BMO misses goals, pays bonuses: A long-time pattern continues

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In an underwhelming year for Canada’s big banks that resulted in falling CEO paycheques, none saw their total compensation tumble more than Darryl White of Bank of Montreal BMO-T – a notable 12.2-per-cent decline. Not even Toronto-Dominion’s TD-T Bharat Masrani, who voluntarily gave up $1-million of his bonus because of his bank’s continuing U.S. fumbles, had such a cut.

And yet we can ask: Did Mr. White pay enough of a price?

Mr. White’s annual bonus fell 23 per cent from 2022 levels, but was still $2.71-million. The value of his stock awards fell 9 per cent – but was still $7.41-million.

His total direct pay of $11.22-million, as BMO measures it, came in $532,000 below his target compensation. That’s because the bank’s performance-pay factor, used for all these incentive-pay components, came in at 95 per cent for the year. That’s just five percentage points below full funding.

That math might surprise anyone looking at BMO’s financial performance, however.

BMO uses three financial metrics in its incentive plan. It set its 2023 goals below the 2022 achievements – and missed all three anyway.

After a return on equity of 15.5 per cent in 2022, the bank set a goal of 14.1 per cent for 2023; it reported 12.7 per cent. Its efficiency ratio – the primary measure of a bank’s cost management – was 55.8 in 2022. The 2023 goal was 56.1 per cent – lower is better – and it reported 59.8 per cent. Earnings per share growth was 7.7 per cent in 2022; BMO set a 2023 goal of 5.2 per cent. Instead, EPS went down 7.7 per cent. Oof.

Looks like 0-for-3 to me. But if you think that translates to a zero bonus, then you don’t know the math behind CEO incentive pay.

Somehow, for reasons not made explicit in 41 pages of compensation disclosure, these missed goals allowed Mr. White and other BMO executives to get a 75-per-cent payout for financial performance.

Canada’s banks are loathe to set up bonus plans that pay out zero for poor results. That would incent executives to take too much risk, they’ve told me in the past.

Absent disclosure, however, it’s hard to figure where the floor is at BMO. Is there any possibility for zero? Or is the worst they can do is a 25-per-cent payout? A 50-per-cent payout?

BMO spokesperson Jeff Roman did not answer that question but pointed to several passages in the circular where BMO explains its pay philosophy. “Our compensation framework is designed to deliver sustained, positive long-term shareholder performance, is a reflection of business results and is competitive with the market,” he added.

Now, financial metrics are not everything. Like many other big Canadian companies, BMO includes other goals in incentive plans. Specifically, “purpose and strategic objectives” make up a quarter of the formula for Mr. White. And, in 2023, the BMO board scored management at 104 per cent of these goals, helping make up for the smaller financial payout. (BMO closed and integrated the gigantic Bank of the West acquisition last year, for example.)

But wait – there’s more! BMO adjusts its performance rating in a range from plus 20 per cent to minus 20 per cent based on its three-year total shareholder return compared with its peers. BMO came in first this year, so the bonus factor got bumped up by 20 per cent. (Mr. Roman notes the proxy language that says BMO introduced this in 2019 “to focus executives on driving positive and sustained shareholder value over the medium term.”)

To its credit, BMO uses the average share prices for the final three months of the years it compares, rather than the annual closing prices, “to reduce the impact of short-term volatility.” But if they had used closing prices, National Bank would be first, and TD would be just a half-percentage point behind BMO, according to S&P Global Market Intelligence. In other words, there’s not a lot of outperformance pushing BMO’s bonus inflation factor from zero to 20 per cent.

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Let’s reset BMO’s scorecard. Let’s say the bank scored a 25-per-cent payout for its financial misses. Let’s be generous and give them that strategic 104-per-cent payout. And let’s say BMO instead came in second in total shareholder return and got a bump of just 10 per cent.

If all that happened, I calculate BMO’s compensation formula would spit out $5.25-million in bonus and stock awards, not the $10.11-million Mr. White received. Quite a difference.

I’m sure I could do this for most CEO incentive plans and cut millions, so it sounds like I’m picking on BMO. I am, because they deserve it: This is the fifth time in 15 years I’ve written a column or news story with this theme.

• April, 2010, Rich pay doesn’t align with performance at BMO: The bank falls short of the goal in three of four performance measures, then gives CEO William Downe a raise anyway.
• March, 2015, BMO misses three of four targets, but raises CEO’s pay – again.
• March, 2020, At BMO, missing key goals still means millions for those at the top: The bank, now led by Mr. White, missed all four of its financial goals but cut just six percentage points from its business performance factor.
• March, 2021: Compensation rose for Bank of Montreal CEO despite missed goals: BMO beat two of four financial targets and came in fifth out of six banks in total shareholder return.

As a journalist, this is a gift that keeps on giving. I should simply slot a BMO executive-pay column for every March, knowing there’s a good chance that when the proxy rolls out, I’ll have some great material to work with.

It’s considerably more painful, however, for BMO shareholders. At some point, one would think, so much failure would more substantially lighten a wallet or two in the BMO executive suite.