Executive Compensation Program Bank of Montreal (BMO)

The Board of Directors of the Bank of Montreal (BMO) is of the view that strength and performance of the people are crucial for achieving the goals of the bank. The board believes that the tool of executive compensation program could be effectively used in achieving the objective of share-holders’ value. The concerned committee has designed the executive compensation scheme on accordance with the objectives of the bank and to provide the executives stake in the long-term financial growth of the bank. In the financial year 2015 the bank has given $10,155,000 as total direct compensation which remained unchanged from 2014 and awarded $8,272,950 as total incentives to the CEO Bill Downe. Total incentive awarded was 92% of target incentives and total direct compensation was 97% of the target total direct compensation. This paper outlines the features of executive compensation program for the chief executive officer (CEO) of the bank and the important measures the bank has used to grant a certain level of compensation.

Features of the Executive Compensation Program

The executive compensation program of the Bank of Montreal (BMO) is based upon three core principles;

1) Attract and retain executive talent: properly structured compensation package helps in attracting and retaining talented professionals especially the chief executive and would motivate the chief executive and other executives to work towards fulfilling the objectives of the bank.

2)  Link compensation to the performance of the bank: The compensation scheme must be synchronized with the organization’s objectives and compensation should be related to the performance of the bank.

3) Encourage long-term interest to increase share-holders’ equity: The compensation scheme should be so designed as to make variable pay of the chief executive equity-based. Thus, the chief executive needs to excel to qualify for ownership requirements.

4) Align with risk taking: The compensation scheme should not encourage un-necessary risk taking and hence significant portion of the compensation of the chief executive is deferred.

Important Measures to Grant Compensation

The total direct compensation has two segments; fixed and variable. The fixed segment consists of basic salary, which is the compensation paid for running day-to-day operations of the business. This is paid to the CEO as fixed amount of cash. The variable segment consists of three parts, namely short-term incentive, mid-term incentive and long-term incentive. Short-term incentives are given is cash for fulfilling specific year to year business objectives. Mid-term incentives are given in the form of share units for fulfilling mid-term objectives of the bank. This is deferred incentive. Long-term incentive is focused on long-term objective of increasing shareholders’ value. If the chief executive can create substantial share-holders’ value in a long-term perspective, then the chief executive is given deferred incentive in the form of stock options or deferred share units.

The Executive Compensation program Committee compares the executive compensation of the BMO with that of two groups in order to judge effectiveness and competitiveness of the compensation program. One group consists of other four largest Canadian banks, namely Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), and Toronto-Dominion Bank (TD). In the other group, there are 10 U. S.-based mid-size banks. The peer comparison gives information for primary consideration. For secondary consideration in structuring the CEO compensation program, the committee considers the compensation for the CEOs of the Canada-based insurance companies.

The other factors that the committee takes into account while designing executive compensation program are; compensation given to CEOs of the companies listed with TSX 60, compensation program of CEOs of selected U. S. firms, the ratio between amount compensation to the CEO and that to other employees, and the Canadian median family income.