You may be among the relatively few who get some sort of year-end bonus when yourcompanydoes well. 

Or you may be among the even smaller number who get incentive compensation whenyour company doesn't do particularly well at all. If so, you are probably an executive atone of Canada'sbiggestbanks.

Here's the concept: Every year, banks give executives millions of dollars' worth of"performance share awards" - shares, or some sort of "units" that represent shares.Then, over a period that's typically three years, the bank measures its performanceagainst itspeers.Thatdetermineshowmuchofthestocktheexecutive getsto keep.

It sounds great in theory, and it beats stock options, which can rise in value by themillions even when astocklags itspeers.

But theproblem isthatthebankshavesetupplans wheretheycanunderperformandtheexecutiveskeep nearlyallthe share awards anyway.

An example: Royal Bank of Canada looks at its total shareholder return over a three-year period. The executives get their full awards even if the bank finishes in the thirdquintile of performance versus peers. As you'll remember from math class, each quintilerepresents one-fifth of the group, so the third quintile ranges from better than 60 per centof peerstobetterthanjustabout40percent.Mediocrity, in other words.

Worse: The award is reduced by just 10 per cent for finishing the fourth quintile. Finish inthe bottom quintile and the award is reduced by just 25 per cent. (It works in the otherdirection:First-quintile performancebooststhe award by25 per cent.)

At RBC, at least, there's a provision that the bank will pay out nothing in theperformance-share plan if it fails to hit a three-year return-on-equity target. However,RBCsetthereturnonequity hurdleat10percent;thebanklasthad anROEbelowthatlevelin 1993 and ithasn'thadan ROEbelow14percentsincethen.

At Toronto Dominion, there isn't even that sort of fallback. The minimum payout in theperformance-share plan is 80 per cent, and executives get 100 per cent of the award forbeingaverage intotalshareholderreturn.

Bank of Nova Scotia's plan uses both shareholder return and return on equity; half ofexecutive rewards depend on each measure. The company doesn't disclose what levelof ROEmightresultin azeropayout.

However, the portion of the plan based on total shareholder return allows for 100 percent payout if the bank is at the median; performance at or below the 25th percentile ofthepeergroup stillgivesthe executivesa50percentpayout.

CIBCuses ROEversuspeers asitsperformancemetric;theminimumpayoutis75percent,regardless ofhowfarbehind CIBCfinishes.

And Bank of Montreal? In a way, they solve this problem by determining the size of theperformance share award on the basis of the prior three years' total shareholder return,adjusting the target up or down by as much as 20 per cent. Then the executives get thesharesattheend ofthree yearsiftheystay.

Now, to be fair, Canada's big banks are not the exclusive practitioners of thiscompensationphilosophy.

Similar issues with "performance" shares can be found across industries and acrossborders.

Andhavingsomeperformancemetricisbetterthanthebanksmakingsimilarlysizedstockawardsthatexecutives getmerelyforsticking around.

The fact remains, however, that these plans are structured so that the bank pays out halfto three-quarters or more of these multi-million-dollar awards even if it is below-averagein the performance metric. I asked the banks a real-world question foreign to the world ofexecutive compensation: Why should any awards be granted if the bank has below-averageperformance?

The banks' answers, as you might expect, involved a lot of talk about retention,motivation and aligning compensation with shareholders' interests. And some also notethat since the awards are linked to the share price, if the stock price falls, so does thevalue oftheawards.

Allof them haveamurkyprovisiontoscalebackawards incaseofsignificantfailures.

Examples: RBC allows for adjustment if "there has been a material downturn in financialperformance or a material failure of managing risk." CIBC says its board can use a"performance claw back" provision to reduce payments in case of "unexpected losses."TD's compensation committee has the right to adjust the awards downward - or upward -by20 percent"basedonareviewoftheriskstakentoachieve businessresults."

However, TDandScotiaalsoofferedanotherexplanationforthestructureoftheirplans.They argue that if there were the potential for the awards to go to zero, the executivesmighttakeontoomuchrisktohitthetargets.

"If this portion of compensation regularly went to $0 because it did not meet a certainthreshold," says TD spokesman Stephen Knight, "we would create risk ... that executiveswould be incented to take actions that were not in the long-term interests of the bank inordertomeetthethreshold."

Toavoidrisk,it seemsthebankshaveconcludedthatit'sbettertoofferafloor levelofpay -in themillions-torewardmediocrity.

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REWARDINGTHECEOS

How reliant are Canada's big five banks on performance-based share awards?According to the banks' proxy circulars, they gave out just over $56-million in awards totheir top-paid execs, or roughly one-third of their total direct compensation. Here's whattheCEOsgot:

Bank	CEO	Shareawards	Totalcompensation
Bank ofMontreal	WilliamDowne	$4,000,000	$11,420,242
Scotiabank	RichardWaugh	$3,858,000	$10,617,196
CIBC	GerryMcCaughey	$1,920,000	$10,601,000
RoyalBank	GordonNixon	$5,137,500	$11,171,129
Toronto-Dominion	EdClark	$5,210,010	$11,380,730

Required:

In your own words, discussthe above article in thecontextof therelevantmaterialthat was covered during the Contemporary Issues in Accounting courseyouarenowtaking.