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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?

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.

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. 

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.

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.

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.

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.

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.

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.

Asset Management 2008 Recap: A Look Back At A Profoundly Changing Industry

While 2008 was a profoundly challenging period for the asset management industry, the impact of the stock market chaos in the latter part of the year is only partially recognized in the financials of our benchmark firms. This document summarizes public data collected for twelve asset management firms in a report titled Asset Management — Quarterly Financial Benchmarks.

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.

Bonus Plans within Public Pension Funds: Should They Stay or Go?

Taxpayers, beneficiaries and politicians are up in arms about paying bonuses to public fund investment staff during this economic crisis. For some, it is unconscionable to pay bonuses when pension benefits are being cut, other state workers are on salary freezes or work furloughs, and AUM levels have been decimated by the market meltdown.

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.

 

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