May 4, 2016
As proxy season comes to a close, shareholder meetings are heating up and Say on Pay votes are rolling in. So far, we haven’t seen too much shake-up from previous years—that is, most companies are passing Say on Pay with flying colors—but a notable standout in early annual meetings has been the U.S. banking industry, where controversy about CEO pay and potential M&A scenarios have shareholders and regulators keeping a close eye on these financial giants.
In particular, two annual meetings this week were marked by significant shareholder dissent. At Citigroup, 36% of shareholders voted against Michael Corbat’s pay package, joining just 7% of public companies that have so far received a Say on Pay vote of less than 70% approval so far in 2016, according to Equilar’s Say on Pay Tracker.
In 2015, the banking industry fared slightly better than the public company market overall, with 6% of banks receiving lower than 70% approval. Meanwhile, equivalent to the pace so far this year, 7% of all public companies received approval from fewer than seven in 10 shareholders last year.
Despite Corbat’s pay raise in 2015, Citigroup Chairman Michael O’Neill openly said that the board was not satisfied with performance, according to The Wall Street Journal. Corbat was the 25th highest paid executive on this year’s Equilar 100 list, a compilation of the 100 largest companies by revenue to file before the halfway point in proxy season (April 1).
Meanwhile, at Comerica, investors also expressed disappointment with company performance, and while Say on Pay received more than 80% support—as well did the director approval ratings, according to The Wall Street Journal—shareholders are pushing for a sale of the bank. Earlier this year, Reuters reported that Comerica was one of many banks targeted by activists, seeking opportunities in a volatile market to capitalize on returns from M&A.
New Regulations Will Affect CEO Pay Packages
As annual meetings for Citigroup and Comerica are just two examples of the compensation and corporate structure issues concerning shareholders, new regulations proposed in late April shine a light on the fact that the scars from the 2008 financial crisis are not quite healed.
On April 21, the National Credit Union Administration proposed rules that would require banking executives to wait four years—three years is currently typical—to realize portions of their bonuses, as well as expedite rules on clawbacks for executive bonuses based on behaviors that may influence financial losses. According to the New York Times, the new rules would “apply only to incentive-based compensation—generally bonuses—which varies according to the performance of the bank and the individual executive.”
These proposed rules are a continuation of mandates from Dodd-Frank meant to mitigate risk taking from executives, particularly on the part of the banks that were seen as a significant contributor to the financial crisis. Though the impact of these remain to be seen, as the implementation has not yet been set, several scenarios could come to bear. There are a number of different ways banks may restructure pay to executives in the wake of these rules, such as:
Adoption of deferral provisions for bonuses
Shift of short-term cash from variable to fixed (i.e. less bonus, more salary)
Shift of annual bonus value to long-term incentives and accompanying terms such as performance periods, vesting provisions and holding periods
Discretionary bonuses or long-term incentive gran
According to Michael Melbinger, a partner at Winston & Strawn, these rules may indeed have influence beyond the financial sector. Though he estimates that the rules would likely not go into effect until 2019, even if passed as proposed, they entail “a preview of best practices coming soon to a company or board meeting near you,” regardless of a company’s sector.
“The proposed rules are very detailed and full of new concepts, and if you are a lawyer, compensation committee member, or other executive compensation professional, you may need to learn a new language, as the proposed rules create a series of new definitions—many of which do not match with professionals’ common understanding of the meaning of those terms,” Melbinger noted.
The concept of curbing “significant risk-taking” is omnipresent throughout the executive pay rules proposal, and in particular spends pages defining what a “significant risk-taker” entails. In other words, the degree to which these rules augment the definition of corporate risk could end up with a lasting legacy, regardless of how executive pay is challenged or changed.
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