Infrastructure Pay Update: Rebalancing Value

In a previous article, we discussed how banks largely “back into” funding incentive pay for their Infrastructure or support groups. Many firms use hard financial metrics to measure performance and create incentive funding in their revenue generating areas, and only after these obligations have been satisfied, divide up the balance for the Infrastructure groups.

What Does the Fed Really Want? Practical Ways to Meet the Fed’s Guidelines

For the better part of two years the Federal Reserve Bank and the nation’s largest banks (also known as “LCBOs”—Large Complex Banking Organizations) have been trying to come to agreement on the best way to minimize the possibility that incentive plans would encourage executives and employees to put the bank’s balance sheet at risk for their own personal gain. In short, they want to ensure that compensation is not a contributing factor to future financial crises.

How Motivated Is Motivated Enough?

Prior to the financial crisis, most people outside of the sector likely never gave compensation and incentive plan design a second thought. As the crisis unfolded and the government set out to identify the contributing factors, however, evaluating compensation practices became an important exercise for regulators and banks. The government’s point of view was that banking organizations often rewarded employees for increasing revenue or short-term profit without adequate regard for the risk those activities posed to the organization and the financial system at large.

Shareholders at the Top 50 Say “Yes” on Pay

​If investors are dissatisfied with executive pay, voting results during this proxy season are certainly not reflecting that sentiment. An overwhelming majority of shareholders at the top banks gave their approval on executive pay. However, shareholders have shown a desire to have ongoing input into the pay decision-making process by strongly supporting annual say on pay proxy votes.

What Does the Fed Really Want? Horizontal Review Update

All financial institutions have been besieged by a plethora of new rules coming from domestic and, in many cases, foreign regulators. The volume of compliance work is only outweighed by the collective concern about what these regulations will do to profitability, compensation and shareholder return. At the same time, the Federal Reserve’s (the Fed) position is quite simple and reasonable—they want to prevent compensation from contributing to a future financial crisis.

Proposed Rules: Incentive Compensation Arrangements Under the Dodd-Frank Act

The United States federal regulators are proposing rules (the “Rules”) to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) addressing incentive compensation arrangements with a focus on prohibited and excessive compensation.  On Monday, February 7, 2011, the FDIC published their version of the proposed Rules.  This client alert focuses on both the proposed rules as published, as well as specific areas where the regulators are asking for comment.  

Important CD&A Reminder: Use of Non-GAAP Performance Measures

In July of last year, the SEC staff issued a Compliance and Disclosure Interpretation (C&DI) covering the disclosure in the CD&A of "non-GAAP" financial measures. When the non-GAAP measure is disclosed as the target level of performance for an incentive plan, disclosure must be provided as to how the number is calculated from audited financial statements. However, if a non-GAAP measure is disclosed in the CD&A and is not a target measure (for example it is used in the CD&A or other parts of the proxy to explain the relationship between pay and performance or justify certain levels or amounts of pay), then disclosure of the non- GAAP measure is subject to the more onerous requirements of Regulation G and Item 10(e) of Regulation S-k.

Life after TARP

In 2010, we saw a number of firms repay their TARP funds through capital raises or retained earnings. In addition, for banks under $10 billion in assets the Small Business Lending Fund now provides an opportunity for the best performing TARP banks to swap their TARP capital and be unencumbered by the TARP compensation restrictions. As we look to 2011, we expect both these trends to continue and the pool of TARP banks to shrink.

Update on CRDIII Implementation: Part 2 Convergence of EU Regulations

On 10 December 2010, the Committee of European banking Supervisors (CEBS) published the final guidelines on implementation of the Capital Requirements Directive (CRD)III remuneration regulations in the EU and on 17 December, the UK Financial Services Authority (FSA) published the associated Revised Remuneration Code.

Brazil Update: A Superheated Talent Market

As the world economy struggles to gain its footing, Brazil is in the midst of a new “golden age”. Having overtaken the United States and tying China as the most favorable country for investments as well as playing host to the Olympics and the World Cup in the near future, the stage is now officially set for Brazil to further cement itself as a prominent world player.

Update on Capital Requirements Directive III (CRDIII) Remuneration Guidelines

The long awaited guidance from the Committee for European Banking Supervisors (CEBS) was published 8 October 2010. The guidelines are designed to help institutions and regulators interpret and implement the remuneration aspects of the EU CRD III legislative resolution on the implementation of the Basel III agreement on solvency. In short, these guidelines will direct institutions on how they can compensate a significant number of their most crucial employees. As was anticipated, the guidelines are strict on the conditions and structure of variable pay from a risk management and solvency perspective.

The Perils of Pre-Pays

Over the years, some companies have actively managed the timing of incentive compensation in anticipation of tax rates changing. While there has been a fair amount of speculation around this recently, to date, there has been more discussion than any real action on this front. 

Infrastructure Bonus Pool Funding:

During the last 12 months, pay structures for bank staff have changed dramatically. There have been significant increases in base salaries for some firms and changes to the delivery of incentive compensation. The decision making for these changes has been directed at perceived risk takers in the front offices of banks. However, these changes have also impacted the back offices, i.e., the infrastructure functions. As firms are now beginning the planning process for year-end compensation, should they also reassess the way that the bonus pool for infrastructure functions is calculated and distributed?

The Psychology of the Take-Away

As firms consider ways to deliver pay that are motivating, conform to regulatory guidelines, factor in multi-year performance, and discourage risk, there has been increasing thought and energy devoted to expanding clawbacks, holdbacks, performance hurdles, etc. In some cases these provisions are largely window dressing. Most clawback provisions are linked to employee malfeasance or conduct that is deliberately detrimental. When you consider the recent credit crisis, very little of the conduct would have actually triggered any of these provisions. 

Remuneration Governance in the Gulf

It is a generally accepted belief that remuneration and corporate governance issues may have contributed to the recent financial crisis. Therefore, many countries’ regulatory bodies have encouraged stronger remuneration governance especially in financial institutions. The latest remuneration governance principles set out by authorities in Bahrain, the Kingdom of Saudi Arabia and the United Arab Emirates (UAE) have specifically addressed the issue of Remuneration Governance.

Refining the Employee Value Proposition

Over the last 18 months, a number of forces—regulatory reform, firm economics, share availability and public perception—have forced large-scale shifts in the form, level and mix of compensation in financial institutions. Many of these changes were made in haste and out of necessity. As competition for talent heats up, firms are under pressure to define, benchmark and optimize what they use to attract, engage and retain employees―their Employee Value Proposition.

Compensation Risk: Regulatory Update and Risk Review Process

To reward, to retain and to motivate – it is a phrase that often sits at the core of a compensation program philosophy. To achieve these goals, companies use a wide array of compensation vehicles. Among them, incentive programs are the most relied upon component of total reward used to motivate and encourage alignment of individual and organizational goals.

2010 Compensation Plans: A Year in Flux

Mandatory deferral plans were never particularly interesting. Firms were preoccupied with being “competitive with the street”. There wasn’t a great deal of variety and innovation. Employees griped about having some portion of their bonuses deferred, and then often sat back and watched the value of their awards escalate. Of course, that hasn’t always been the case in the last couple of years.

2009: A Year to Forget? Are There Lessons to Be Learned?

By all accounts, 2009 was a year that most of us want to forget. The credit crisis came home to roost, government intervention and regulation reached an all-time high, executives in general and bankers in particular were vilified, and so many things that we took for granted were turned upside down. But, from all this, are there lessons that we can learn?

Country Specific Compensation Regulation

Given the multitude of regulatory agencies that global financial institutions have to deal with, we thought it would be helpful to summarize the latest requirements as we understand them. The table below is designed to give you an update "at a glance". It is not comprehensive and only covers the major economies. We will update this as we become aware of changes.  

The Changing Landscape of Strategic Cost Management for Insurers

The global financial crisis of 2008 - 2009 has spurred a renewed focus on operational efficiency and Enterprise Risk Management (ERM) not only for (re)insurers but for all organizations. With companies facing the toughest market conditions and economic climate since the Great Depression, challenges and questions loom around every corner. The turmoil we have experienced, and continue to encounter, coupled with an abundance of new and proposed regulatory reforms, presents firms with daunting challenges - and significant opportunities.

What Do They Mean By Unreasonable Risk?

Virtually every regulatory body has come out with some pronouncement or other admonishing financial institutions to curtail compensation programs that “encourage the taking of unreasonable risk.” Two parts of that statement are problematic.

Financial Services Authority: Reforming Remuneration Practices in Financial Services

Regulatory bodies and industry associations across the world have been focused on incentive compensation practices in order to assess their impact on the recent financial crisis and more importantly to identify ways to prevent future problems. On August 11, 2009, the United Kingdom’s Financial Services Authority (FSA) published a policy statement for regulating remuneration policies in the UK. This was preceded on July 13th by a report from the European Commission. The overall objectives of the policy statement and recommendations are to sustain market confidence and promote financial stability. Most regulatory and industry organizations have concluded that by removing incentives that encourage inappropriate risk-taking, there will be greater stability in the financial markets.

Starting Over: The Rebuilding of Executive Pay Structures in Financial Instituations

For a number of reasons—government scrutiny, shareholder backlash, undernourished balance sheets—bank management and boards are hearing the call to reform executive pay. Many are convinced that while pay did not cause the financial meltdown, it certainly exacerbated the problem. This has lead to a genuine interest in transforming executive pay. The devil, of course, is in the details. 

Job Alignment Opportunities

​In the current market environment, there are numerous opportunities for human resources and compensation professionals to continue to add value to their organizations. While a return to more robust revenue levels would obscure a multitude of other problems, lean times force organizations to work smarter and more efficiently, and HR and compensation professionals are uniquely positioned to lead.

Salary Increases: Separating Fact from Speculation

There is a lot of noise in the market and in the press that seems to suggestthat many banks and financial services firms of all types are increasing salaries broadly – a sentiment that is reinforced by those lobbying for such action. The topic is emotionally charged and like most market events, the perception may often create its own reality.

Considering Salary Increases

​There has been a lot of talk about increasing salaries in financial institutions. This is particularly surprising given that relative performance is, for the most part, declining.

Can We Please Stop This Craziness Now? The Case Against Punitive Taxes on Banker’s Pay

It was a big week in Washington—lots of hoopla and press and plenty of opportunity to take pot shots at the “fat cats” on Wall Street. But, it’s a new week and calmer heads must rationally get down to the business of saving our financial system.

The Brave New World of Executive Compensation

This is a year like no other in the world of executive compensation.  Everything has turned on its head and the challenges for professionals in the field are staggering.  The bad news is that things will never again be like they were before and we are going to have to get used to it.  The good news is that we have an opportunity to, within very real constraints, reinvent executive compensation practices in this critical industry.

2009 Compensation Plans: An Early Look

In the 2008 / 2009 bonus process, we have seen significant changes to deferral plans, most notably, substantially more compensation deferred. Employee perception is a mixed bag: with stock prices depressed across the market, this may be a time when employees see more potential upside in performance driven / long-term awards; however, in some cases, employees have seen historic awards lose value, and may be skeptical as to their value proposition.

 

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