The Board of Directors of the Bank of Montreal (BMO)
is of the view that strength and performance of the people are crucial for
achieving the goals of the bank. The board believes that the tool of executive
compensation program could be effectively used in achieving the objective of
share-holders’ value. The concerned committee has designed the executive
compensation scheme on accordance with the objectives of the bank and to
provide the executives stake in the long-term financial growth of the bank. In
the financial year 2015 the bank has given $10,155,000 as total direct
compensation which remained unchanged from 2014 and awarded $8,272,950 as total
incentives to the CEO Bill Downe. Total incentive awarded was 92% of target
incentives and total direct compensation was 97% of the target total direct
compensation. This paper outlines the features of executive compensation
program for the chief executive officer (CEO) of the bank and the important
measures the bank has used to grant a certain level of compensation.
Features
of the Executive Compensation Program
The executive compensation program of the Bank of
Montreal (BMO) is based upon three core principles;
1)
Attract and retain executive talent: properly structured compensation package
helps in attracting and retaining talented professionals especially the chief
executive and would motivate the chief executive and other executives to work
towards fulfilling the objectives of the bank.
2) Link compensation to the performance of the
bank: The compensation scheme must be synchronized with the organization’s
objectives and compensation should be related to the performance of the bank.
3)
Encourage long-term interest to increase share-holders’ equity: The
compensation scheme should be so designed as to make variable pay of the chief
executive equity-based. Thus, the chief executive needs to excel to qualify for
ownership requirements.
4)
Align with risk taking: The compensation scheme should not encourage
un-necessary risk taking and hence significant portion of the compensation of
the chief executive is deferred.
Important
Measures to Grant Compensation
The total direct compensation has two segments; fixed
and variable. The fixed segment consists of basic salary, which is the
compensation paid for running day-to-day operations of the business. This is
paid to the CEO as fixed amount of cash. The variable segment consists of three
parts, namely short-term incentive, mid-term incentive and long-term incentive.
Short-term incentives are given is cash for fulfilling specific year to year
business objectives. Mid-term incentives are given in the form of share units
for fulfilling mid-term objectives of the bank. This is deferred incentive.
Long-term incentive is focused on long-term objective of increasing
shareholders’ value. If the chief executive can create substantial
share-holders’ value in a long-term perspective, then the chief executive is
given deferred incentive in the form of stock options or deferred share units.
The Executive Compensation program Committee compares
the executive compensation of the BMO with that of two groups in order to judge
effectiveness and competitiveness of the compensation program. One group
consists of other four largest Canadian banks, namely Bank of Nova Scotia
(BNS), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC),
and Toronto-Dominion Bank (TD). In the other group, there are 10 U. S.-based
mid-size banks. The peer comparison gives information for primary
consideration. For secondary consideration in structuring the CEO compensation
program, the committee considers the compensation for the CEOs of the
Canada-based insurance companies.
The other factors that the committee takes into
account while designing executive compensation program are; compensation given
to CEOs of the companies listed with TSX 60, compensation program of CEOs of
selected U. S. firms, the ratio between amount compensation to the CEO and that
to other employees, and the Canadian median family income.
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