Untangling the spin on executive compensation

By: Jim Stanford

  The annual release of executive compensation figures must be the worst day on the calendar for the PR flunkies at Canada's major banks. It falls to these loyal messengers to explain to hard-pressed Canadians why the pin-striped leaders of high-finance are being paid quite so much money.
  Perhaps it was the daunting nature of this spin-doctoring challenge that drove the Royal Bank's Dan Maceluch to distraction earlier this month, as he announced ­ and attempted to justify ­ the $6.7 million pay package received by CEO John Cleghorn last year. Maceluch was clearly instructed to use a "soft touch" in spinning the story, and hence adopted the following novel strategy.
  "It's important for us to be empathetic on how, for some people, these numbers are difficult to understand," Maceluch expressed. How kind. Some Canadians would express empathy for their homeless fellow citizens who sleep in the streets. Others might express empathy for malnourished children, or impoverished single parents, or even lost puppies. Maceluch, however, would have us direct our empathetic energies towards those poor sods who can't for the life of them figure out why bankers make as much money as they do.
 

The next time my salary is up for re-negotiation, I will demand an 800% raise. My boss will say that is ridiculous. I will say, "But jeez, that's still way less than Bill Gates makes."

  His appeal was carefully distinct from that of a typical millionaire expressing empathy for the less fortunate around him. It is not the common folks' lack of money which sparks the bankers' empathy. It is, rather, their inability to comprehend the logic of an economic system which rewards an executive so handsomely, during a year in which his company's share price fell and the bank began to eliminate what may amount to 6,000 jobs.
  This falls squarely into the paternalistic "this-is-going-to- hurt-me-more-than-it-hurts-you" school of logic. It's something like Paul Martin telling a taxpayer, "I'm so sorry you don't understand why I'm taking your money." Or an unrepentant prisoner whose best shot at contrition consists of saying, "I'm sorry I got caught."
  The ingenious Mr. Maceluch continued with his spinning as follows. Sure, Mr. Cleghorn made $6.7 million last year, and holds that much again in unexercised stock options. But that's nothing compared to what the owners of start-up Internet companies can make if they are lucky and their IPOs catch fire in today's hyperactive stock market. "When you look at what some of the new economy CEOs and the market cap that some of these companies are commanding these days, ... I think [Mr. Cleghorn's] compensation and that of our senior executives actually compares quite favourably."
  In other words, since some financial investors are apparently willing to part with billions of their dollars to buy shares in companies with no profits and little revenues, they should hardly get upset if the Royal Bank showers a few millions upon their fearless top executives.
  I will try this logic on my own employer the next time my salary is up for re-negotiation. I will march into his office and demand an 800 percent raise. He will say that is ridiculous. I will say, "But jeez, that's still way less than Bill Gates makes." I wonder who will win the argument.
 

The House of Commons Finance Committee's recommended reductions to the capital gains tax would save Cleghorn about $500,000 on his 1999 tax bill ­ enough to cover the total annual welfare incomes of over 40 single-parent families in Ontario.

  For those poor, arithmetically-challenged souls among us, who so rightfully deserve the empathy of the banking community, here are a few tidbits to help us understand just exactly how much these captains of industry are earning. [It will take a higher power than mere math, however, to explain exactly why these salaries are so high.]

• At $6.7 million, the Royal's Cleghorn earned last year as much as the total yearly income of some 420 hourly-paid bank tellers.
• Over two-thirds of Cleghorn's income came from cashing in some $4.6 million of his Royal Bank stock options. [He still has another $6.6 million in outstanding unexercised options to go.] The House of Commons Finance Committee has recommended reducing the capital gains tax inclusion rate to 50 percent from 75 percent at present. This would save Cleghorn about $500,000 on his 1999 tax bill ­ enough to cover the total annual welfare incomes of over 40 single-parent families in Ontario.
• Cleghorn's income was far outstripped by that of former Bank of Montreal CEO Matthew Barrett, who subsequently went to work at Britain's Barclays Bank. Barrett took in $20.8 million in 1999, most of it in exercised stock option gains. The Finance Committee's recommendations would reduce Mr. Barrett's 1999 tax bill by about $2.5 million.
• During Barrett's last year at the helm, the Bank of Montreal cut its workforce by some 1450 positions. Barrett's 1999 salary alone would have been enough to pay the salaries of those 1450 workers for close to six more months of employment.
• Rich as they are, these bankers are no longer the fattest cats in Canada's tight club of chief executives. That honour will surely go this year to Laurent Beaudoin, former CEO of aerospace giant Bombardier. He retired last year holding Bombardier stock options worth an incredible $250 million­over one-third of which he promptly exercised. Beaudoin's stock options would single-handedly pay the average straight-time wages for all of the 4000 unionized workers at Bombardier's deHavilland plant in Toronto for a full eighteen months. The Finance Committee's proposed tax cut on stock option gains would reduce Beaudoin's 1999 tax bill by a stunning $12 million.