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Bonus Cap: Capital Requirements Directive IV

Negotiators for the European Parliament and European Council reached a provisional agreement on 27 February 2013 on changes to the Capital Requirements Directive (CRD IV), primarily focused on moves towards the implementation of Basel III. Included in these proposals is the cap on bank bonuses that European Union (EU) politicians have been pushing for. There are still details to be fleshed out; the agreement needs to be set down in writing, EU finance ministers and the European Parliament must ratify the final rules, and aspects of implementation require the European Banking Authority (EBA) to develop new guidance. In the meantime, this Alert summarises the main terms and considers some of the likely impacts.

Sales Incentives and the UK FSA's Guidance: More than Just a Reactive Review is Needed

This Alert summarises the final FSA guidance on the risk to customers from financial incentives; outlines the minimum that firms are required to do; sets out what firms have done to date; and suggests how to makes these changes as effective as possible.

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.

Undervalued Private Bankers

Private bank margins have been squeezed from all sides of late. Low federal fund rates and high deposit insurance costs have lowered spreads on banking products; defensively inclined clients, holding high levels of cash, are reluctant to become more aggressive which is driving down fees and commissions; and private banker compensation has been rising faster than the revenue they bring in.

Improving Wealth Management Margins Requires HR Led Change

Steady growth, high margins relative to other segments of financial services, and low capital requirements makes wealth management an attractive sector in a low growth, capital constrained post-Basel III world. However, the influx of investment has kept demand for Relationship Managers high and caused Relationship Manager pay to rise faster than productivity (see Exhibit 1 below). This has exacerbated the margin pressure caused by historically low spreads on banking revenue and weak equity markets. As a result, U.S. private bank margins have declined 25% since hitting a peak of 40% (pre-tax) in 2006. These lower margins have resisted dramatic improvement despite reduced loan loss provisioning in recent years.

UK Financial Services Authority Update on the Remuneration Code

​In an effort to streamline and focus the supervisory process, the UK's Financial Services Authority (FSA) recently issued guidance on the proportionality structure in its Remuneration Code. The requirements that were previously structured as four Tiers based on either assets or regulatory capital have been redrafted in a new three-level system based solely on the firm's total assets.

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."

Software Development Lessons from the Technology Sector: Banks Consider New Sources of Talent

Major financial institutions are increasingly viewing the technology sector as a source of talent for key roles such as low latency trading, cloud computing, security, mobile applications and other development/architecture roles.  At the same time, in light of flat or reducing total compensation levels, banks are concerned that they, in turn, will lose staff to the technology sector and are looking to find alternative ways of motivating and rewarding key talent.

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.

Location Arbitrage: Gaining Competitive Advantage through an Effective Sourcing Strategy

Offshoring has long been viewed as a way to reduce costs and potentially deliver wider benefits such as increased productivity or new revenue opportunities that might be unprofitable if delivered onshore. Offshore locations such as China and India are well established but a number of new Asian and European centers are challenging the traditional offshore service locations. Placing of support services in highly educated, language capable, low cost locations has proved a widely publicized success story for many banks, but has it been as far-reaching as we have been led to believe?

Proposed UK Disclosure Rules: Top Eight Executives below the Board

The UK Treasury is consulting on proposed regulations to require larger banks to publish anonymous remuneration details for each of the top eight UK-based executives below the board “to enhance the transparency of the relationship between risk and reward for the highest paid senior executives in the largest banking institutions.”  The consultation runs until 14 February 2012. 

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.

Emerging Regions Update

A team of our consultants provide an update on emerging regions including Brazil, Russia, India, China, Middle East, and South Africa.

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.

A Case for Rigor in the Glow of the Pipeline

2010 was a bounce back year for many Investment Banking firms focused on M&A, particularly smaller "boutique" shops. After painful years in 2008 and 2009, with low deal volume, scrambles to assemble restructuring teams, and speculation about the merits of countercyclical products and services, firms are bullish on the M&A pipeline and focusing on expansion. If the anticipated deal volume comes to fruition, this will likely be a prosperous year for the vast majority of firms in this space. There will be a small set of firms that will make the most of this opportunity and some that will simply ride the wave up and then slide back down.

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.

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.

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.

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).

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.

 

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