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.

Troubled Assets Relief Program (TARP)

Since its enactment, the Emergency Economic Stabilization Act of 2008 (EESA) has required that financial institutions participating in the Troubled Assets Relief Program (TARP) accept certain conditions for executive compensation and corporate governance for the period during which Treasury holds an equity stake.

Addressing Underwater Options: Measured Responses to a Contentious Problem

The credit crisis of 2007 and 2008 has resulted in severely depressed stock prices for the majority of large financial services firms, leaving their executives and employees holding underwater options (an employee stock option with an exercise price greater than the fair market value of the underlying company stock). Many executives have lost a significant portion of net worth based on the decline in the value of their holdings.

First Quarter Optimization

After working harder than ever, in the most stressful year-end environment any of us have seen, it would be nice to say that we can coast a bit in the first quarter of 2009. But we can’t – there is still much work to be done.

View From the Top: What Should We Do About Executive Pay?

Boards and senior leaders of financial institutions from around the world are struggling to decide what to do about pay this year-end, and time is running out. After an impressive run of staggering business results and pay to go with it—everything came tumbling down. Now is the time that compensation/remuneration committees must decide how and what to pay top executives this year. While there are few benchmarks to guide these decisions, there are many loud and conflicting voices expressing opinions from the sidelines. Traditional tools like surveys, payout ratios and market trends provide useful intelligence, but there is even more to consider.

Stemming the Tide of Title Inflation

While some may look at title inflation as a statistical curiosity, or a “soft” issue, and not a legitimate business concern, we have seen compelling evidence to the contrary. McLagan works with our clients to manage this problem out of their organizations through benchmarking title ratios, defining promotion criteria and improving title processes.

So What Should We Do Now?

​We have spoken to hundreds of firms over the last 60 days and they are all asking—“so what should we do now?” Existing executive compensation programs won’t/aren’t working and executives’ net worth has declined dramatically. There is the very real prospect of zero bonuses, underwater (drowning) options and performance plans that don’t have a prayer of paying out now or in the foreseeable future.

Pay Pressures

As 2008 progresses, and the banking / capital markets business shows limited signs of bouncing back, firms are struggling to think of ways to deliver a reasonable level of compensation. To some degree, this is a problem that is being carried forward from 2007, as many firms did not adjust pay levels downward in a way that corresponded to business results. Payout ratios, which have largely been a constant for mature businesses, increased in unprecedented and unsustainable ways.

Where Are The Villains Now?

In this current crisis, pain is widespread and where there is pain there is a search for villains. As a result, there is likely to be broad and deep investigation into Wall Street’s compensation plans. The outcome of this work could be the most significant shift in the compensation philosophy and plans since firms went public. It is clear that regulatory bodies are taking a hard look at this topic at this very moment.

 

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