Executive remuneration

WWW.MISHCON.COM ©MISHCON DE REYA 2014

26 JUNE 2014

EXECUTIVE REMUNERATION:2014 UPDATE

Greg Campbell, PartnerMishcon de Reya

Presented at an event hosted by Selby Jennings, part of the Phaidon International group on 26/06/2014


• Massive increase in executive pay in 50 years

• CEO pay quadrupled since 1998

• Widening gap between pay of senior executives and lowest paid staff members

• Increasing CEO pay has outstripped company performance

• Banking crisis: (perceived?) impact of bonus culture

• EU intervention through CRD IV

HOW DID WE GET HERE?


PAY RATIOS IN THE US


PUBLIC PRESSURE

“It is time for big FTSE companies to recognise that, in absolute terms, executive remuneration is excessive.” Simon Walker, Director General of the Institute of Directors

“There’s a serious problem, because executive pay has got way out of line with company performance and you’re getting rewards for failure, and the average of high-level pay has gone far ahead of share prices.” Vince Cable, Business Secretary

“The UK’s families might be struggling to cope with the biggest squeeze on their incomes in living memory, but that hasn’t discouraged top directors from awarding themselves austerity-busting pay and bonus packages worth millions.” Frances O’Grady, TUC General Secretary


• In broad terms bonuses in FS in 2013 were flat

• This is despite improved Bank performance and general economy

• Average pay for top 15 CEOs - $13million

• Senior executive pay showing differences between US and UK/EU

• Regulatory pressure • Weakness of continental Europe economy• Withdrawal from investment banking

2013 AWARDS


• Hedge funds generally underperformed

• Wide variation in performance – some made huge returns

• Lack of volatility and value in equities reduces easy wins

• Capital issues loom large – London Whale

• Boutique corporate finance houses reappear as banks preserve capital

• Retail banking focus of UK banks, leads to reduced returns

2013 AWARDS


• End of an era

• 2008 is not coming back for the foreseeable future

• Even if profits reappear, regulatory and shareholder pressure too great

• Focus on return to shareholders/cost of capital

• There is money available for star performers

• The rising tide will no longer lift all boats

• Most employees may need to be willing to accept less

2013 AWARDS


BARCLAYS A CASE STUDY

• 2013 bonus decisions almost cost Antony Jenkins his job

• Did lead to exit of Chair of Remco

• Bonus pot 10% higher than 2012 ($2.4 billion) - despite 30% drop in profits

• BUT that is not comparing apples and apples

• 2012 bonus pot was originally much larger, but was reduced for “conduct” risk

• 2013 bonus pot was ultimately larger because employees adhered to Risk/Compliance rules

2013 AWARDS


COMPLICATED INTERLOCKING STRUCTURE

CRD IV

Remuneration Code

Employers

Individuals

Employment Contracts

Public Opinion

ABI / NAPF

Financial Reporting Council

Politicians


EMPLOYMENT CONTRACTS

• Freedom of contract is a thing of the past

• However, there is still room for differentiation

• Power of the Remuneration Committee

• What does a “discretionary” bonus really mean?

• Commerzbank v Keen• Dresdner Kleinwort v Attrill• Imam-Sadeque v Bluebay Asset Management • Discrimination / Equal Pay

KEY CONCEPTS


EMPLOYMENT CONTRACTS

• Payments on termination

• Pilon – salary only / salary and benefits?

• Bonus entitlement

• Deferred compensation: good leaver, bad leaver, intermediate team

• Constructive dismissal issues:

• Damages• Loss of restrictive covenants

KEY CONCEPTS


CAPITAL REQUIREMENTS DIRECTIVE IV

• CRD IV in force July 2013

• Implemented in UK: 31 December 2013 for bonus year 2014

• Extends CRD III:

• New remuneration code• Greater disclosure obligations• Bonus cap (1 x salary, unless shareholders approve 2 x

salary)• UCITS V: extends regulation to fund managers, but

bonus cap won’t apply• Cap being challenged by UK Government

KEY CONCEPTS


THE REMUNERATION CODE

• Aimed primarily at risk management

• In operation for 5 years, working effectively

• Use of deferral and stock to (dis)incentivise behaviours

• Deferral is currently 3 years, but market practice varies, likely to increase

• Stock buy out on pre-existing terms

KEY CONCEPTS


THE REMUNERATION CODE

• Guarantees generally unacceptable (n.b. 2014 Remuneration Code)

• Possibility of waivers - s.138A FSMA

• Can’t avoid EU Directives

• Two grounds:

• “unduly burdensome”• “wouldn’t achieve the purpose of the rule”

• Work with the PRA

KEY CONCEPTS


MALUS AND CLAWBACK

• Currently only malus required under the Remuneration Code

• Clawback remains good practice and common amongst larger banks

• Utilised primarily in high profile cases:

• JP Morgan – “London Whale” case

• BUT - Standard Chartered – did not clawback in response to regulatory fines

KEY CONCEPTS


MALUS AND CLAWBACK

• Clawback to be required – PRA consultation paper

• New rules wider than market practice

• Reasonable evidence of misbehaviour or material error• Material downturn of performance• Material failure of risk management

• 6 year period – well above market practice

• Take “reasonable steps” to get contractual agreement to clawback awards from 1 January 2009

• What about an employee who has already spent the money – bankruptcy?

KEY CONCEPTS


MALUS AND CLAWBACK

• What if employee refuses variation of contract?

• What about former employees?

• Many contracts expressly subject to Remuneration Code

• CP only expects ‘reasonable steps’ to amend contract

• Can change be imposed – constructive dismissal

• Restrictive covenants than financially

• Can employers continue to employ refuseniks?

KEY CONCEPTS


ROLE BASED ALLOWANCES

• Pressure from Europe / politicians suggesting CRD IV avoidance

• Can also be entirely legitimate

• Need to be for a sufficient period

• Include in PILON, pay during garden leave?

• Any performance conditions?

• Circumstances in which they can be withheld?

KEY CONCEPTS


LTIPS

• Still variable compensation for CRD IV

• Combination of deferral plus performance

• How do you report missed targets?

• Not strictly malus, but useful PR

• Huge flexibility, but valuation difficulties

KEY CONCEPTS


FUTURE DEVELOPMENTS: LEGAL, REGULATORY AND POLITICAL• Vince Cable letter

• RBS debate on bonus caps

• Labour 2015 manifesto:

• Bonus tax• 50p tax rate• Maximum pay ratios

• EU attack on role based allowances

• Loss of 2 x cap

KEY CONCEPTS


Q&A

Greg CampbellPartner, Mishcon de ReyaTel: 0207 440 7234Email: [email protected]

THANK YOU

mailto:[email protected]

Executive remuneration

Business

Transcript of Executive remuneration