Who wouldn’t want to run a bank? Giant corner office, maybe the use of the bank’s private jet, and, best of all, a seven or even eight figure salary. Before you send in your application, though, consider some of the headaches. If employees look disgruntled, maybe it’s because their annual pay is less than one percent of yours. Good luck explaining to your institutional investors why your accrued pension benefits total a whopping $53 million (see Kenneth Lewis, CEO of Bank of America). But if those cause a headache, recent regulatory moves in major financial centers may result in a migraine. With fairness and clawbacks, as well as disclosures, in their sites, regulators are looking to make quite a mark.

Having pumped trillions of dollars into the bailout of the financial system, governments and investors around the world are paying a lot more attention to the financial services industry and the people who run it. Specifically, they’re focused on the compensation paid to the leaders of these companies and they’re asking questions. Not just “how much are they paid”, but also “what are they paid for”, and “is it too much?” Many observers and governments alike are coming to the same conclusion – there should be some rules. Thus, we examine how big banks report executive compensation today, the role being played by regulators and investors in the “say on pay” debate, and what the banks will do going forward.

The dictates and claw backs of the U.S. Pay Czar have been riling up bailed out banks across the U.S. Though much of the expressions of angst are focused on the seven institutions most immediately affected, others are in the spotlight as well. FPB Bancorp Inc and PlainsCapital Corp, two TARP-receiving private banks in the process of public offerings, have both noted the TARP and EESA related restrictions on executive pay and the Pay Czar are possible business risks. Along the same lines, the pay czar has reportedly vowed to rework the AIG bonuses that sparked outrage earlier this year. With GMAC supposedly seeking a third dose of TARP funds, it remains to be seen if most U.S. bank will get off with only a “say on pay”. Some cause for pause is that, according to Reuters, the czar has qualified his claw back powers, limiting their use to the “rare and far between”.

On the other side of the border and safe from the wrath of the Pay Czar, Canada’s nine largest banks and insurers, including the Big Five, are likewise transforming their compensation regimes. In a notably amicable move that is peculiarly Canadian, these institutions announced their intent to submit identical “say on pay” resolutions to their shareholders in 2010. By voluntarily taking the reins, these companies may be trying to avoid having the regulators step in. After all, by voluntarily adopting such a measure, these issuers don’t lock themselves in, should things go sideways. But it still leaves a number of questions on the table.

With controversy raging, fairness, rather than legalistic disclosure, is the driving force behind compensation controversies and say on pay in particular. If these controversies say anything at all about shareholders and government, it is that it’s not all about the disclosure. Neither group appears to be satisfied with knowing how much an executive gets paid, or how the numbers were calculated, but rather how “fair” that number is – and determining that will prove tricky indeed.

These changes are not occurring within a vacuum. A signal that change was afoot in the U.S. arose earlier this year, during the 2009 annual meeting season. A number of companies faced proposals that would give shareholders an opportunity to vote on advisory resolutions ratifying executive compensation. A number were approved, including those at companies such as Peoples Bancorp, CVB Financial Corp and Tecumseh Products, a manufacturer of commercial and residential compressors.

The backdrop to all of this is a series of recent regulatory moves. In late October, two major U.S. initiatives threw executive compensation back into the U.S. spotlight. First, the SEC proposed a new rule that would give shareholders in companies that received TARP funds a “say on pay” – a non-binding vote on the compensation of named executive officers. The proposed rule would implement Section 111(e) of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. CalPERS and other investors have commented favorably on the proposed rule, and the SEC reportedly plans to implement it in time for the 2010 proxy season.

Second, the Special Master for TARP Executive Compensation announced that executive pay at bailed out financial services companies would be limited. So far, the Special Master is targeting only the firms that received the most support under the government’s $700 billion TARP program. AIG and six other bailed out financial firms were ordered to slash compensation for their 25 top earners for the last part of the year, when bonuses are typically paid. The other six companies affected by the ruling are: Bank of America, Citigroup, General Motors, Chrysler, GMAC and Chrysler Financial.

Meanwhile, similar signals were being emitted across the pond in the UK. After the financial collapse Prime Minister Gordon Brown was publicly infuriated at what he called “inflated pay and reckless speculation” among many bankers. As a result, in February, he commissioned Sir David Walker to issue a report (“Walker Review”) specifically aimed at making recommendations overhauling the executive pay structures and boardroom practices of banks and other financial institutions. The report, which was issued on July 16, 2009, makes a total of 39 recommendations, 12 of which are aimed exclusively at compensation. Particular emphasis is made on enhanced board level oversight of remuneration and the extension of variable pay performance targets over a longer period of time, even up to five years.

While the Walker Review was intended to be specific to banks and other financial institutions, a July 2009 review of the Combined Code on Corporate Governance (“Combined Code”) recommends implementing many of its recommendations and extending them to non-financial institutions, so its ripples may be much wider than originally anticipated. That is because the Combined Code requires all London Stock Exchange-listed companies to report on a periodic basis how they have complied with the code or explain why they have failed to do so (“comply or explain”). So, companies essentially must implement its recommendations unless they want to field questions and receive criticism from shareholders.

Some UK companies, however, are anticipating significant changes to the Combined Code in light of the Walker Review and are accordingly making disclosures ahead of the final report, expected later this month. Resolution, for example, in is circular filed September 8, 2009, warned in relation to its proposed issue of shares in connection with its acquisition of Friends Provident Group that “[i]f implemented as described, the [Walker Review’s] initial proposals [if implemented by the Combined Code] could result in increased governance and compliance costs.”

Perhaps also taking a page from some of the Walker Review recommendations, just this week both the Royal Bank of Scotland and Lloyds announced plans to defer bonuses payments for all employees with an annual salary of £39,000 or more in exchange for an additional £40 billion in taxpayer funds. 

The say-on-pay initiative has also gained significant traction in Canada. Although regulators have chosen to remain largely on the sidelines, the voices supporting a say on pay have become louder over time. Tangible signs of movement first arose in 2008, when the Big Five and several other companies tabled shareholder proposals at their Annual Meetings urging Boards to include say on pay resolutions in future proxies. Though the resolutions failed to pass, they received support from a substantial number of shareholders (most shareholder proposals receive less than 10% support).

Three players who have been quite active in driving things forward are Meritas Mutual Funds, the Shareholders Association for Research and Education (SHARE) and the Mouvement d’éducation et de défense des actionnaires (MÉDAC), a shareholders advocacy group based out of Montreal. But many others have also supported this initiative, including the influential Canadian Coalition for Good Governance, the members of which are 41 of the largest investment funds in Canada, including the Canada Pension Plan Investment Board, Ontario Municipal Employee Retirement System and Ontario Teachers’ Pension Plan.

With the decent results of the 2008 vote, and growing support behind say on pay south of the border, they took another kick at the can earlier this year. The Royal Bank of Canada experience was indicative of how things turned out. In the proxy circular for its 2009 Annual Meeting, RBC included eight shareholder proposals, typical of proxy circulars for the large banks. Three addressed executive compensation, including one seeking a consultative vote. The others included topics such as the number of women on the Board, limits on directorships held by Board members, and director recruitment policies. While those resolutions obtained no more than 7% approval, the idea of a consultative vote on executive compensation was supported by more than 50% of the shares voted.

Indeed, all of the Big Five ended up in the same position (though TD conceded the point before the matter was even heard at its Annual Meeting). Other large Canadian companies faced the same issue, including insurers Manulife and Sun Life Financial, as well as TMX Group, owner of the Toronto Stock Exchange.

The fairness objective increases pressure in the environment of the already-heightened focus on compensation disclosure – and here too, quite telling different approaches exist north and south of the border. Driven by U.S. and Canadian mandates toward Compensation Disclosure and Analysis, banks have started to come clean as to their compensation approaches. How clean, however, varies, and there are quite telling differences in approach between banks on both sides of the border.

As an interesting side note, while the new Canadian reporting requirements apply only for financial years ending on or after December 31, 2008, the “Big Five” – who have October 31 year ends – adopted most of these requirements early. The Big Five are Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), and Toronto-Dominion Bank (TD). As a result, of their actions, their 2009 Proxy Circulars include most of the information (if not all) that regulators will be expecting from other Canadian issuers in future, thus allowing for a comparison of disclosures made by U.S. and Canadian banks under the “new” regime.

The most recent proxy disclosures by CIBC and Bank of America appear quite similar – at least at first glance. CIBC dedicated 30 pages to executive compensation, while Bank of America included 21 pages in the Circular for its April 29, 2009 Annual Meeting of Shareholders. Yet a brief examination of the two circulars highlights significant differences. Bank of America apparently uses no formulas or weightings in determining the compensation of its senior executives. Indeed, it does not even disclose what companies are used as benchmarks for compensation.

CIBC, on the other hand, specifies benchmarks for the CEO and CFO, as well as for other executives. It breaks down how corporate, business unit and personal performance are weighted for each executive in determining their total compensation. Also, key financial objectives for the year past are identified, and a comparison to actual results is provided, sometimes resulting in fairly brutal conclusions.

An examination of two other Circulars, those for JP Morgan and TD Bank, highlight similar (though smaller) differences in reporting. JP Morgan specifies benchmark companies, identifies the qualitative and quantitative criteria utilized, and discusses some of the company’s achievements over the prior fiscal year. Again, the Canadian bank provides more detail around how compensation is determined – it quantifies the performance measures, rather than simply naming them. TD also includes some interesting (and apparently voluntary) disclosures, including a table showing a “cost of management” ratio.

In all four cases, the regulatory requirements appear to be satisfied, or exceeded. All of the circulars provide the specifics one would expect about the “what” of compensation – detailed tables, etc. But the Canadian banks seem more willing to delve into the “why” (and perhaps “how”), by providing greater specifics. This may speak to differences in the disclosure perspective of U.S. banks versus their Northern counterparts, as the exclusion of certain information is permitted where companies view disclosure as prejudicial to their interests.

The say-on-pay initiative is perhaps most interesting because of the direction it suggests for future developments in corporate governance. Will shareholders seek advisory votes on other matters in future? While the notion may be appealing to some, the reality may be somewhat more troublesome. After all, getting ten directors to agree around a table is one thing. Expecting thousands of shareholders (or even dozens of funds) to agree is another. Counsel will no doubt be keeping a close eye on developments in this area, both to assess the impact on compensation and disclosure and to consider where current models of corporate governance are headed.