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Equity Treatment Upon Retirement in the Financial Sector


October 21, 2016

Equity Treatment Upon Retirement in the Financial Sector

After embattled Wells Fargo CEO John Stumpf retired last week amidst controversy surrounding sales practices at the bank’s retail unit, many observers were keen to understand how executive compensation design affects what CEOs receive in retirement—regardless of the circumstances. Equilar undertook a comparative analysis of equity-related retirement benefits at 22 financial companies with $1.4 billion to $19 billion in revenue. The findings aim to shed light on common practices within the industry and how these benefits work.

As part of the ongoing investigation at Wells Fargo, the board decided to nullify Stumpf’s outstanding equity awards, valued at $41 million at the time. However, prior to this forfeiture, Stumpf’s equity benefits at retirement would have been offered in addition to or in place of pension and deferred compensation, similar to many of his colleagues. In fact, 90.9% (or 20 of the 22) of the companies in this study offer some kind of preferential equity treatment upon an executive’s retirement.

Retirement Eligibility

For an executive to receive special equity treatment upon retirement, they need to qualify as retirement eligible under the company’s incentive plan or the accompanying award agreements. The definitions of retirement eligibility are often intricate, but typically include two components: 1) one or more age thresholds and 2) a length of service threshold linked to each age threshold. Typically, the older an executive is, the fewer years of service he or she is required to have in order to be retirement eligible.

To standardize these definitions, Equilar calculated the minimum combined age and years of service required under each company’s incentive plan. For example, if a company were to require executives be at least 55 with 10 years of service, the combined minimum is 65 years. Out of the 20 companies in this sample that defined retirement, the maximum was 70 years, the minimum was 60 years and the median was 65 years. Sixty percent (or 12 of the 20) have a combined minimum of 65 years.

Equity Treatment

The actual treatment of equity, once an employee is retirement eligible, can fall into one of three categories:

  1. Forfeited: Unvested equity will no longer vest
  2. Accelerated: Unvested equity vests immediately
  3. Continued vesting: Unvested equity vests on original schedule

Some policies will allow the full award to vest while others will only apply this treatment to a pro-rated portion of the award. Additionally, some companies will limit the awards that vest based on the amount of time the executive served between the grant date and their retirement date. For example, Ameriprise Financial requires executives to forfeit awards that were granted to them in the year of their retirement, but all awards granted in prior years will continue to vest on their original terms. Four companies in this sample use these types of provisions and the required length of service after grant ranges from six months to one year.

The Analysis

The following three charts summarize the treatment of equity Equilar found in its analysis. Awards were only considered to be forfeited if the executive would have to forfeit all awards upon retirement. In other words, if any portion of outstanding stock, options or performance equity would accelerate or continue to vest, treatment was placed in one of those two categories. Overall, 15 companies had unvested stock awards, 10 granted option awards and 20 granted performance equity.

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For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at dmarcec@equilar.com.

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