Bharat Masrani, Group President and Chief Executive Officer of TD Bank Group, outside the bank offices in downtown Toronto, on Sept. 3, 2020.Fred Lum/The Globe and Mail
Toronto-Dominion Bank TD-T didn’t fire chief executive officer Bharat Masrani after U.S. government regulators and law enforcement concluded an investigation that saw the bank plead guilty to criminal charges. Mr. Masrani also didn’t resign.
Instead, TD said Mr. Masrani would retire in April, then stay on as an adviser until October.
That may disappoint you. That may enrage you. But how would you feel if I told you that the decision to allow Mr. Masrani to retire sets him up for tens of millions of dollars after he leaves the bank? And that we’ll never know just how much money he’ll make?
It’s true.
Like most Canadian public companies, TD makes stock and stock options a huge part of executive-pay packages. In its disclosures over the past nine years, TD has said it has paid Mr. Masrani $113.9-million, with $76.4-million of that coming from the estimated value of stock and option awards. (We won’t know until the March proxy statement the official total for the fiscal year that ended Thursday, but by the time he retires, the total should be around $125-million.)
And like most Canadian public companies, TD has different ways of treating stock-based compensation when an executive leaves the company. Most of it centres around whether an award is “unvested” – meaning the executive doesn’t yet own a share or can use a stock option, and must continue employment to get the awards.
If a TD executive is terminated “with cause” – generally defined as for wrongdoing – all the unvested stock awards are forfeited. With a termination “without cause,” the executive’s stock awards continue to vest after employment, but they must use them a little more quickly than they otherwise would. And if an executive resigns, unvested stock awards are forfeited. They must use vested stock options within 30 days, even if they were supposed to expire years in the future.
But a retirement, as with Mr. Masrani? Stock awards continue to vest on their original terms, and expire on their original expiration dates. (TD stock options have a 10-year term.)
I will now set aside the issue of which of these methods of termination was most appropriate, given TD’s conduct; you, dear reader, may have an opinion on the matter.
What is factual, however, is just how much money Mr. Masrani can make because he will be allowed to keep his stock options.
Mr. Masrani is unusual, in a good way, by Canadian CEO standards. Until early this year, he hadn’t exercised a single stock option he’d received as compensation during his tenure as CEO. When he has exercised the options TD gave him in his pre-CEO roles, he typically kept all the underlying shares, rather than selling some to pay taxes or all to lock in the profits. By doing so, he built a stake in TD of nearly 1.4 million shares, worth nearly $107-million at Thursday’s closing price of $76.97.
“Throughout his tenure as CEO, Bharat has taken pro-active steps to align his financial interests with those of our shareholders, and continues to hold a substantial portion of the stock acquired when exercising options,” TD spokesperson Ronald Alepian said in response to The Globe and Mail’s questions.
Because he’s held onto most of his CEO awards, he has just over two million TD stock options. Stock options can be a wealth-creation machine for a Canadian bank CEO. I calculate that had TD stock risen consistently in the high single-digit range from the dates the bank granted the options, they could have provided anywhere from $100-million to $250-million in profits.
Alas, TD stock has not done that, and the options have a much smaller, unrealized gain right now. In fact, Mr. Masrani would have a profit of about $14-million for all of them, were he forced to exercise them now, at current prices.
Except, he won’t be forced to exercise them now, thanks to the retirement treatment. Instead, he’ll hold them until expiry, with some usable until 2033. (Will TD grant Mr. Masrani a nice big slug of options at the normal time this December, which will last until 2034? It will be interesting to see.)
What if TD stock appreciates 8 per cent per year, from today’s prices, over the next 10 years? Well, Mr. Masrani’s options would be worth about $87.2-million if he exercised them as they came due.
Is 5 per cent more reasonable? Just under $50-million. Are you optimistic enough to say 10 per cent? Then, just under $116-million.
We won’t ever know for sure, because once Mr. Masrani ceases being an employee and board member, he’ll cease being an insider, so he won’t need to report his stock sales.
If TD comes to a financial arrangement with Mr. Masrani that is more, or less, generous, we will not know until March of next year at the earliest. As I have observed before with much irritation, the United States considers executive departures or material modifications in their contracts to be worthy of immediate disclosure. Canada does not, allowing the disclosure to come later, in the proxy after the conclusion of the fiscal year in which a severance arrangement is finalized.
TD’s Mr. Alepian said “additional compensation impacts to Mr. Masrani and others are being considered by the board and will be disclosed in our proxy circular in March.”
Last week, I participated in a question-and-answer with Globe and Mail readers about the TD scandal. “What are the consequences for the CEO for this scandal?” one reader asked. “Did he not know this was happening? How is he held responsible?”
I’m not sure, given Mr. Masrani’s future stock-option profits, that I can provide a very satisfying answer.