McLagan periodically publishes white papers called "McLagan Alerts". Authored by thought leaders at the firm, McLagan Alerts provide analysis and commentary on topics relevant to our clients in the financial services industry.
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Click on the links below to read previous Alerts:
As banks begin to make their year-end pay decisions, it is clear that incentive pay for employees across investment banking, equities and fixed income will decrease at most firms, particularly the largest ones.
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The UK Treasury is consulting on proposed regulations to require larger banks to publish anonymous remuneration details for each of the top eight UK-based executives below the board “to enhance the transparency of the relationship between risk and reward for the highest paid senior executives in the largest banking institutions.”
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In spite of a modest cooling off of the economy, Brazil continues to be a location of strategic importance for financial services. For the first time last June, investors viewed Brazilian debt as less risky than highly-rated U.S. debt, which, according to Brazil’s Finance Minister Guido Mantega, is a reflection of the country’s economic resilience and soundness.
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While there will always be a differential between Front Office and Infrastructure (Back Office) pay, at some banks we may be seeing some early indications of change, both in terms of reducing the differential but also in giving greater attention to getting Infrastructure pay “right” for the current market.
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For the better part of two years the Federal Reserve Bank and the nation’s largest banks (also known as “LCBOs”—Large Complex Banking Organizations) have been trying to come to agreement on the best way to minimize the possibility that incentive plans would encourage executives and employees to put the bank’s balance sheet at risk for their own personal gain. In short, they want to ensure that compensation is not a contributing factor to future financial crises.
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Prior to the financial crisis, most people outside of the sector likely never gave compensation and incentive plan design a second thought. As the crisis unfolded and the government set out to identify the contributing factors, however, evaluating compensation practices became an important exercise for regulators and banks.
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If investors are dissatisfied with executive pay, voting results during this proxy season are certainly not reflecting that sentiment. An overwhelming majority of shareholders at the top banks gave their approval on executive pay.
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All financial institutions have been besieged by a plethora of new rules coming from domestic and, in many cases, foreign regulators. The volume of compliance work is only outweighed by the collective concern about what these regulations will do to profitability, compensation and shareholder return.
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2010 was a bounce back year for many Investment Banking firms focused on M&A, particularly smaller "boutique" shops. After painful years in 2008 and 2009, with low deal volume, scrambles to assemble restructuring teams, and speculation about the merits of countercyclical products and services, firms are bullish on the M&A pipeline and focusing on expansion. If the anticipated deal volume comes to fruition, this will likely be a prosperous year for the vast majority of firms in this space. There will be a small set of firms that will make the most of this opportunity and some that will simply ride the wave up and then slide back down.
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The United States federal regulators are proposing rules (the “Rules”) to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) addressing incentive compensation arrangements with a focus on prohibited and excessive compensation. On Monday, February 7, 2011, the FDIC published their version of the proposed Rules. This client alert focuses on both the proposed rules as published, as well as specific areas where the regulators are asking for comment.
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For many banks there is—or shortly will be—life after TARP.
In 2010, we saw a number of firms repay their TARP funds through capital raises or retained earnings. As we look to 2011, we expect both these trends to continue and the pool of TARP banks to shrink.
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External forces such as legislation, regulatory guidance, and shareholder and media scrutiny have necessitated the largest thought overhaul the banking industry has seen in many years. The overall message is clear: Banks will change the way they consider compensation, either voluntarily or by mandate. This paper discusses concerns, considerations and challenges banking leadership must deal with moving forward in their compensation planning.
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In response to the recent legislation and regulation, banks are examining the relationship between risk and their incentive plans - and considering necessary adjustments to be in compliance. We examined compensation and incentive trends for 2010 as well as what is being planned for 2011 concerning; incentive plan performance measures and incentive compensation methods.
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In order to help clients prepare for 2011 salary, compensation, and incentive planning, we have gathered information on bank’s plans for their 2011 salary and compensation budgets. This flash survey examines the base salaries and planned salary increases for bank employees focusing on three employee levels; Executive, Exempt and Non-exempt with data provided for percentage of planned increase and how the planned increase for 2011 compared to 2010.
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2010 brought a great amount of activity from regulatory agencies, Treasury and Congress regarding risk, compensation and salary plans, incentive plans, and corporate governance. Amalfi Consulting's 2010 White Paper summarizes and discusses the impact of this activity on salary, compensation and incentive plans as well as corporate governance.
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This flash survey examines whether or not banks use equity as part of their overall compensation program. For banks that use equity we present information on what type of equity they grant, as well as what metrics, vesting and the frequency of grants being used and how they anticipate future changes in equity plans.
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On July 21, 2010, the Dodd-Frank Wall Street Reform & Consumer Protection Act was signed into law. This legislation includes a number of provisions affecting executive compensation and corporate governance. While a majority of the compensation provisions apply to all public companies, a few select provisions apply to all financial institutions (public or private) with assets of $1 billion and more. This client alert summarizes these provisions and the associated effective dates.
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Given the state of the banking industry over the past two years, we felt it was time to examine if and how board of directors’ compensation plans were changing. In this flash survey, we explore changes in compensation practices of bank directors in regards to cash and equity compensation for services, chairmanships and committee work.
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On June 21, 2010 the Federal Reserve, OCC, OTS, and FDIC jointly issued final guidance on sound incentive compensation policies. Originally issued by the Federal Reserve in the fall of 2009, the purpose of the guidance is to assure that the safety and soundness of the United States financial system is not jeopardized by unhealthy incentive compensation plans. This Client Alert outlines the key aspects of this guidance.
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On 10 December 2010, the Committee of European banking Supervisors (CEBS) published the final guidelines on implementation of the Capital Requirements Directive (CRD)III remuneration regulations in the EU and on 17 December, the UK Financial Services Authority (FSA) published the associated Revised Remuneration Code.
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As the world economy struggles to gain its footing, Brazil is in the midst of a new “golden age”. Having overtaken the United States and tying China as the most favorable country for investments as well as playing host to the Olympics and the World Cup in the near future, the stage is now officially set for Brazil to further cement itself as a prominent world player.
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The long awaited guidance from the Committee for European Banking Supervisors (CEBS) was published 8 October 2010. This McLagan Alert reviews these guidelines and their implications based on our discussions with institutions and regulators.
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Over the years, some companies have actively managed the timing of incentive compensation in anticipation of tax rates changing. While there has been a fair amount of speculation around this recently, to date, there has been more discussion than any real action on this front.
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During the last 12 months, pay structures for bank staff have changed dramatically. These changes have also impacted the back offices, i.e., the infrastructure functions. As firms are now beginning the planning process for year-end compensation, should they also reassess the way that the bonus pool for infrastructure functions is calculated and distributed?
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The Dodd‐Frank Wall Street Reform and Consumer Protection Act is likely to usher in a transformation of the wealth management industry with implications not only for the brokerage firms that will be most affected by new regulations, but also for private banks and investment advisors who already operate under a fiduciary standard of care.
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As firms consider ways to deliver pay that are motivating, conform to regulatory guidelines, factor in multi-year performance, and discourage risk, there has been increasing thought and energy devoted to expanding clawbacks, holdbacks, performance hurdles, etc.
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The latest remuneration governance principles set out by authorities in Bahrain, the Kingdom of Saudi Arabia and the United Arab Emirates (UAE) have specifically addressed the issue of Remuneration Governance.
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Over the last 18 months, a number of forces—regulatory reform, firm economics, share availability and public perception—have forced large-scale shifts in the form, level and mix of compensation in financial institutions.
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To reward, to retain and to motivate – it is a phrase that often sits at the core of a compensation program philosophy. To achieve these goals, companies use a wide array of compensation vehicles. Among them, incentive programs are the most relied upon component of total reward used to motivate and encourage alignment of individual and organizational goals.
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Mandatory deferral plans were never particularly interesting. Firms were preoccupied with being “competitive with the street”. There wasn’t a great deal of variety and innovation. Employees griped about having some portion of their bonuses deferred, and then often sat back and watched the value of their awards escalate. Of course, that hasn’t always been the case in the last couple of years.
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The credit crisis came home to roost, government intervention and regulation reached an all-time high, executives in general and bankers in particular were vilified, and so many things that we took for granted were turned upside down. But, from all this, are there lessons that we can learn?
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Given the multitude of regulatory agencies that global financial institutions have to deal with, we thought it would be helpful to summarize the latest requirements as we understand them.
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In this Alert, we provide a framework to take a more holistic view of incentive plan design that moves beyond performance metrics and award opportunities into considering the overall risk and competitiveness of a firm’s compensation program.
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The global financial crisis of 2008 - 2009 has spurred a renewed focus on operational efficiency and Enterprise Risk Management (ERM) not only for (re)insurers but for all organizations. The turmoil we have experienced, and continue to encounter, coupled with an abundance of new and proposed regulatory reforms, presents firms with daunting challenges - and significant opportunities.
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Virtually every regulatory body has come out with some pronouncement or other admonishing financial institutions to curtail compensation programs that “encourage the taking of unreasonable risk.” Two parts of that statement are problematic.
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Regulatory bodies and industry associations across the world have been focused on incentive compensation practices in order to assess their impact on the recent financial crisis and more importantly to identify ways to prevent future problems.
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For a number of reasons—government scrutiny, shareholder backlash, undernourished balance sheets—bank management and boards are hearing the call to reform executive pay.
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In the current market environment, there are numerous opportunities for human resources and compensation professionals to continue to add value to their organizations.
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There is a lot of noise in the market and in the press that seems to suggest that many banks and financial services firms of all types are increasing salaries broadly – a sentiment that is reinforced by those lobbying for such action.
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There has been lots of talk about increasing salaries in financial institutions. This is particularly surprising given that relative performance is, for the most part, declining.
Since the people raising the issue are neither naive nor stupid, there must be a method behind the madness. When you scratch the surface there are some very good reasons...
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It was a big week in Washington—lots of hoopla and press and plenty of opportunity to take pot shots at the “fat cats” on Wall Street. But, it’s a new week and calmer heads must rationally get down to the business of saving our financial system.
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While 2008 was a profoundly challenging period for the asset management industry, the impact of the stock market chaos in the latter part of the year is only partially recognized in the financials of our benchmark firms.
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This is a year like no other in the world of executive compensation. Everything has turned on its head and the challenges for professionals in the field are staggering.
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Taxpayers, beneficiaries and politicians are up in arms about paying bonuses to public fund investment staff during this economic crisis.
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In the 2008 / 2009 bonus process, we have seen significant changes to deferral plans, most notably, substantially more compensation deferred.
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Since its enactment, the Emergency Economic Stabilization Act of 2008 has required that financial institutions participating in TARP accept certain conditions for executive compensation and corporate
governance...
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The credit crisis of 2007 and 2008 has resulted in severely depressed stock prices for the majority of large financial services firms, leaving their executives and employees holding underwater options...
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2009 will offer many opportunities for firms to emerge leaner, more efficient, and well poised to take advantage of the opportunities that will be available.
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Building on results of Performance Intelligence, McLagan and Casey Quirk's annual study of asset management company financial performance, this paper highlights the challenges facing asset management firms.
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Boards and senior leaders of financial institutions from around the world are struggling to decide what to do about pay this year-end, and time is running out.
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Any firm that is in the business of underwriting, syndicating and/or investing in credit vehicles is witnessing times like never before.
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In a year where most firms will struggle to deliver bonuses that resemble the amounts paid at year-end 2006, or even 2007—both of which now feel like a long time ago—it will be tempting for firms to give promotions, in lieu of pay.
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Payout ratios, which have largely been a constant for mature businesses, increased in unprecedented and unsustainable ways.
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As is true in every downturn on Wall Street there is a search for the obvious villains—those that caused firms to fold, investors to lose their money and countless innocents to lose their jobs.
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