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Ethics of Executive Compensation

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Jeff Snyder

on 29 April 2010

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Transcript of Ethics of Executive Compensation

Executive Compensation for Banker's Bank Ethical Challenges of Executive Compensation Duties to the American Taxpayer Regulations Our Model Global CEO Pay 1. How much should executives be paid?

2. Should compensation be tied to profitability?

3. Who should determine executive compensation?

4. How should executives be compensated? Are senior executives worth hundreds of times more than the average employee? 1980 - Average CEO made 42 times as much as the average employee. 2008 - Average CEO made 319 times as much Are CEO's worth that much? Organizations have started to take note of the problem
Since 2000, average CEO compensation has decreased 166% How much should executives be paid? Should executive compensation be tied to profitability? -Research in 2001 showed no correlation between executive compensation and company profitability.

International CEOBank Compensation
What's Wrong with this picture?
Why is there such a huge
disparity between U.S banks and
other international banks? Why not take extra risk with that kind of compensation? Why are executives making more money while their organizations are losing money? Who should determine the executive compensation packages? The packages are usually determined by the compensation commitee
The compensation committee hires a consulting group to give a recommendation.
The consulting group is hired by executives.

Conflict of interest!
How should executives be compensated?
-Most executive compensation packages include a mix of cash, stock options, and other incentives.

-Cash can allow executives to become complacent in their high salaries

-Stock options can tempt executives take actions to increase stock price even though it might not be in the best interest of the company.

-Stock options can also prompt a short-term focus by executives, causing them to ignore the long-term implications of their actions Long Term Compensation CAMELS Plan B Risk Mitigation decrease crazy risk taking Keep focus on the future of the company NOT on the executive's wallet! What is CAMELS? Capital Adequacy Asset Quality Management Earnings Liquidity Sensitivity to Market Risk A rating of the bank on how well it is doing Only the leaders of the bank know the CAMELS score, so they can use it as a performance measure Force the company to come up with a plan B What exactly is going to be done if there is another crises? Steps need to be taken in order to mitigate the risk of another crises Set aside debt that will turn to equity only once the bank is truely in trouble known as "Contingent Capital" The Bank The Board The Executives profitability
compliance strategize
accountability enact
report Philosophy is the Foundation The perfect mix Cash Base Salary
Short-term incentives
Long-term Incentives
Cash-based performance bonuses Don't forget a STRATEGY Cream of the crop
Quick, but lasting growth
Benchmarks Maintains motivation during
a recession or when an industry
isn't doing well. 75th Percentile
50th Percentile
25th Percentile What's the point? What do you mean? Who are the benchmark companies? The companies may change year to year based on consulting information...
but here is the list for this year.... BB&T Corporation
The PNC Financial Services Group, Inc.
Capital One Financial Corporation
Regions Financial Corporation
Comerica Incorporated
SunTrust Banks, Inc.
Huntington Bancshares Incorporated
U.S. Bancorp
Wells Fargo & Company
M&T Bank Corporation
Zions Bancorporation
Marshall & Ilsley Corporation
Alright, so what is the model? Figures are expressed as percentage of total compensation
Annual base salary – 15%
Annual incentives – 25%
Long-term incentives – 60%
•We offer numerous long-term rewards in order to help align our executives actions with the interests of our stakeholders

40% - Stock options that vest in 5 years
½ of these are share at risk

35% - Stock options that vest in 10 years
½ of these are shares at risk

25% - Stock options that vest in 15 years
¼ of these are shares at risk
President and COO VP's Similar model- more cash base Annual Salary – 30%
Annual incentives – 25%
Long-term incentives – 45%
40% - Stock options that vest in 5 years
½ of these are share at risk

35% - Stock options that vest in 10 years
½ of these are shares at risk

25% - Stock options that vest in 15 years
¼ of these are shares at risk
Belief that VP's ultimately don't influence the long term future as much... Compensation packages have to include the correct mix of cash and stock options,
not too much of one or the other! Joe Buehler
Caroline Carpenter
Mike Davis
Matt Perkaus
Jeff Snyder
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