in that time.
CEOs aren’t the only beneficiaries of this trend. The numbers are similar for the full group of named executive officers (which includes the CEO) at financial services firms. Collectively, NEOs took home about $75 million in liquid compensation in 1997, or $92.5 million adjusted for inflation. That is now up to more than $181 million for the same collection of top managers.
Yet, over that period, CEOs have enjoyed a larger gain in pay than NEOs overall. On a percentage basis, overall CEO liquid compensation is up about 166% compared with an increase of 140% for NEOs. Similarly, estimated total compensation — including both liquid and variable components — is up 115% for CEOs in the 10 years and up about 90% for NEOs.
The result of this incremental advantage for CEOs is that they now account for slightly more of the average executive team’s overall pay total. In 1997, CEOs garnered about 28% of the NEOs’ cash compensation. They now enjoy a 31% share of liquid payouts. Similarly, their share of total NEO compensation has risen to 33% from 29% in 1997.
This rise in CEOs’ share of overall executive compensation over the past 10 years is evident at each of the Big Five banks, with the exception of CIBC. Among the other firms in our survey — insurers (before demutualization) and asset managers — there is no discernible pattern of more or less concentration of compensation in the CEO’s office. But, on balance, the rich are getting richer.
Several of these trends call to mind comparisons with another arena in which the pay is large and still growing fast, the rich get richer and compensation often seems unconnected to actual performance despite efforts to link them — professional sports.
The market for professional sports talent is comparable with that for top corporate executives in that there are a limited number of highly coveted jobs, a relatively open market for the talent to fill those positions and the employees tend to be highly compensated because they have a great deal of bargaining power (in that their efforts may directly make large amounts of money for other people).
Among the major professional sports, baseball is probably the best proxy for executive talent because it is the only one that doesn’t have a salary cap that could artificially limit salaries. Although the size and growth rate of corporate compensation may be difficult to fathom for the average worker, it is noteworthy that large gains in executive pay over the past decade are similar to the escalation in Major League Baseball salaries over the same period.
@page_break@From 1997 to 2007, according to USA Today’s sports salary database, aggregate payrolls in the major leagues have grown by about 130% — slightly less than the gain in financial industry executives’ liquid compensation over the same time frame and slightly more than the rise in their total compensation.
Like sports stars, corporate executives’ time at the top can be short. Only a handful of CEOs from 1997 are still going strong — Power Corp. ’s Robert Gratton, Prem Watsa of Fairfax Financial Holdings Ltd., Guardian Capital Group Ltd. ’s John Christodoulou, A.G. Lowenthal of Oppenheimer Holdings Inc. (then Fahnestock Viner Holdings Inc.) and TD Bank Financial Group’s Ed Clark (although at the time, Clark was at the helm of CT Financial Services Inc.).
Although there has been a turnover of starring firms and individuals in the financial services industry over the past 10 years, the good news for shareholders is that the firms that have weathered the decade have done well. Net income for the firms in IE’s 1997 survey is up about 221% over the 10 years, exceeding overall gains in executive pay by a healthy margin.
The Big Five banks all saw net income rise at a faster clip over the past 10 years than overall executive compensation. The biggest bargain among them is TD. Although its net income rose by 400% over the period, total NEO compensation grew less by than 150% in the same time frame.
However, even TD was outshone byGreat-West Lifeco Inc. , which saw net income jump almost 500% over the past 10 years; yet, total executive pay dropped 25% over the same period. Even though this sort of result makes critics question how pay is linked to performance, the firm’s cash compensation to executives is actually up 79% over the period. The reason for the overall drop is that GWL executives had large expected options gains in 1997 that don’t exist today.
The popularity of options has waned. (See page 30.) According to our 2007 survey, the expected value of CEOs’ option grants about equals the value of basic salaries — in aggregate, both total $31.8 million.
This is a return to the level of significance for options that the industry saw when publicly traded companies were required to start disclosing their executive compensation data in the mid-1990s. Then, there was approximately a one-to-one relationship between estimated option grant values and basic salary. Yet, on the back of a heady bull market, expected option values had grown to about 3.5 times the value of salary by the late 1990s. Now, they’ve returned to pre-bubble levels.
Together, salary and options now account for only about a third of CEOs’ pay packages. Options have been replaced by complicated compensation schemes — designed to keep executives interested in their work — that now make up the majority of executives’ pay.
One thing has remained constant in the industry’s executive compensation: brokers still take home some of the industry’s biggest paycheques. Paul Reynolds, president at Canaccord Capital Inc. , led the way, earning almost $11 million for the fiscal year.
The head of investment banking at GMP Capital Trust, Thomas Budd, wasn’t far behind, pulling in slightly less than $9 million for its fiscal year. He was followed by Canaccord chairman Peter Brown and Timothy Hoare, CEO of Canaccord Adams Ltd.
These payouts may seem excessive, but at least brokers still take their loot the old-fashioned way — in straight-up cash — while the rest of the industry crafts exotic instruments for executive pay, even as it comes under increasing scrutiny. IE
Executive compensation continues upward trajectory: Includes Charts
Over the past 10 years, only the salaries of professional baseball players have kept up in terms of growth
- By: James Langton
- October 29, 2007 October 28, 2019
- 13:03