north america Articles

The Troubled Waters for Retail Banking

Incentive opportunities and the mix of pay continue to be examined as the effectiveness, administrative burden, and risks of low dollar programs are under scrutiny in retail banking.

Further Ramifications of New DOL Fiduciary Ruling on FA Training

In addition to the compensation implications discussed previously, another area demanding firms' attention will be roles and training. Compliance departments will require additional staffing, including new roles dedicated to all things fiduciary.

Incentive-based Compensation Arrangements: A Summary of Dodd-Frank Section 956 (Part II)

The update provides an executive summary of critical strategic issues, a deeper dive on tactical implementation issues, and definitional clarity on key topics. McLagan has been in communication with members of several regulatory bodies and based upon those communications developed our perspective for this alert. While we believe the substance of each agency's proposal is aligned, we acknowledge the potential for nuances as the proposals range from approximately 300 - 700 pages in length, depending on the agency.

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.

Securities and Exchange Commission—Proposed Clawback Rules— Technical Insights

On July 1, 2015, the Securities and Exchange Commission (SEC) released proposed rules addressing the final executive compensation regulation required under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).  Proposed Exchange Act Rule 10D-1 requires the SEC to adopt rules directing the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement a policy providing for the disclosure and recovery of excess incentive-based compensation received by a current or former executive officer whenever the issuer is required to prepare an accounting restatement in order to correct erroneous financial data.

Proposed Pay Versus Performance Rules Preliminary Observations

On April 29, the Securities and Exchange Commission (SEC) voted in favor of issuing proposed rules for the Pay Versus Performance disclosure that Congress included under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Breaking the Digital Banking Talent Code

Innovative digital developments have had a profound impact on the day-to-day lives of individuals, including retail banking customers. In response, the banking industry has begun to embrace the digital era, where mobile apps and smart ATMs are no longer a luxury but have become a necessity. The wave of digitalization has led many banks to reevaluate their business and talent strategies to attract, engage, and reward a new generation of staff that can successfully transform their existing platforms and provide the digital experience their customers have come to expect.

Consciously Uncoupling Complexity in Retail Banking Incentives

Historically, branch employees were the main interface with the customer. Today customers have more frequent interactions with their banks through technology, thus altering the role of branch employees. Within retail banking, incentive plans have grown overly complex in response to the historic branch business model.  However, technology-driven changes in the branch are enabling model firms to simplify their incentive plans and drive desired staff behaviors within a new banking model. Firms that are able to make this change will have a competitive advantage in recruiting staff and serving customers. 

SEC Publishes Proposed Rules for the Implementation of the Pay Ratio Disclosure

Among the many executive compensation related items included in the Dodd-Frank Wall Street Reform Act of 2010 (the Dodd-Frank Act), one of the most heavily debated and anticipated was the Pay Ratio Disclosure, or Section 953(b). This ratio, designed to illuminate the relationship between total reported compensation for a CEO and the median employee of the company (not including the CEO), sounds simple in concept, but generates a number of complex challenges. These challenges explain much of the two year delay in moving forward with the rule.

Middle Market Horizontal Review: Potential Impact

The nation's largest banks recently received letters from the Federal Reserve related to a horizontal review of Commercial Lending, which for most clients will impact their Middle Market and Specialty Lending practices.

Constraints, Caps & Clawbacks: The New Compensation Paradigm for Bankers

It has been a crazy five years for United States banks. So much has changed and yet so little progress has been made. The three key groups of stakeholders in financial industry pay are regulators, shareholders and staff. While all the stakeholders will no doubt agree that change has occurred, the real debate starts when we consider whether or not the sum of the changes have produced better or worse results.

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.

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.

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.

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.

SNL Financial: The New Mandate for Compensation Decision-Making

Publication in SNL Financial: External forces such as legislation, regulatory guidance, and shareholder and media scrutiny have necessitated the largest thought overhaul the banking industry has seen in many years.  The overall message is clear:  Banks will change the way they consider compensation, either voluntarily or by mandate.  This paper discusses concerns, considerations and challenges banking leadership must deal with moving forward in their compensation planning.

Study Results: Market Impact on Incentive Compensation Trends

McLagan conducted an online survey in November and December 2010 regarding current and planned performance metrics and payment vehicles at community and regional banks. The intent was to sample the latest thinking in light of the current economic and legislative environment. Sruvey questions covered 2010 and planned 2011 incentive plans

Study Results: 2011 Salary Incentive Planning

In order to help clients prepare for 2011 salary increases, we conducted a free flash survey in late September and early October of 2010 to get a sense of what banks are planning for their 2011 salary budgets. The 97 banks that participated in the survey were asked if they planned to give salary increases in 2011; and if so, what percentage increase they were budgeting, and how the increase differed from their 2010 increases (greater, less or the same).

Impact on Brokerage Firms of a Fiduciary Standard

The Dodd‐Frank Wall Street Reform and Consumer Protection Act is likely to usher in a transformation of the wealth management industry with implications not only for the brokerage firms that will be most affected by new regulations, but also for private banks and investment advisors who already operate under a fiduciary standard of care.  Congress has charged the SEC with the responsibility and authority to create a single fiduciary standard covering brokers, who were previously only held to a suitability standard, and investment advisors who already work to a fiduciary standard of care.  While the final shape of this SEC rule‐making will determine how brokers and investment advisors will be impacted, we can be sure that the changes will be far reaching and impact almost every element of brokerage firms’ business models, from product management, client management, execution and FA compensation.

Trends in Equity Approaches

This survey examines whether or not banks use equity as part of their overall compensation program. For banks that use equity, we present information regarding what type of equity they grant, the company, individual, etc. performance measures upon which Banks base the equity grants, how frequently grants are made, and vesting.

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.

Today’s Compensation Environment – 2010

This is the 9th edition of Corporate and Consumer Banking Consulting Practice White Paper on current compensation trends in the banking industry. Since beginning this annual publication (originally published by Amalfi Consulting and sponsored by the American Association of Bank Directors) we have focused on specific trends in compensation with a detailed year-over-year analysis. However, with the industry continuing to face challenges on numerous fronts, we also comment on the state of the banking industry, along with the resulting impact on compensation.

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.

Final Guidance on Sound Incentive Compensation Policies

On June 21, 2010 the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (collectively, the “Agencies”) issued final guidance on incentive compensation arrangements that apply to all banking organizations. This final guidance replaces the proposed guidance issued by the Federal Reserve on October 22, 2009.

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.

Holistic Risk and Competitive Review of Incentive Plans

In McLagan’s previous Alert, “What Do They Mean by Unreasonable Risk?”, we considered the challenge of defining unreasonable risk and who should decide that after the fact the risks taken were unreasonable.

 

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