Business

Bay Street bonanza

Million-dollar bonus cheques are no longer a rarity

JENNIFER WELLS December 30 1996
Business

Bay Street bonanza

Million-dollar bonus cheques are no longer a rarity

JENNIFER WELLS December 30 1996

Bay Street bonanza

Million-dollar bonus cheques are no longer a rarity

Business

BY JENNIFER WELLS

The man on the phone works in the investment business, for one of the big bank brokerages that this year are ringing up record profits. He makes a lot of money. He will not say how much. But the money issue—the money generated in the business in which he works—has got him thinking. “Our industry is grossly overpaid,” he says. “Spectacularly overpaid.” This strikes him particularly when he talks to friends who work in what he calls the “real world,” as opposed to his world, the one driven by what he calls financial asset inflation. The last time he fessed up about his compensation to a longtime friend, he self-consciously lopped 40 per cent off the figure. The friend was nevertheless appalled at the huge sum, so he has not said a word on the subject since. Others can no longer hide. Since 1993, the top five earners in publicly traded companies have been compelled by Ontario securities law to report their individual compensation. “I wonder if it does the public any good to know,” muses the reticent fund manager. “Maybe it just breeds greater discontent.”

Maybe so. In mid-December, the Canadian Imperial Bank of Commerce released its management proxy circular, in which it disclosed that John Hunkin, president of CIBC Wood Gundy, the bank’s investment dealer, took home $4.9 million. All but $300,000 of that was paid out in the form of a bonus. The bonus pool is drawn from Gundy’s pretax profits, which last year reached $528 million, more than double those of the previous year. There are few other specifics: Hunkin’s bonus was ultimately awarded at management’s discretion. It is impossible to see what specific contributions were made to justify the fatness of the pay purse. It has unarguably been a spectacular year for Bay Street. From mergers and acquisitions to initial public offerings and plain old equity deals, market players are experiencing their fattest revenue year ever and very likely a record year for profits, too.

But Hunkin’s reward was not record-breaking. Two years ago, Lawrence Bloomberg, head of securities firm First Marathon Inc., reaped $6.9 million. This year, Brian Steck, chairman of the Bank of Montreal’s investment banking division, Nesbitt Burns Inc., received $3 million in salary and bonus. Richard Thomson, CEO of Toronto-Dominion Bank, took home a relatively modest $2.8-million total. Bay Street is now eagerly awaiting the release of performance rewards from RBC Dominion Securities in January to see whether anybody will top Hunkin. What will not be disclosed are the incomes of nonmanagement types—the hot young traders, for example, who receive seven-figure bonuses with which to purchase the latest model Porsche.

The whopping rewards serve once again to emphasize the growing financial disparity between those who are on top and those who are not. A common Bay Street defence is to compare compensation levels in Canada to those in the United States, where the pay has always been much higher. Take Morgan Stanley. In 1995, chairman Richard Fisher and president John Mack each took home bonuses in excess of $5.4 million, on top of half-million-dollar salaries and stock worth a couple of million dollars. Given that 1996 has been a much better year, the top brass will surely receive multiples of last year’s rewards.

The second line of defence is that these pools of compensation are variable, that the pay packets will wither in bad years and that big cheques are the just reward of the entrepreneurs and risk takers. “If you’re not working in the results world, you’re not going to get paid in the results world,” one Bay Street broker says clinically.

But by definition every job creates some “result.” The difficulty, says Diane Gerard, a compensation specialist at Hay Management Consultants in Toronto, is fixing the “line of sight” between employees and their corporation’s objectives. But Gerard says it is being done. She recently advised a company whose employees could not equate their particular jobs with the profits of the company. “Individ-

CHAIRMAN, NESBITT BURNS INC. $3 MILLION

uals couldn’t see how their performance was linked to profit objectives,” she says. So Gerard changed the plan, linking bonuses to such performance measures as speed to market, price and quality.

Such corporate plans are, says Gerard, seeing a growth explosion. It is still hardest, she says, to make the fconnection between performance and variable compensation for those employees at the lower levels. Companies that do reward employees in this way would generally pay a year-end top-up of about five per cent of salary, Gerard says.

They do this at the banks. At the CIBC, for example, the company has what it calls its TEAM Dollar$ Plan, which applies to all bank employees, including executives. The rewards are based on two objectives, the first being the bank meeting its own return-on-equity targets, the second being an assessment of the employee’s performance. According to the bank, when employees see their incentive

payouts on Dec. 31, the “vast majority” will see bonuses, in cash, of between four and 20 per cent of salary.

Not exactly a windfall of Hunkin proportions. But the CIBC also offers a share purchase plan allowing bank employees to invest between one and six per cent of salary in CIBC shares, depending on years of service and seniority. The bank kicks in an additional amount equal to 50 per cent of the employee’s contribution.

There’s nothing new in that kind of plan. Last week, the Chase Manhattan Corp. in New York City announced a stock option plan for all Chase staff, granting each fùll-time employee 450 options in Chase common stock, to be distributed equally over three years. The

options are exercisable when the company’s shares trade at $110 (U.S.) or more for five consecutive business days (Chase shares in late December were trading in the mid-90s). “There really is a link between your own individual performance and the performance of Chase as a whole,” said Chase CEO Walter Shipley. “The more successful you become in serving our customers and supporting your colleagues, the more successful Chase becomes financially.”

The Chase example is notable for its equitable distribution, all the more key when salary increases have been negligible. The lack of equity in most incentive plan offerings comes clear in numbers tracked by the Hay Group. In the industrial sector, predictably 100 per cent of top executives participate in short-term incentive plans. That number falls to 91 per cent for senior managers, 75 per cent for middle managers, and a mere 45 per cent at the clerical and technical level. The big banks appear to have done better than that. The

Bank of Montreal currently extends its incentive plan to 81 per cent of its employees and will extend it to all employees next year. The bank will not say what level of bonuses workers can hope to see on average in their pay packages this year.

“Bonus” is a misnomer. And almost anachronistic. Diane Gerard thinks that’s probably a good thing. Tying incentives instead to prestated performance goals eliminates the vagaries of executive largess, the “let’s be nice and give people a bonus” attitude. Gary MacDonald, vicepresident of marketing for Kingston Technology Co., agrees. “Most companies tend to rethink their commitment when their profit number gets to be a big number.”

Kingston, by contrast, has never backtracked on its generosity to employees. Up until last month, few in this country had heard of Kingston, which makes its home in Fountain Valley, Calif. Kingston makes computer memory modules, and has been in business for 10 years. Founded by John Tu and David Sun, the company has always proclaimed its devotion to people first, products second and profits third. Employees have always received a distribution of five per cent of pretax profits, quarterly. The employee turnover rate is less than one per cent. Everyone sits in identical cubicles with 3V2-foot walls, even Tu and Sun.

The founders’ philosophy has been to share a percentage of the wealth, no matter how big the wealth gets. Last month, it got very big. Tu and Sun sold control of the company. Of the sale price, $135 million is being divvied up among the company’s 523 employees, who will be ranked on performance and years of service. The average salary at Kingston is $75,000. In late December, MacDonald was working with the bosses, fine-tuning the rewards. Good employees who have been with the company for five years will do very well, says MacDonald. When the cheques are handed out on Dec. 31, those workers could collect as much as $300,000 apiece. Now that’s a bonus. □

ESIDENT, CIBC WOOD GUNDY $49 MILLION

CEO, TORONTO-DOMINION BANK $2.8 MILLION