The Council of Institutional Investors (CII) released a new report today that concludes that Wall Street’s executive compensation practices have improved somewhat since the global financial crisis, but warns that major banks still are not tying pay to long-term gains in performance.
“While many banks have strengthened their pay practices, there’s still a long way to go,” Ann Yerger, CII’s executive director, said in a press release. “The report suggests they need to do more to make sure that executive compensation rewards performance over the long term.”
The report was written by Paul Hodgson, a senior research associate at the Corporate Library.
The report’s findings include:
- Total CEO compensation at major Wall Street institutions in 2003-2007 was two to three times the level of pay at other Fortune 50 companies during the same period. The differential was driven mainly by big dollops of time-restricted stock in Wall Street pay packages.
- Pay at these banks was structured to incentivize executives to deliver strong performance--over the short-term. But lavish cash bonuses, high absolute levels of pay, and excessive focus on short-term annual growth measures had damaging consequences for shareowners over the long-term.
Compensation structures on Wall Street has improved since 2008, but the banks still are not tying compensation to long-term performance metrics.
The report details a series of best practices and urges investors to identify those firms that do not follow those standards. Those best practices include:
- Multiyear performance metrics that measure sustained and sustainable long-term shareowner value growth, not simply short-term stock price gains. Economic profit metrics that require the return on capital to exceed the cost of employing capital should be considered alongside more commonly used operational metrics, such as net income, revenue, and return on equity. Such metrics, also known as shareholder value added, including the widely used "economic value added," are a far more reliable indicator of long-term growth than, for example, total stockholder return.
- The majority of incentives are delivered as equity.
- The majority of vested and realized equity is deferred into retirement.
- Incentive compensation is subject to "clawback" in the event of financial restatement or major loss is incurred, regardless of whether an executive has committed fraud.
- Base salaries do not exceed the $1 million deductibility cap set by the Internal Revenue Service on pay that is not performance-based.
While the report encourages investors to use "say on pay" votes to signal their displeasure with a company's compensation practices, the paper observes that a significant "against" vote is a "blunt" instrument. "Shareowners should ensure that if they do vote against compensation, they explain their objections in a letter to the company," the report said. "A letter to the compensation committee chair with copies to the board chair and corporate secretary is typically the first step in the engagement process, followed by in-person meetings. If change is not forthcoming, owners can let the company know that they will vote against the reelection of compensation committee members."