Royal Bank CEO Dave McKay speaks at the bank's annual meeting in Toronto on April 6, 2017.Frank Gunn/The Canadian Press
Folks, I believe I have found the most strategic chief executive officer in Canada’s banking industry. Maybe the most strategic CEO in all of Canada.
That man is Dave McKay of Royal Bank of Canada RY-T. Why is he so strategic? Because RBC’s board tells me so.
They’re not talking to me, of course. I can see it in their actions – resulting in vast sums of money they pay Mr. McKay each year, specifically tied to what they believe is otherworldly strategic performance.
Here’s what I’ve found after a deep dive into a decade of RBC’s proxy circulars, where they spell out the bank’s executive compensation philosophy.
Like many of its peers, RBC has explicit financial goals that are part of incentive pay, both short-term and long-term. At RBC, 60 per cent of the annual bonus plan is based on whether the bank hits profit targets. Sounds good.
That’s not 100 per cent, though. To fill it out, RBC bases 10 per cent of the annual bonus on client satisfaction and loyalty, and 30 per cent on a category called “risk and strategic.” RBC defines this as “business segment and individual goals relating to risk management, business strategy, environmental sustainability, and social and governance practices.”
There are plenty of things in there that can be quantitatively measured, resulting in a hit-or-miss result for calculating a bonus. There are other things, though, that are more qualitative. They allow for the RBC board to use a little more subjectivity.
I think the numbers suggest RBC is embracing that subjectivity. The bank’s proxy disclosure allows readers to reverse-engineer how Mr. McKay is paid, versus target in each of the categories – which I have done, for all the years of Mr. McKay’s tenure.
Let’s say, quite reasonably, that getting paid at 100 per cent of target bonus means the targets are met. Let’s also say that paying out well above 100 per cent means the bank, or Mr. McKay specifically, blew past expectations.
In the nine full years of Mr. McKay’s tenure, RBC has never paid him less than 140 per cent of the target for risk and strategic objectives, and that was in his first two years. Once he settled into his job, he got even more strategic: The payout rate has been 150 per cent once (2022); 160 per cent once (2017); and 170 per cent five times (2018, 2019, 2020, 2021 and 2023).
That is a consistent track record of vastly exceeding expectations. So, if your CEO consistently exceeds strategic goals by 170 per cent, are your strategic goals sufficiently aggressive, as opposed to the bar being too low?
I know this is going to shock you, but RBC says no. “Our strategic goals are ambitious, purpose-driven and global, and have resulted in RBC becoming one of the highest-valued banks in the world throughout Mr. McKay’s tenure,” spokesperson Ingrid Mone says in an e-mail.
Okay, is this element of the annual bonus program a tool that allows the board to award Mr. McKay bonus money that he has missed out on when RBC comes short of its financial targets? Like in 2020, when Mr. McKay got zero of a potential $1.35-million financial bonus because the bank missed its profit targets because of the COVID-19 pandemic, but the 170 per cent payout in the risk and strategic category gave him an extra $472,500 that offset the loss?
No, says RBC. “Our executive compensation program is rigorous, independently reviewed and based on several key principles, including alignment with long-term shareholder interests and other sound risk management principles,” Ms. Mone writes. “Our short-term incentive program payout factors are independently determined from one another.”
By my calculations, Mr. McKay has made a total of $3.61-million in bonus pay over and above the target amounts for the risk and strategy category over the past nine years, amounts ranging from an extra $337,500 to $472,000 in each of the past seven years.
You may be asking whether all Canadian banks reward their very strategic CEOs this way. Now it’s my turn to say no.
I reviewed compensation programs at Toronto-Dominion Bank TD-T, Bank of Montreal BMO-T and Bank of Nova Scotia BNS-T to see how strategic goals, labelled as such, are used. (Canadian Imperial Bank of Commerce CM-T does not explicitly use the term.)
At TD, strategic objectives are part of the “business performance factor” that’s used to calculate all incentive pay, including stock awards. A high rating in this measure, which has no upper bound in the plan, can have an even bigger impact on pay at TD than in RBC’s model.
Yet TD has made no adjustment in five of the six years since the bank introduced strategic objectives to its pay plan, even when it said “management made notable progress on strategic initiatives.”
BMO, which I slagged a week ago for its compensation practices, has given its executives a score above 100 per cent in four of the past five years. But only marginally so: I figure that in 2023, it added just $106,500 to CEO Darryl White’s paycheque, despite BMO also applying the factor to all incentive pay, not just the bonus.
Scotiabank made no upward adjustments for strategy in 2021 and 2022, and made a downward adjustment in the most recent fiscal year.
One of RBC’s points about Mr. McKay’s compensation is that the bank’s total shareholder return – stock-price appreciation plus dividends – has beaten peers over multiple periods, reflecting his ability to create long-term value. Indeed, that is true.
Yet there are many measures possible. Here’s one: In a December, 2013, interview with The Globe and Mail upon his retirement, former RBC CEO Gord Nixon extolled the virtue of compounding the bank’s profits, “however one does it strategically.” With RBC at $8.4-billion in net income, Mr. Nixon said, perhaps tongue-in-cheek, “Dave McKay’s job is quite simple. We want $16.8-billion five years from now.”
It’s been a decade since he said that, and RBC still hasn’t reached that level of profits. So one can ask: Just how strategic is Mr. McKay? Maybe not nearly as much as the RBC board thinks.