executive compensation Articles

The Kingdom Reforms (Part II)

Saudi Arabia has announced a spate of cuts around compensation within the government and the public sector. While there may not be immediate ramifications of these curbs for the private sector, firms irrespective of their ownership structure, should be wary of these changing times. In this second part of the series, we explore what organizations in the Kingdom could do to effectively adapt to these circumstances.

Corporate Titles: An outdated concept or a building block for excellence?

As we look across a set of industries—Financial Services, Technology, Fin Tech, and Consulting—we see dramatically different approaches to job architecture in general, and the use of corporate titles in particular.

Incentive-based Compensation Arrangements: A Summary of Dodd-Frank Section 956

After five years, the interagency task force has re-proposed Section 956 of Dodd-Frank. This proposal is clearly more prescriptive and covers all financial institutions with balance sheet assets over $1 billion that are regulated by the six agencies.

Incentive Pay for Support Staff: Should Banks Consider Moving to Salary Only

As firms look to reduce costs, the topic of how infrastructure or support staff should be paid is frequently raised. A number of firms have broached the topic of removing incentive pay for some or all of these employees and compensating them on a pure salary basis. Other firms, who have moved compensation from variable to fixed over the past 5 years are now unhappy with their rising fixed cost base – not just for revenue generators, but for support staff as well.

Re-Aligning Performance / Reward in Investment Banking

2001 to 2007 was a remarkable time for the investment banking business. Firms felt they could do little wrong, and saw a steady increase in share price, revenue and compensation spend. A new set of professionals came of age in this era and it now appears that some of the rigor in rationalizing pay versus contribution has fallen by the wayside. In this article, we will focus on the investment banking advisory business, although some of the thinking may also apply to other lines of business in the securities sector.

Shareholders at the Top 50 Are Getting Tougher

Right or wrong, the public and political perception that undue risk taking and its link to pay was central to the financial crisis has fueled a resurgence in the discussions around executive pay. Those discussions and associated headlines are further stimulated by Dodd-Frank's requirement that shareholders be given their say on the topic. As top banks continue to face higher scrutiny on executive pay, shareholders have not been shy of giving the "thumbs down."

Conducting a Comprehensive Classification Review

Organizations, after all, make headlines almost daily, when they become the defendant in an employee lawsuit or the target of a wage and hour investigation. The price tag for such mistakes can be astronomic. In the wake of a U.S. Department of Labor investigation last year, for example, Farmers Insurance agreed to pay more than $1.5 million in back pay owed to employees for unpaid overtime. IBM settled similar allegations for $65 million.

Reforming Wall Street Pay

The noise around "Wall Street" pay is deafening. The industry, its employees and the regulators are under daily attack. The criticisms, while loud, are not particularly constructive. The purpose of this paper is to separate fact from fiction, to distinguish the naive from the realistic and to level set the kinds of reforms that are both necessary and practical.

Will There Be a Lasting Reset in Pay Levels?

As banks begin to make their year-end pay decisions, it is clear that incentive pay for employees across investment banking, equities and fixed income will decrease at most firms, particularly the largest ones. Veterans of compensation management know that pay tends to be cyclical and closely aligned to business performance, and that it takes a discerning eye to differentiate between a typical cyclical variance and an actual reset, which is far less common.

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. 

Dodd-Frank Wall Street Reform & Consumer Protection Act

On July 21, 2010, the Dodd-Frank Wall Street Reform & Consumer Protection Act (the “Act”) was signed into law. This legislation of more than 2,300 pages includes a number of provisions affecting executive compensation and corporate governance. While a majority of the compensation provisions apply to all public companies, a few select provisions apply to all financial institutions (public or private) with assets of $1 billion and more. This client alert summarizes these provisions and the associated effective dates.

Board of Directors Compensation Practices

Given the state of the banking industry over the past twenty-four months, we felt it was time to examine if and how board of directors’ compensation plans were changing. In this flash survey, we explore the prevalence of increases and decreases in overall board of directors’ compensation, retainer, or meeting attendance compensation as well as committee retainer and attendance compensation.

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. 

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.

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.

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.

Building a Meritocracy

Most firms pride themselves on being meritocracies, yet financial services firms are increasingly struggling to rationalize a pay for performance culture.

Aon Names Ray Everett Global President of McLagan

Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, today announced it has named Raymond Everett as global president of McLagan. In this role, Everett is responsible for leading a team of experts who provide compensation, performance and talent intelligence to companies in the financial services and insurance industries. He leads the McLagan executive committee and is a member of Aon’s Talent, Rewards & Performance executive committee.

Managing Compensation in a Downturn

It seems like we are in for a rocky ride in 2016. While underlying economies of many countries and the financial performance of many companies still appear solid, numerous firms are preparing for a tough year ahead.

Looking Back at Compensation for Regional and Community Banks in 2017

As we kick off another year, it is important to reflect upon the evolving environment of the banking industry. From the continuing shift towards technology and the specific roles that have arisen as a result, to increased regulatory and shareholder pressures, and the emergence of tech startups, there are many variables to consider. Here’s what regional and community banks need to know to prepare for regulatory updates and the future of executive, director, and staff compensation.

Australian Regulators “BEAR” Down on Accountability

The Banking Executive Accountability Regime (BEAR) is scheduled to go live in Australia on July 1, 2018. This marks the Australian government’s latest response to improving accountability in the financial services industry. The new regulation aims to raise the bar for risk management and corporate governance standards and outline consequences for both institutions and responsible individuals who breach the required standards of the regulation.

Aviation Finance: Navigating Executive Pay Programs

Second only to the weather, travel woes are the friendliest form of small-talk. Unexpected delays, airport congestion, and shrinking seat size are universally relatable for air travelers. However, it may come as a surprise that many aircraft are leased and not owned by the operating airline. In fact, a small group of organizations purchase, maintain, and lease aircraft to airlines. These aviation finance firms provide an interesting case study of compensation programs, reflecting the realities and forces that shape a specialty finance sector. The following article discusses the unique demands placed on executive management teams in aviation finance, why it is challenging to recruit and retain these individuals, and considerations for setting an effective pay strategy.

Executive Compensation: Hidden Questions in Bank Peer Group Selection

Most banks use peer groups to evaluate their executive compensation programs. However, since every peer group process is unique, creating hard and fast rules is not usually the best approach for firms to take. We have seven questions for consideration that may change the way you think about your compensation peer group altogether.

The 2018 McLagan Perspectives Report: An In-Depth Exploration of Current and Future Trends in Financial Services

We are in an age of major global transformation for financial services. As technology continues to shape a new industry landscape, firms are forced to rapidly adapt to trends in the current market, including longstanding talent and rewards strategies to stay competitive in the race for tech-enabled talent. This is a challenge that financial services firms must face head on, while at the same time contending with political and social unrest, economic fluctuation, and strong regulatory standards.

Should Your Credit Union Think About Long-Term Incentives?

In today’s fiercely competitive market, credit unions are increasingly competing with the broader financial services market for top talent. This results in the need for new compensation plan design for credit union executives and key leaders. We’re beginning to see a rise in prevalence of long-term incentive plans (LTIPs) driven by three main factors:

  • Market trend towards performance-based compensation
  • Risk best practices
  • Tax law changes

The Spotlight: Todd Leone, Partner, Global Head of Executive Compensation and Regional and Community Banking

Todd Leone leads McLagan’s global executive compensation practice and the regional and community banking sector team. Todd specializes in advising banks and compensation committees on complex compensation issues in the context of changing regulatory environments. He works with clients to design compensation plans that consider taxation, regulatory compliance, and compensation agreement provisions.

SEC Enforcement Action on Perks Disclosure Reminds Issuers to Be Mindful of the Standard

The SEC’s recent enforcement action against a large, US-based company for failure to properly disclosed executive perquisites is a good reminder to all issuers of the circumstances under which detailed disclosure is required.

What We Learned from the 2018 Proxy Season

Another proxy season has wrapped up and, with it, the eighth year of say-on-pay votes are in the books for most public companies. Negative vote recommendations for say-on-pay proposals from Institutional Shareholder Services, Inc. (ISS) and Glass Lewis & Co. (Glass Lewis) went up slightly—as did the number of outright say-on-pay failures for both the Russell 3000 Index and S&P 500 Index. When it comes to equity proposal votes, ISS and Glass Lewis models are not always needed for sufficient shareholder support. Companies can obtain necessary shares to adequately fund their programs by engaging directly with their shareholders—even in the face of receiving negative recommendations. In any case, for both say-on-pay and positive share plan proposals, it all comes down to planning ahead.  

What's Trending in Major Financial Services Hubs Across the Globe?

The influence of evolving technology in financial services is changing industry landscapes and long-lasting practices across the globe. Certain economies and companies are finding it easier to adapt to the moving industry and to new regulations. For some countries, the challenge is creating a deep-enough pool of skilled workers to meet demand. For others, it’s a matter of cutting redtape to encourage new businesses, or embracing new industries and business models.

Five Questions for Banks to Consider When Setting Executive Annual Incentive Plan Goals

With such a substantial percentage of executive pay delivered through incentive programs, it’s no wonder that incentive plan discussions comprise a significant portion of the compensation committee’s agenda for many banks. However, through our experience of serving as advisors in over 300 compensation committee meetings per year, we are surprised by how little dialogue exists around the specific topic of annual incentive plan performance goal selection and goal setting. 

 

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