CEO Pay Tied to ESG Sets Canadian Banks Apart From the Crowd

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Canada’s six largest banks have all added ESG components to their chief executive officers’ compensation frameworks, putting them in a small minority of companies that tie executive pay to such measures.

How environmental, social and governance matters affect pay varies by firm, as does the percentage of compensation involved. Still, the Canadian lenders stand out because only 9% of the 2,684 companies in the FTSE All World Index tracked by researcher Sustainalytics in a 2020 study had tied executive pay to ESG.

The moves, disclosed in the banks’ proxy circulars earlier this month, put them at the front of a push by activists and investors to establish incentives for actions like reducing emissions and diversifying workforces. At Canadian Imperial Bank of Commerce, the impetus to make changes also came from within, said Sandy Sharman, head of the bank’s people, culture and brand team.

“We didn’t want this to be something that we just report on and it’s a check-box,” Sharman said. “We actually wanted to drive accountability, and we also wanted to put areas in there that we wanted to improve. You need that healthy tension to move up your game.”

BankHow ESG is tied to executive compensation
Royal Bank of CanadaClient satisfaction and “strategic measures like climate change, employee satisfaction, and diversity and inclusion” are part of the “risk and strategic” performance segment, which accounts for 30% of the short-term incentive program.
Toronto-Dominion BankESG-related objectives regarding “customers, colleagues, community, environment and governance” are a component of the “customer experience & other ESG metrics” category, which accounts for 20% of the annual business metrics portion of executive pay.
Bank of Nova ScotiaMetrics such as “customer score, employee engagement, culture, diversity and inclusion, and strong governance” are included in the “customer” category, which makes up 20% of the business performance factor of executive pay.
Bank of MontrealPerformance on the company’s sustainability scorecard -- which includes measures such as carbon-related assets, total GHG emissions and percentage of women on its board -- is part of the “strategic objectives” that account for 25% of variable pay.
Canadian Imperial Bank of CommercePerformance on the company’s ESG and customer experience indexes -- which include commitments to sustainable finance, climate footprint, employee engagement and client experience -- accounts for 35% of the business performance factor portion of the executive variable pay plan.
National Bank“Commitment to the community and incorporation of ESG criteria” is one of the factors used to determine CEO pay.

Canada overall is ahead of the curve, with 16% of its companies studied by Sustainalytics reporting relatively transparent ESG criteria tied to pay. That trails only Australia, at 20%.

“From an investment perspective, as well as from a corporate perspective, it’s becoming clear that putting more onus on executives to steer their companies toward a lower-impact future on those types of issues, including climate change, is more and more important,” said Martin Vezer, the Sustainalytics researcher who led the study.

Linking progress on ESG to pay can prompt firms to make substantive changes rather than just image-polishing moves, said Harlan Zimmerman, senior partner of activist investor Cevian Capital AB, a Stockholm-based firm with about 12 billion euros ($14 billion) under management.

“It enables shareholders, through the existing mechanisms of remuneration consultation, to engage with boards,” Zimmerman said in an interview. “Because pay plans are subject to ‘say on pay’ votes, shareholders are in a strong position to influence the ESG targets.”

The S&P/TSX Commercial Banks Index has risen about 15% this year, compared with an 8.1% gain for the broader S&P/TSX Composite Index.

CIBC’s plan goes beyond the executive suite and affects variable compensation for the majority of the company’s employees, Sharman said. Individual executives often will have additional ESG measures built into their pay plans as well.

At Toronto-Dominion Bank, large investors have been bringing up ESG more frequently, and that has played a role in policy-making. The bank’s ESG pay plan is tied to its public commitments, such as a goal of achieving net-zero carbon-dioxide emissions from operations and financing activities by 2050, said David Fellows, Toronto-Dominion’s senior vice president of human resources.

“This isn’t a once-and-done,” Fellows said. “We’ve been making progress over a number of years, and we’ll continue to evolve our approach.”

©2021 Bloomberg L.P.

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