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Compensation for banking executives will shrink next year. Bonuses will be about 30% smaller and come with strings attached. Overall compensation will also decline by about a third, with companies that specialize in investment banking getting hit the hardest. Golden parachutes, or agreements granting executives huge payouts when they leave a company, will also be phased out.
Firms that take the Treasury's rescue package cash will scale back. They'll have little choice. "I can't remember when compensation has been a political issue like this," says John Challenger, CEO of Challenger Gray & Christmas, a placement firm in Chicago. Under pressure from Congress and partly to appease public outrage, bank executives at Goldman Sachs gave up their 2008 bonuses. Around the world, executives at Barclays, UBS and Deutsche Bank did the same. Expect other top-tier banks, such as Morgan Stanley, JP Morgan, Bank of America, Citigroup and others, to cut back bonuses this year. "It would be risky for them to give out large, end-of-the-year payments," says Challenger. "It is unseemly in this environment."
Companies are restructuring salaries in line with a changing economy. Overall compensation pools will be based on measures beyond the immediate bottom line. "It won't be as simple as profit versus revenue," says Vicki Elliott, partner at Mercer Human Resources Consulting. "Pay will try to get to the issues of the cost of capital based on the risk associated with running a business." That will bring down the overall amount of money available for executive pay. To keep valued employees from fleeing to competition, look for banks to target bonuses toward high performers. "One of the issues you still have is companies fighting for a limited talent pool," says Scott Valentin, a Friedman Billings Ramsey research analyst.
Bonus contracts will also be restructured. "That's what's already happening in Australia," says Peter Miterko, a principal at Hewitt Associates. Top-tier executives will receive higher base salaries and smaller bonuses. Those bonuses will be split between cash and deferred compensation, such as stock. Right now, about 33% to 50% of the total salary is in cash. The rest usually comes in the form of restricted stock with three- to five-year vesting times.
New constraints on those deferred payment schedules lie ahead. That stock will get paid out under certain performance conditions, such as how well the company does relative to its peers, overall profit growth and other measures that account for more than just how long the employee worked at the company. Banks will also follow the example of UBS, which decreases the deferred payout if the company performs poorly. That ties executive pay to long-term results, rather than shorter-term annual goals. "It's what people want to see more of," says Valentin.
Bottom line: Executives will be less likely to risk short-term payoffs. Making sure executives don't get paid if the company crumbles encourages them to be more conservative and less tempted by get-rich-quick schemes. "This is a good move in the right direction for governance," says Miterko. "However this shakes out, executives are going to have to think several times before they take the same amount of risk that they have taken in the recent past."
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POSTED BY: SteveTheHawk (December 02, 2008 10:13 AM)
Well.... let me say.... "DUH!". Many, including myself, have harped on this for years. Rewarding for short term performance almost always creates long term risk. Why is that so hard for these morons to understand? Pay and perks should always be linked to long term performance. Pretty simple concept but apparently a difficult one for some people.
POSTED BY: Bob (December 02, 2008 11:12 PM)
No executive is worth a million dollars a year let alone tens of millions plus stock options. This Good Ole Boys Club with "yes men" directors and mutual back scratching has gone on for far too long. Salaries should be set only at stockholder meetings rather than back room deals. The old excuse that "One of the issues you still have is companies fighting for a limited talent pool," has got to be a Corporate Myth. What talent are they talking about? When you look at some of the top level mistakes being made, ANYONE with ANY common sense and even a little foresight could have done better. Simply taking pay and benefits away from your lowest paid employees and then giving yourself a big bonus doesn't take talent. I can think of several more accurate words to describe such management skills.
POSTED BY: keelight Harsh (December 04, 2008 03:55 PM)
Should have trimmed the ol' bonus last year. This clearly isn't a "new" development. Overpaying employee salaries and not paying vendors who are trying to pay their employees.... shameful.
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