Academic journal article ABA Banking Journal

Executive Compensation: The Problem of Two Masters

Academic journal article ABA Banking Journal

Executive Compensation: The Problem of Two Masters

Article excerpt

WHEN IT COMES TO COMPENSATION, boards are faced with the problem of two masters: Institutional Shareholder Services and the bank regulators. "They don't always agree. Bank regulators have their own guidelines. ISS has an entirely different set," says Susan O'Donnell, a banking compensation and governance consultant with Meridian Compensation Partners.

O'Donnell, who has spoken at numerous ABA conferences, explained that bank regulators are focused on risk mitigation, so they believe pay incentives are bad since they feel incentive compensation is risky.

ISS, on the other hand, likes incentive pay because it believes the practice creates a win-win situation for banks and shareholders.

"You can be a high incentive compensation payer and get good marks from ISS as long as you are a high performer," says O'Donnell.

She called this tug-of-war between regulators and the leading shareholder advisory services one of bank directors' biggest challenges.

According to O'Donnell, there are many cases where bank consultants tell ISS that banks have to follow regulations and ISS simply doesn't care. The end result is that a lot of bank compensation programs have come to look alike, as boards have to find a happy medium.

Changing practices

O'Donnell says the biggest change in how ISS rates compensation practices lately has been in regard to equity plan proposals.

Until this year, ISS focused on the concept of shareholder value transfer (SVT), which is simply the value of equity given to directors and executives that dilutes the holdings of other shareholders.

Now, the advisory firm has come up with a score sheet of pluses and minuses where SVT is one factor of several. …

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