Executive compensation continues to make headlines in the United States. To cut through the chaos of a seemingly endless stream of multiple legislative proposals, “Say on Pay” initiatives, and regulatory pronouncements on the topic, here is a brief summary of the two major developments released in the last few months:
Incentive Compensation Guidelines
Following instructions from the G-20 summit, the U.S. Federal Reserve has issued proposed guidelines for incentive compensation. These guidelines apply to banking organizations governed by the Federal Reserve, including the U.S. operations of foreign banks with a branch, agency or commercial lending subsidiary in the United States.
Special Master Kenneth Feinberg released determinations on 2009 compensation packages for top executives at seven firms that received exceptional assistance from the U.S. government. As was extensively covered in the media, Special Master Feinberg rejected proposals that he thought provided too much cash. He also forced executives to take payments in company stock that must be held over the long term.
Even though many employers are not directly affected by these pronouncements, both of these developments will no doubt be of interest to Canadian financial institutions as well as public companies more generally. In particular, companies that are seeking a framework for analyzing the link between compensation and risk-taking will be studying the following principles that were applied in these announcements:
- Balanced Risk Taking: Make compensation more sensitive to risk through, for example, the deferral of payment (and “clawbacks”), longer performance periods and risk adjustment of awards (i.e., communicating to employees the ways in which awards will be reduced as risk increases). Sound incentive compensation plans should reward appropriate risk, not excessive risk.
- Risk Management and Effective Controls: Institute appropriate controls to maintain the integrity of risk management functions and revise arrangements as needed if payments do not appropriately reflect risk.
- Strong Corporate Governance: Provide resources to the board of directors so that it can actively oversee incentive compensation and follow a systematic approach to balanced compensation design.