Executive Compensation

Council of Institutional Investors Updates Policies

On October 5, 2012, the Council of Institutional Investors (CII) released updated corporate governance policies. The primary change in regards to executive compensation involved a tightening of the CII’s policies with respect to clawbacks. CII now calls for companies to:

  • Ensure that sufficient and appropriate mechanisms and policies are in place to recover erroneous bonus and incentive awards paid in cash, stock or any other form to current or former executive officers and to prevent the payout of such awards in the first place.
  • Establish a minimum recovery period of at least 3 years following discovery of the fraud or cause forming the basis for the recovery.

The CII’s revised Corporate Governance Policies can be found at:

http://www.cii.org/UserFiles/CII%20Corp%20Gov%20Policies%20Full%20and%20Current%2010-5-12%20FINAL.pdf

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Speaking at WorldatWork Total Rewards Conference

Ed will be speaking at WorldatWork’s Total Rewards 2012 Conference this Wednesday, May 23,2012 from 9:15 to 10:30 am with Bonnie Kelly from Capital One Financial Corporation and Reid Pearson of Alliance Advisors. Their presentation is “Get to Know the Long-Lost Relatives You Never You Had: How to Get to Know Your Shareholders,” which will look at what you can do to get to know your shareholders, what they want, how they are likely to react to certain compensation-related proposals and how your team can help ensure your proposals succeed.

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Federal Reserve Report on Incentive Compensation Practices

The Federal Reserve just finished up its horizontal review of large banking organizations and released a report that looks at incentive compensation practices at such firms. The report is available at:

http://www.federalreserve.gov/publications/other-reports/files/incentive-compensation-practices-report-201110.pdf

Banks in the horizontal review with the oversight of  the Federal Reserve and other banking agencies, implemented new practices to make their employees’ incentive compensation sensitive to risk. The four key areas that were addressed by banks involved in the horizontal review were:

  • Incentive Compensation Design-making the amount of incentive compensation take into account the risk an employee’s activities may pose to the organization, and deferring payout of a portion of incentive compensation.
  • Identifying Key employees-those who have a hand in risk taking.
  • Risk-Management Processes and Controls-involving risk-management and control personnel when considering and carrying out incentive compensation arrangements.
  • Corporate Governance Frameworks-changing the frameworks to become attentive to the risk-taking incentives created by the incentive compensation process for employees throughout the firm, not just to senior executives.

The report indicates that work still needs to be done in some of the above areas by the banks but that progress has been made.

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New Research Looks at Optimal Option Exercises

A new research report, Executive Decisions, Making the Most of Compensation Plans To Build and Protect Personal Wealth,  from AllianceBernstein addresses equity compensation from the executive’s perspective.

One of the more interesting things detailed in the report is the finding that the optimal exercise time for stock options is when their time value is in the range of 10%-30% of total value. This could result in option exercises that occur well before the end of the option term. Many advisors had previously advised that executives should hold onto options until they are just about to expire in order to maximize the potential return from the stock options.

Additionally, the report compiles AllianceBernstein’s key findings, which include:

  • How to evaluate and compare different types of stock-based compensation
  • How to integrate stock-based compensation into lifetime wealth planning, using a “core and excess capital” framework
  • A method for determining how much single-stock risk is appropriate in your portfolio, and, if you need to diversify, a framework for choosing which holdings to divest and which to keep
  • Strategies for integrating single stock with estate and charitable planning
  • Determining when and how to use non-qualified deferred compensation plans
  • Best uses of 10b5-1 plans
  • How to make well-informed decisions regarding Net Unrealized Appreciation (NUA) elections and 83-b elections

The report can be downloaded from:

https://www.alliancebernstein.com/Research-Publications/Black-Books/Corporate-Executive/Stories/Executive-Decisions.htm

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