European Union parliamentarians voted last week to approve new caps on bonuses paid to bankers that will take effect beginning in 2011. Advocates of the new EU-wide law say it will “transform the bonus culture and end incentives for excessive risk taking.” The rules are largely similar to pay restrictions promulgated by some national regulatory bodies, including the U.K. Financial Services Authority, and those voluntarily adopted by many of Europe’s largest banks in the wake of the global financial crisis. Consequently, the impact of the EU rules will likely be most pronounced at small to medium-sized financial services firms.
Under the new rules, upfront cash bonuses will be capped at 30 percent of the total bonus and at 20 percent for “particularly large” bonuses, EU officials said in a July 7 statement. Moreover, between 40 and 60 percent of any bonus must be deferred for at least three years and can be recovered if “investments do not perform as expected.” At least one-half of the total bonus would be paid as “contingent capital” (funds to be called upon first in case of bank difficulties) and shares, EU officials said. The new rules also stipulate that bonuses be capped as a proportion of salary. Each bank will have to establish limits on bonuses related to salaries, on the basis of EU-wide guidelines, “to help bring down the overall, disproportionate role played by bonuses in the financial sector.”
“Exceptional” pension payments must also be held back in instruments such as contingent capital that link their final value to the overall strength of the bank. This, EU officials said, will avoid situations that occurred in the past, in which some bankers retired with substantial pensions unaffected by the crisis their former employer was facing.
Published in the Federal Register last week, the FAA recently issued a proposal to revise its broad prohibition on pro rata reimbursement for the cost of owning, operating and maintaining a company plane when used for routine personal travel by executive officers under certain conditions. I’m far from being a FAA expert – but I believe this change, if approved, would permit greater flexibility for companies to seek and accept reimbursement from executives for their personal use of the corporate jet.
Given the affinity for private plane use – and officer distaste for disclosure about this practice – my bet is that executives would jump at the opportunity to do this, particularly if the money that executives paid was “replaced” in some way. The upshot is we may well see fewer perk disclosures for personal plane use in the not-so-distant future…
– Ed Hauder, Exequity and Reid Pearson, The Altman Group
In this Special Report, we examine the 38 equity plan proposals that failed out of approximately 2,200 total proposals put forward by Russell 3,000 companies from 2007 through 2009. The authors detail several lessons for companies to consider when requesting shares, the most significant of which are to ensure that both dilution and burn rate are not excessive.
The Special Report also looks at the success rates of RiskMetrics/ISS’ against vote recommendations for equity plan proposals and finds that they vary, sometimes significantly, based on the industry group. Similarly, the percent of equity plan proposals that failed varies based on industry group. Companies that are considering requesting shareholders to approve additional shares for their equity compensation plans will have a better idea of the challenges they face after reading this Special Report.
myStockOptions.com just turned 10 years old this month! It started at the what turned out to be the high point of stock options. It survived and evolved to cover all types of stock grants, with engaging content, tools, and courses on restricted stock, stock options, SARs, and ESPPs. To celebrate, we are offering a $50 discount on one and two year memberships (use promotional code of “Tenth”).
While it was created for plan participants with its financial planning and tax focus, it has developed a following with stock plan professionals in administration, finance, and legal. Its editorial content and tools have won many awards and media accolades, plus even a US patent. For an interesting take on how equity compensation has evolved since the site started, read the article on the site: “Five Major Developments In Equity Compensation Of The Past Decade.”
To follow up on my blog posting about my “provoking” presence on a panel at the ICGN conference which has just wound up in Toronto, I thought it might be an idea to summarize what I said.
If you remember, we were tasked with coming up with good examples of compensation.
Now, my problem is that I can come up with good examples, but they always have so little in common that moving from knowing what the problems are elsewhere to knowing “what the answers are” as the panel description said is a bit of a problem.
Never mind.
My first example was UK company WPP, which we had written about for AdWeek’s latest issue on executive compensation. This is a classic example of “skin in the game” CEO comp, where execs must invest their own money – that’s right, folks, their own money – in shares which will then be matched or not to the extent that a relative TSR target is met or not. And the TSR must equal or exceed the median for any match. That’s right folks, they have to be better than their peers. Are you listening Corporate America!?
For contrast I described Morgan Stanley’s “Leveraged Coinvestment Program” in which execs were “allowed” to defer shares they had just “been given for free” as part of the annual bonus plan into some kind of “fund of funds”. The company gives a two for one match (regardless of performance) and the participant receives all the investment returns on the whole amount though, at the end of the day, will only receive their own deferred shares when the plan is cashed out. But note, the fund of funds invests in everyone else’s shares, not the company’s.
See the difference?
Then I contrasted the US banks’ reaction to the worldwide economic crisis with the European banks.
US banks – defer more pay, stringent clawbacks, no fundamental change.
European banks – major pay makeover with introduction of plans that deliver the majority of compensation and are based on long-term performance. That’s right! Long-term performance. What? Long-term? Yes, long-term. Wow!
Then I brought in the shining knight from the US – Nucor, the steel company that has made a profit every year since Rubber Soul came out and is star of no less than three reports about wonderful compensation policies. Check them out.
Conclusions? They have little in common except that they have little in common. That, and simplicity and moderation. Possible real conclusion? Stop copying everyone else and figure out the right compensation policy for YOUR executives, YOUR company, YOUR point in the economic cycle, YOUR industry, YOUR company’s maturity level.
As an update to our initial study released in March that compared ’09 and ’10 data, Exequity has now released an updated study that includes CEO LTI awards from ’08 to identify trends in LTI opportunity over the last three years. Overall, we found that 2010 CEO LTI award levels have essentially returned to 2008 levels.
At the median, total LTI value decreased slightly (-2%) from 2008 to 2010 relative to an equal decrease (-2%) in grant price. This study presents additional key findings, including LTI opportunity percent change by industry from 2008 to 2010, an updated 2009 vs. 2010 CEO LTI analysis by stock price change which includes companies granting LTI awards in March and April, and an updated in-the-money option analysis for 2008 and 2009 stock option awards.
This post is copied from what Lucian Bebchuk recently blogged on the “Harvard Corporate Governance Blog,” and is based on his study with Prof. Jesse Fried:
In our recent study, “Paying for Long-Term Performance,” we provide a detailed blueprint for how equity-based compensation should be designed to tie executive payoffs to long-term results and to avoid excessive risk-taking incentives. Our conclusions can be distilled into the following eight “principles”:
1. Executives should not be free to unload restricted stock and options as soon as they vest except to the extent necessary to cover any taxes arising from vesting.
2. Executives’ ability to unwind their equity incentives should not be tied to retirement.
3. After allowing for any cashing out necessary to pay any taxes arising from vesting, equity-based awards should be subject to grant-based limitations on unwinding that allow them to be unwound only gradually, beginning some time after vesting.
4. All equity-based awards should be subject to aggregate limitations on unwinding so that, in each year (including a specified number of years after retirement), the executive may unwind no more than a specified percentage of the executive’s equity incentives that is not subject to grant-based limitations on unwinding at the beginning of the year.
5. The timing of equity awards to executives should not be discretionary. Rather, such grants should be made only on prespecified dates.
6. To reduce the potential for gaming, the terms and amount of post-hiring equity awards should not be based on the grant-date stock price.
7. To the extent that executives have discretion over the timing of sales of equity incentives not subject to unwinding limitations, executives should announce sales in advance. Alternatively, the unloading of executives’ equity incentives should be effected according to a prespecified schedule put in place when the equity is originally granted.
8. Executives should be prohibited from engaging in any hedging, derivative, or other transaction with an equivalent economic effect that could reduce or limit the extent to which declines in the company’s stock price would lower the executive’s payoffs or otherwise materially dilute the performance incentives created by the company’s equity-based compensation arrangements.
A full explanation of the basis for these principles, and a detailed discussion of how they should be implemented, is provided in our study.
It goes without saying that the media has paid unprecedented attention to executive compensation issues as the general public continues to express anger over excessive pay levels. Some media outlets have even created 24/7 pages online devoted to the topic, such as the NY Times’ “Wall Street Pay” Microblog. A “microblog” is akin to a Twitter feed on a topic, with essentially only headlines and a brief description being provided, with a link to more information.