Stopping CEO Pay Escalation at Canada’s Big Banks

For over 20 years, CEO pay at Canada’s big banks has increased at a rate far outpacing that of other workers, leaving several observers outraged. The source of the problem is that none of the banks wishes to position its CEO pay below that of others. This leads to pay escalation that is rationalized with arguments of retention, motivation and competitiveness. In a recent twist, three big banks (CIBC, Scotia and TD) have implicitly admitted that comparing pay with one another yearly was problematic. They have agreed with NEI Investments, an activist investment firm, to explore approaches to CEO compensation which would diminish the role played by annual CEO pay comparisons with one another in return for the withdrawal prior to the AGM of an intended shareholder proposal to curb executive pay.

Two things are missing in the big banks’ approaches to executive compensation in order to stop CEO pay from soaring further. The first is to admit that currently-prevailing CEO pay packages with annual grant-date target values around $10 million per year are sufficient to alleviate concerns that a CEO might leave for pay reasons. Indeed, turnover for reasons other than retirement is virtually nonexistent among big bank CEOs in Canada, and the banks generally do a great job at succession planning and talent management. The second is to adopt an additional guiding principle in their approach to executive compensation in order to align some important executive pay decisions with the wealth of the communities they thrive in.

The rest of this article suggests a benchmark for CEO pay at big Canadian banks that would effectively halt the ongoing CEO pay escalation while allowing banks to remain competitive and attractive employers for top talent. CEO pay trends are presented next. Details on the proposed benchmark follow. The concluding section presents evidence that limiting future CEO pay increases for a while would not lead to an exodus of key executive talent.


Inflation-adjusted total CEO pay has nearly doubled at Canadian big banks between 1998 and 2010 according to IGOPP’s analysis of proxy disclosures (Pay for Value: Cutting the Gordian Knot of Executive Compensation, 2012). In fact, it has more than quadrupled since the early 1990’s. The evolution of total CEO compensation can be summarized as follows:

  • Steady increases far outpacing inflation through the early 1990’s;
  • Significant jump in executive pay through the dot-com bubble (i.e., between 1999 and 2001);
  • Steady increases still far outpacing inflation through the early 2000’s;
  • Pay cut due to the financial crisis of 2007-2008;
  • Back to pre-crisis levels by 2010, with subsequent increases since; and
  • Three banks agree to explore ways to halt the trend in 2013.

Most of the increases were awarded through equity-based compensation. Smaller banks, such as the National Bank of Canada, followed the trend while applying a size-based discount to bigger banks’ statistics when setting CEO pay. By and large, Canadian CEOs from all industries have more or less enjoyed the same pay trend.


To stop CEO pay escalation at big banks, I recommend that banks incorporate the following guiding principle as part of their executive compensation philosophies: “Executive pay is connected to the economic wealth of communities living where the bank operates while also considering the pay of the bank’s average employee.” The transformational implication of this guiding principle is that banks should no longer look only at one another to set executive pay levels, but should wish to take into consideration the wealth of the communities that allow them to flourish. The suggested indicator is the median annual income of a Canadian family.

More precisely, I suggest that annual grant-date target total CEO pay should remain flat at $10 million until it is indexed to 100 times the median Canadian family income, i.e., until the median Canadian family’s income rises above $100,000. Interestingly, the current median Canadian family income of about $70,000 is within the range of a big bank’s average worker’s total compensation, including benefits. This procedure of freezing target grant-date pay until the rest of Canadian workers catch up ensures that the proposed benchmark can be implemented without immediate pay cuts. Realistically, pay cuts would likely be impossible to implement without governmental intervention.

Targeting grant-date pay at $10 million for a time does not mean that actual realized pay will be flat at $10 million. Realized pay on annual incentives and on long-term incentives would continue to vary based on performance and would normally range between $3 and $40 million depending on post-grant performance. The long-run average realized CEO pay should remain around $10 million on average. Proper pay-for-performance calibration will be the main challenge for boards. Fortunately, board time historically devoted to setting target CEO pay levels would surely be shifted to more beneficial pay-performance alignment work.

Figure 1


The suggested 100x Multiple is designed to be implementable immediately as it meets the following five conditions for success:

1.       The Multiple guides the future evolution of executive pay, as opposed to calling for major pay cuts;

2.       The Multiple is immune to variations in average workers’ pay across companies, industries and jurisdictions, since it is unclear that businesses employing a greater proportion of unskilled workers are necessarily less challenging to manage effectively;

3.       The Multiple is high enough to attract and retain top talent;

4.       The Multiple is suitable for use by all of the biggest Canadian banks as well as many other large corporations, including the largest regulated utilities that benefit from governmental (i.e., population-sponsored) privileges; and

5.       The Multiple is simple and easy to understand.

In addition to connecting CEO pay with the wealth of the communities where Canadian banks operate predominantly, the median Canadian family income is:

  • The best current annual income indicator used by statistics Canada, as census families now include couple families, with or without children, and lone-parent families;
  • Close to big banks’ average employee total compensation (including pension and benefits);
  • Reflective of where Canadian banks are headquartered and incorporated;
  • Coherent with the bank’s functional currency (CAD$) as per IFRS criteria of “primary economic environment in which the entity operates;”
  • Consistent with ownership restrictions imposed on Canadian banks’ equity;
  • Linked with the currency in which most senior executives are paid;
  • Determined independently and objectively by Statistics Canada (ratios based on a bank’s own employee population can be manipulated, for instance, by outsourcing low-paying jobs);
  • Simple.


Going progressively back to 100 times the median Canadian family annual income would return CEO pay back to where it was at the end of the 1990’s, before the dot-com bubble inflamed executive compensation. It is still a high multiple that is in line with the current median pay at TSX60 companies. A starting point at $10 million also remains a reasonable proportion of profits, revenues, assets and market capitalization for big banks, especially in light of fees charged by some money managers.

Increasing evidence suggests that it would absolutely be enough. A recent study by Charles Elson and Craig Ferrere of the University of Delaware (Executive Superstars, Peer Groups and Overcompensation: Cause, Effect and Solution, 2012) argues that the transferability of executive talent is a flawed assumption that boards use while setting executive pay.  Not only are opportunities to switch job from one CEO role to another rare, they very often result in failure. In other words, increasing grant-date CEO pay year after year for retention purposes is most likely an overused excuse that leading boards should have the guts to challenge. Besides, a $10 million a year package, along with the prestige and perquisites attached to the role of big Canadian bank CEO should be sufficient to attract, retain and motivate top candidates for years to come. In fact, the amount matters less to most CEOs than their perception of where they stand relative to peers at other companies.