Sunday 23 October 2016

The thorny issue of capping pay for the top bankers in the US

Olivia Oran

Published 02/09/2016 | 02:30

Over the past two years, a growing number of US banks has capped directors' earnings, but the ceilings are so high that they primarily serve to fend off potential shareholder litigation rather than control the pace of pay rises.

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Most of the caps are typically two-three times what directors now get paid, according to data reviewed by Reuters.

For instance, Morgan Stanley's quarterly financial statement last month noted a new $750,000 (€670,000) limit on annual compensation for independent directors. That's over double the $350,000 median the bank now pays its directors.

Morgan Stanley's board has permission to "alter, amend or modify the plan at any time", according to the bank's filing.

Pay consultants and recruiters say banks need such flexibility because heightened regulatory burdens make positions on boards less attractive than in other sectors. Competitive pay can help lure qualified directors who otherwise would choose less time-consuming and highly scrutinised jobs, they say.

"The time spent in these type of positions has grown, as has the risk and potential liability," said Rose Marie Orens, a partner at Compensation Advisory Partners. Advocates of reforming pay - by linking it with performance and reducing incentives for risk-taking - argue the ceilings are so high they lack teeth.

"It doesn't really change the landscape significantly other than insulate companies from lawsuits," said Yaron Nili, a law professor at the University of Wisconsin who focuses on corporate governance. Overall, the median annual board compensation at the six biggest US banks was $349,027 in 2015, nearly $80,000 more than the median director pay at S&P 500 companies overall, according to compensation data firm Equilar.

While regulators scrutinise pay at big banks, investors wield the stick when it comes to independent directors' earnings. Several shareholder lawsuits on the issue got banks' attention.

In one important case, investors sued waste disposal company Republic Services, accusing directors of paying themselves too much. The judge ruled in 2012 that the company lacked "meaningful limits" on director awards.

Facebook settled a similar lawsuit in 2014 by agreeing to review director compensation annually and to bring in an independent consultant.

No banks have been subject to litigation over director compensation, but have imposed caps to avoid facing similar suits.

"For the most part, these limits aren't really going to affect director pay, other than the fact that it's really just a protection for them," said Bill Gerek who advises companies on executive pay and governance matters at Korn Ferry. "What's the cost?"

Consultants and lawyers say ceilings makes a company less likely to be targeted in a lawsuit. Director pay has been rising at banks at a similar pace as at other large companies in recent years. But the rises have generally outpaced share performance.

From the beginning of 2014 to the end of 2015, the KBW Nasdaq Bank Index rose 5.2pc compared with an 11pc rise in the S&P 500 Index. Average director pay at the 10 biggest US banks rose 7pct during the same period, according to Equilar.

So far this year, the KBW index is roughly steady while the S&P has risen 6.3pc.

Goldman Sachs Group pays its board the most among banks and ranks sixth among S&P 500 companies, according to executive recruiting firm Spencer Stuart. Its directors earned a median annual compensation of $595,000 last year, up 32pc since 2011.

Goldman does not have caps on board pay. Most of its directors' pay comes in the form of stock whose sales are restricted until several quarters after they retire. A Goldman spokesman declined to comment. A Willis Towers Watson analysis of Fortune 500 companies found that about 52pc of financial institutions have limits on stock awards directors can receive, compared with 28pc for the whole 500. (Reuters)

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