As performance deteriorated in 2007 and 2008, many Compensation Committees reset performance targets, paid discretionary bonuses, excluded unusual or one-time charges from bonus calculations, or increased long-term incentive grants for retention purposes. These actions are inconsistent with paying for performance
San Francisco, CA (PRWEB) August 4, 2009
CEO and CFO compensation at banks receiving Troubled Asset Relief Program (TARP) investments did not change in statistically meaningful ways despite the banks' poor financial performance, according to a new study by Presidio Pay Advisors.
From 2006 to 2008, banks' profitability deteriorated and most generated negative shareholder returns. While absolute levels of executive compensation dropped at many banks, the study found changes in pay were effectively random, with no measurable link to changes in performance for the group as a whole.
The San Francisco-based compensation consulting firm analyzed the relationship between changes in executive compensation and measures of financial performance among 115 banks holding total assets of $11.9 trillion, with each receiving a minimum of $50 million in TARP investments.
Since 2006, more than 90 percent of these banks generated negative shareholder returns. Surprisingly, despite the negative returns:
- Nearly three in ten (29 percent) of the CEOs who held office from 2006 through the end of last year received increases in 2008 total cash compensation (base salary plus annual bonus); the increases ranged from one to 108 percent over 2006 levels.
- Almost one-third (30 percent) of these CEOs received increases in 2008 total direct compensation (total cash compensation plus the value of long-term incentives granted) of four to 174 percent over 2006 levels.
- More than one-third (37 percent) of CFOs studied received increases in 2008 total cash compensation of two to 76 percent compared to 2006.
- An even greater percentage (43 percent) of CFOs received increases in 2008 total direct compensation of two to 420 percent over the same period.
In their proxy statements, bank Compensation Committees routinely say they pay for performance, but this is not supported by actual compensation practices. "There seems to be a disconnect between stated performance philosophies and pay decisions," said Dave Bisson, a senior consultant at Presidio Pay Advisors. "As performance deteriorated in 2007 and 2008, many Compensation Committees reset performance targets, paid discretionary bonuses, excluded unusual or one-time charges from bonus calculations, or increased long-term incentive grants for retention purposes. These actions are inconsistent with paying for performance," Bisson noted.
The Presidio Pay study also found Compensation Committees approved increases in the size of equity grants to offset lower stock prices:
- Total stock options granted to CEOs increased from 6.5 million in 2006 to 11.1 million in 2008, more than offsetting a drop in restricted stock grants from 2.6 million shares to 1.8 million over the same period.
- Total stock options granted to CFOs increased from 2.2 million in 2006 to 3.5 million in 2008, combined with an increase in restricted stock grants from 0.42 million shares in 2006 to 0.65 million in 2008.
In response to public dissatisfaction with bank compensation practices, Congress imposed significant pay restrictions on banks with TARP investments. These restrictions will only be lifted once TARP funds are repaid in full. "As the debate surrounding executive compensation continues in Washington and elsewhere, thoughtful bank Compensation Committee members should use this "time-out" to fix their compensation programs," Bisson notes. "Otherwise, regulators and politicians may well do it for them."
About the Study
Presidio Pay Advisors' study of the executive compensation practices focused on 115 banks, all of them recipients of Troubled Asset Relief Program (TARP) funds. 2008 year-end assets of banks studied range from $2.0 billion to $2.2 trillion and represent over 90 percent of total commercial bank assets in the U.S. The study was completed in July 2009 and is available for free download from the firm's website, http://www.presidiopay.com, as is a companion piece offering suggestions for improving banks' compensation practices. Questions or comments can be directed to Presidio Pay Advisors' Dave Bisson at (415) 438-3400.
About Presidio Pay Advisors, Inc.
Presidio Pay Advisors is a San Francisco-based compensation consulting firm that provides companies with independent, strategic advice and support on a wide range of compensation issues. The firm's collective expertise encompasses a diverse array of human resources, finance, accounting, regulatory, and shareholder perspectives.
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