Archive for the ‘Compensation’ Category

Executive Pay moderation: what worked until 1980?

Steven A. Bank, Brian R. Cheffins and Harwell Wells recently made available a draft of their analysis (1) of the levers that kept executive pay at acceptable levels in the USA since the 1940´s and until the early 1970´s.

They start presenting the facts: in that period executive pay didn`t follow the fantastic results firms were producing but remained flat and even declined versus the rank-and-file employees when adjusted for inflation. They nevertheless refer briefly to a different period, in the 1920´s. It is worth also recovering Kevin J. Murphy´s “Executive Compensation: Where We Are, And How We Got There”, where he presents the first wave of hired managers earning very large amounts in the 1920`s thanks to bonuses linked to profits; usually the amounts where similar to what we observe in the 20th century when inflation-adjusted. But as Bank, Cheffins and Wells report, in the 1930´s the story is quite different as some outrageous cases forced legislators to impose disclosure of executive pay. Although pay still increased during this decade, compensation soon started to drop, and particularly during the 1940`s. Stock options started to be common in the 1940´s, its nature of compensation (not capital gain at exercise) was recognized in 1946, but they didn´t represent abnormal amounts so that anemic growth for executive pay remained the rule in the 1950´s and the 1960´s. But executive pay started to rebound in the 1970`s and most relevantly in the 1980´s, thanks to the use of stock option and restricted stock option plans. Even more in the 1990`s. Criticism started to spread; an effort to link pay and performance also became evident, so that higher pay was needed to compensate for the riskier pay structure (as perceived by the executives). Only the crisis after 2008 was enough to stop this growth, although (according at least to part of the academic analysts) the distribution problem and compensation gap between executives and employees persists.


After that, they refer to the governmental efforts to curb and shape executive pay; as in the case of Murphy (2), they see more failures than merits, and they all even see many trends in executive pay having been engendered by pay reforms.

The authors then focus on the core of their study: what were the determinants of executive pay that kept it under control in the 1940-1970 decades? Read more…


What is behind BP`s 2015 remuneration report and policy and investors` revolt on it?


News regarding an expected revolt at the Pay vote session in the next BP`s AGM to be held on April 14th 2016 appeared in press recently, (1). I dived into the remuneration report proposed to its shareholders and into the Remuneration Policy approved last year by 96% of them, in order to assess whether the revolt would be reasonable. (2)

The main argument by revolting shareholders concerns annual losses having peaked in 2015, and the inconsistency shown by BP when it increased its Ceo pay strongly. It is true that results in 2015 (3) have been deceiving, $ 6482 m in losses and revenue falling by 37%.

In its annual report (page 22) the company tries to explain the relationships among strategy, pay and performance. They argue that executives noticed the “lower for longer” forecast for oil prices, and reacted in every tool under their control to reduce costs and inefficiencies, while delivering priority projects and enhancing safety and operational performance. BP then drafts a view of their pay proposals: long-term and performance-based, focused on what executives can control, biased towards equity and long enough holding periods. Read more…

Citi Ceo paid 27% more in 2015

February 20, 2016 Leave a comment

In an advance to proxy materials to be delivered in March, the bank has announced its decision on its Ceo`pay. Mr. Corbat, has been recognized a right to a total $ 16.5 m, only 1.5 m out of that in fixed salary.

 A total $6m will be inmediately paid as a cash bonus. And an additional 9 million will be deferred, subject to the bank`s clawback and key performance metrics observed in the deferral period. The deferral is a must today in pay decisions for financial institutions, as a measure to curb excesive risk-taking by managers, so that profits today are not rewarded inmediately when decisions are yet to produce good or bad results for a certain period. Read more…

BBVA: 2015 Compensation Report

February 6, 2016 Leave a comment

BBVA has recently published the mandatory report on 2015`s Compensation for Directors which will be voted in the bank`s next Shareholders General Meeting.

In 2015, it also approved (apart from the 2014 Comp report), a report on its overall Compensation practices for directors, (public companies in Spain need to do this at least every three years).

The bank explains Executive and Non-Executive Directors` compensation in different sections.

I will try to depict the way they calculate variable pay accrued by Executive Directors, as this is critical to evaluate if incentives are correct, if there is a correlation between pay and performance, if the risk is somehow considered, etc.

Which are the metrics for which Executive Directors (EDs) are rewarded? Read more…

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The UK Investment Association`s Compensation Principles (II)

November 21, 2015 Leave a comment

In our previous post, we described the Principles, the Remuneration Policies and part of the Remuneration structures recommended by the UK Investment Association i its recently published “Principles of Remuneration”, (1).

We will today refer to their recommendations regarding Variable Pay. First, they assert shareholders prefer simplicity; second, they state that variable pay must be linked to corporate strategy and long-term value creation; consequently, any metric which firms eventually use to measure performance, (financial or not, as ESG targets), need to be clearly connected to the firm´s performance characteristics. Read more…

The UK Investment Association`s Compensation Principles

November 15, 2015 Leave a comment

The Investment Association published in November 2015 its Compensation Principles, which it expects to guide how remuneration is established and structured in the UK. (1)

The guidance is structured in (i) Principles, (ii) Recommendations to Compensation Committees, -CC from now on- (General, Fixed and Variable Pay).

The Principles refer to the role different constituencies:

  1. Shareholders: remuneration practices need to pursue shareholders` interest and sustainable value creation, which is in line with Institutional Investors` fiduciary duty to final investors, whose capital must be correctly allocated, and once allocated, correctly managed.
  2. Board of Directors: non executive directors and mainly those belonging to the CC must oversee the executive remuneration policies, in connection with the fiduciary duty to act in the interest of shareholders and to pursue long-term objectives connected with other stakeholders also.
  3. Compensation Committee: the CC needs to ensure that internal and external equity, alignment with strategy and agreed risk appetite, and firm performance base executive remuneration.

Read more…

Regulation and Pay for Performance

September 13, 2015 Leave a comment

Steven A. Bank an George S. Georgiev, (Ucla School of Law) recently exposed their view that although regulation is intuitive and well-intentioned, it nevertheless often fails in addressing the problems it is supposed to attack. (1)

They argue that the last 25 years of regulation on pay and performance, led by legitimate concerns on corporate malfeasance and underperformance as connected with inflated executive pay, have not actually been successful in reigning in executive pay.

Complexities introduced by different pieces of regulation have left space for gaming the rules and manipulation and created links among them and with other regulatory goals. The authors recall the case of the 1993 regulation that settled a limit on the deductibility of Ceo`s fixed pay on 1 USD million; they argue the limit soon became a salary floor, and the regulation led to a huge increase in variable pay through stock options and other tools. And the also recall certain cases, (years after the Dodd-Frank regulations were introduced) where executives received large sums of money and rewards while investors saw their wealth squeezed.

They expose how the link between pay and performance continues to be elusive, even if it was the main objective pursued by the 2010 Dood-Frank act. Some tips arise: Read more…