It’s not a huge step, but it’s hugely symbolic: Royal Bank of Canada says it has begun considering how much lower-ranking employees are paid when it sets salaries for its CEO and other high-placed executives.
Banks have been facing increasing pressure from shareholders and activists to bring executive compensation in line by factoring in so-called “vertical metrics”—comparisons of what average or median employees at the same company earn—so industry-watchers are pleased to see signs of change.
But it may seem surprising to some that the bank adopted this new approach during 2013—and then awarded CEO Gordon Nixon a record $12.7 million in compensation.
RBC won’t say how the vertical ratios are being used, so it’s hard to gauge their actual effect. Still, shareholders who’ve pushed for companies to close the pay gap between CEOs and employees are calling this a positive first step.
Robert Walker, vice-president of ethical funds and ESG Services at NEI Investments, says banks are recognizing the need for fair compensation.
“It’s good to see they’re taking this seriously,” Walker told me after the new practice was disclosed in RBC’s latest proxy circular to shareholders. Institutional Shareholder Services, meanwhile, called it ”a ground-breaking first step in the Canadian executive compensation landscape.”
NEI filed shareholder resolutions last year with five of the largest Canadian banks calling for them to consider vertical ratios and assess the risks of horizontal benchmarking —setting salaries by comparing what CEOs at rival banks are paid, a practice that some shareholders argue has led to skyrocketing compensation packages. (All the banks paid their CEOs in excess of $10 million in 2012.)
NEI withdrew its resolutions after the banks agreed to commission an independent study on the issue, the results of which were published in December. The study, conducted by Meridian Compensation Partners, concluded that horizontal benchmarking was acceptable, but suggested that vertical metrics ”can provide additional context to assist decision-making.”
“RBC has taken a first step on vertical metrics, voluntarily, and I think it deserves a lot of credit for taking the lead,” said Walker, though he adds that NEI plans to continue discussing the issue of compensation with the bank to push for more disclosure about how vertical metrics are being used.
Vertical metrics don’t necessarily offer a complete answer to the executive compensation conundrum, according to the Meridian report. Companies that have tried limiting CEO-to-worker pay ratios include Ben and Jerry’s, Whole Foods and furniture manufacturer Herman Miller. The ratios they targeted ranged from 7:1 to 20:1, but all of them ended up revising their numbers upward after competitors tried luring executives with the promise of more money. But Walker says horizontal benchmarking poses significant risks, and can lead to problems like low employee morale and income inequality, which the Meridian report on compensation didn’t address. (One recent report on compensation at Canadian banks calculated the CEO-to-employee ratio at roughly 135:1 in 2012.)
“This is a start,” Walker said. “We’ll be watching to see how it puts the brakes on compensation.”