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Incoming Scotiabank COE Scott Thomson, left, shakes hands with retiring CEO Brian Porter.Scotiabank/Handout

It can cost a wad of money to switch CEOs, including severance, signing bonuses and big stock awards designed to compensate an executive from the riches they’re leaving behind at their previous employer.

The good news is Bank of Nova Scotia BNS-T and Finning International Inc. FINGF seem to have avoided a lot of potential expense this week in the retirement of Brian Porter and the hiring of Finning’s Scott Thomson as the bank’s new CEO.

The rest of it is bad news for investors, however.

One reason for the low cost is neither Mr. Thomson nor Mr. Porter have created much shareholder value over the past decade, despite being paid tens of millions of dollars.

And, unfortunately, Canada’s lax disclosure laws mean shareholders will likely have to wait several months to find out if either man is being further overpaid as they exit their jobs.

To recap the week’s big news, Scotiabank stunned Bay Street by hiring Mr. Thomson from outside the bank, rather than choosing one of Mr. Porter’s deputies to succeed him. Scotiabank is portraying Mr. Thomson, who has hopscotched around industries after starting his career at Goldman Sachs, as an internal hire because he spent the past six years on Scotiabank’s board.

Often, when a company goes outside for a new leader, there’s added cost to an expensive situation. A company often must allow a departing CEO to hold onto, or use earlier than expected, a huge amount of stock options. If a company is able to poach a successful CEO from the outside, it often has to pay up to get the new chief to walk away from potential stock-option riches at the previous employer.

However, neither Mr. Porter nor Mr. Thomson, nor their companies, are so burdened.

A new CEO doesn’t make Scotiabank a buy - but this does

Scotiabank has awarded Mr. Porter nearly 1.4 million stock options over nearly 10 years as CEO. However, as he rides into the sunset, nearly all are currently unusable.

The stock has hovered around $67 a share this week on the transition news; the exercise prices of only his 2013 and 2015 options are low enough to be “in the money,” or profitable. All told, his options have in-the-money value of less than $1-million at current prices.

The bank’s long-term performance under Mr. Porter helps explain why. According to S&P Global Market Intelligence, Scotiabank has put up a total return, including dividends, of about 57 per cent over his tenure. The other Big Six banks returned between 108 per cent and 175 per cent over the same period.

Louis Vachon, who retired in the fall of 2021 from the top performer, National Bank of Canada, illustrates what stock options are worth to high-performing CEOs: The bank said he had $115.1-million in unexercised option profits at the end of the past fiscal year.

In Mr. Thomson, Scotiabank has found an outside executive who need not be compensated for his successes. Stock trading records show Mr. Thomson has fewer than 500,000 Finning options outstanding, but only those granted in 2019 and 2020 have any value as the stock has traded this week around $24 a share. All told, like Mr. Porter, his options have current in-the-money value of less than $1-million.

And like Scotiabank, Finning’s share performance has lagged. The stock has posted just a 42 per cent total return, including dividends, since Mr. Thomson’s ascension in June, 2013, according to S&P. While a peer comparison is not as clean for the heavy equipment seller as it is for a bank, shares of Canada’s Toromont Industries Ltd. have returned 402 per cent over the same period. Two other equipment companies also named as peers by S&P have done even better than Toromont.

This is not to say Mr. Porter and Mr. Thomson have been poorly paid.

Scotiabank estimates it has paid Mr. Porter just over $96-million in eight full years as CEO. About $28-million of that is cash – salary and bonus – and another $43-million is the value of restricted or performance shares.

Finning estimates it has paid Mr. Thomson just under $55-million since 2013, including about $16-million in salary and bonus, and cash and stock awards – other than options – valued at more than $31-million.

But this brings us to the matters of disclosure.

Both companies have stock plans that are more generous to executives who retire, rather than resign. For example, Finning allows a retiring executive to take up to three years to exercise stock options that have already vested, or become usable, and keep unvested stock options on their original schedule. A Finning executive who resigns, however, must use vested stock options within 30 days, and lose any unvested options.

Mr. Porter is 64, with 41 years at the bank, and his retirement is relatively straightforward – meaning he can keep all his stock options on the normal schedule.

Mr. Thomson, however, is just 52, but Finning is describing his decampment to Scotiabank as a retirement – which lets him take his time to use the options.

Both companies are allowed, under Canadian securities law, to make us wait to see the fine details of this transition. While U.S. regulators consider employment contracts with the CEO to be a material matter, and subject to disclosure within a matter of days via a securities filing, Canada does not. So, companies are allowed to disclose termination and hiring compensation in the following year’s proxy circular.

Finning spokesperson Elisha McCallum, while answering some questions about Finning’s compensation for Mr. Thomson and his replacement, Kevin Parkes, said it plans full disclosure next spring. Scotiabank did not respond to queries about its disclosure plans.

What is clear, however, is that Mr. Porter and Mr. Thomson will still be able to make millions more from Scotiabank and Finning – so long as their successors at each company do better than they did.