This is the year when bank shareholders started saying "enough" to gigantic CEO pay packages and giving a stinging thumbs-down to certain banks.
A Briton, Hodgson has been researching and writing about executive pay for 16 years. He has authored a number of books, including "Building Value Through Compensation."
There's a widely held view that pay tied to short-term incentives contributed to the financial crisis. You wrote a year and a half ago that nothing had changed with pay practices since the
Goldman Sachs implemented a plan that measures performance over three years, based on its return on equity. But its ROE targets aren't particularly challenging. They [Goldman managers] may have known something we didn't at the time [the targets were established]. When an institution sets targets lower than they've achieved in recent years, it's a signal you need to heed. It might be that management knows it won't keep up its performance of recent years.
Among other big banks,
When you have a depressed stock price like
Goldman Sachs took a slightly different route but ended up the same. It had been paying top executives
What were the banks thinking in raising salaries so much?They were taking advantage of a push by the Treasury and pay czar [Special Master for Tarp compensation
GMI has said that in addition to the size of CEO pay packages, it's important to look at how much larger they are than those of lower-ranking executives. On that relative basis, you've indicated that the pay of
We have particular concern with banks. Their CEOs are not superstars but team leaders. If they're paid more than three times what anyone else is receiving, that doesn't sound like a team to me but one star and a couple of supporting actors.
That affects the morale of other senior executives and raises questions about succession planning. If you have a couple of CEOs waiting in wings, you'd want to pay them properly. It also affects the balance of power in the boardroom. A CEO who's paid lot more than anyone else can throw his weight around.
In the case of Discover Financial, the problem seems to be disclosure rather than dollars. Namely, that it doesn't let its owners know the details of how they're paying the hired help.The
Not disclosing targets set at the end of 2010 for 2011 seems to have no justification. Offering information that might aid competition isn't a problem because everybody knows how they've done. Instead, it could show that a company didn't set its [performance] targets high enough. Discover paid a cash bonus of almost
So overall pay practices haven't changed much?This [the wake of the financial crisis and passage of Dodd-Frank] was the moment when banks could have revolutionized compensation policy. Lots of advice was out there, but the vast majority have complied with regulation in a very nominal way and returned to business as usual.
What do you mean by "nominally compliant"? They were asked whether their compensation policies encourage risk-taking. None said "Yes." It's difficult to take that at face value. Some do continue [to encourage inappropriate risk]. Look at non-U.S., mostly European, institutions. They made very substantial changes [in pay].
The Dodd-Frank Act began requiring companies to hold say-on-pay votes among shareholders beginning last year, but this is the year they seem to be having a big effect. Why is that?Part of the reason little changed last year is it [the say-on-pay vote] came about very quickly. I don't think shareholders were prepared for the analyses they had to make. There was huge dissatisfaction with ISS [Institutional Shareholder Services, the proxy advisory firm] recommendations. My sense is they were not as sophisticated as they needed to be so companies got a bit of a pass last year.
Are clawback provisions being implemented as you'd want?Both
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