TORONTO (Reuters) - A move by the heads of some of Canada's biggest banks to give up millions of dollars in pay is a sign of things to come for Corporate Canada, faced with the dire state of the economy and markets.

The gesture, combined with indications of a deepening recession and US President Barack Obama's efforts to cap compensation at faltering financial firms south of the border, points to smaller pay packets for Canadian executives in general in 2009.

Such a move will be welcomed by pension funds and other investors, who have complained for years about excessive pay. While the situation is not as egregious as in the US, rewards for Canadian chief executives still too seldom match performance, fund managers contend.

"Most investors are quite comfortable with executives making large amounts of money when the company does extremely well," said Stephen Griggs, the executive director of the Canadian Coalition for Good Governance, which represents a powerful group of institutional investors who manage about C$1.4 trillion ($1.1 trillion) of assets.

"But when the company does not do well - for whatever reason, whether it's the executive's fault or not - that compensation needs to be scaled back quite considerably."

Big paychecks for CEOs were back in the news this month when Obama took on bailed-out Wall Street firms, setting a $500,000 annual cap on pay for top executives at companies receiving taxpayer funds and tapping popular anger over financial-sector excesses.

Taking note of such sentiment, and citing the bad economy, the heads of Royal Bank of Canada and Bank of Montreal said just days ago that they would give up a total of almost C$10 million in mid-term and long-term compensation.

Royal Bank CEO Gordon Nixon said he thought the move was right "in light of the current state of global markets and the challenges faced by so many", while BMO chief Bill Downe said his decision was made as "a result of my reflection upon the current economic environment".

Some considered the decisions ironic given that Canadian banks, recently ranked the world's soundest by the World Economic Forum, were not involved in the aggressive lending that led to massive losses south of the border.

A more frequent target of criticism has been auto parts magnate Frank Stronach, the chairman and former CEO of Magna International. He was paid more than $40 million in compensation and consulting fees in 2007, according to company documents. During that year, Magna shares fell about 16 percent.

But banks in particular - as well as their CEOs and the pay they receive - are in the spotlight because many investors view US financial institutions as being responsible for the economic crisis, said Fiona Macdonald, who heads the executive compensation practice at Towers Perrin Canada.

The decisions by Canadian bank CEOs to part with some of their compensation "will send a message of leadership and moderation", Ms Macdonald said. This message is expected to resonate with corporate boards across Canada.

Many executives have already seen paper losses mount as the spiraling economy drove large losses for the Toronto Stock Exchange's main index, which has fallen some 40 percent since June.

Depressed share prices mean that many of the stock options that CEOs already received as part of their compensation are under water, and can't be exercised at a profit.

Compensation experts say it will be tough for a board of directors to justify higher pay for a chief executive when the shares of that company have tanked, also leading to losses for shareholders.

Many companies are still figuring out how much their top executives will be paid in the coming year, but options grants are likely going to head lower across Corporate Canada, said Michael Thompson, a national partner and specialist in executive compensation at Mercer in Toronto.

He expects most CEO base salaries to stay flat, while other employees will see increases of less than three percent. "That's an example of how tough this market is," he said. "This is the first time that I can recall in my career where a large number of companies are going to set performance targets for next year which are lower than what they actually achieved this year."