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09 Apr. 2010 | Comments (0)

As U.S. financial public companies await the fate of majority voting and Say on Pay measures included in the financial regulatory reform bill in the Senate, companies around the world continue to make progress in meeting G-20 mandated compensation principles and standards. A peer review completed March 30 by the Financial Stability Board (a G-20 committee created during last year’s Pittsburgh summit) reported that although “significant progress” has been made in incorporating FSB principles and standards, full implementation is far from complete. [Read the press release.] “Sustained efforts by firms and authorities remain necessary to effectively align compensation structures in major financial institutions with prudent risk-taking,” the report stated. The FSB also called for a follow-up review on compensation  to be completed by the second quarter of 2011 in order to assess the impact of measures put into place by various jurisdictions worldwide, including the United States. Among the FSB recommendations in the peer review are:
  • FSB members should finalize and implement regulatory and/or supervisory initiatives related to the Principles and Standards in 2010.
  • Firms should continue to make progress on risk and performance alignment of compensation schemes through 2010 and beyond.
  • Supervisors should actively check that the composition of compensation committees meets appropriate standards of expertise and independence.
The Thematic Review on Compensation: Peer Review Report, which was prepared by a team of experts led by Klaas Knot (Deputy Treasurer General and Director of Financial Markets for the Netherlands), specifies that national policies on executive compensation include enhanced supervisory cooperation with regard to cross-border firms and that there be increased coverage of non-bank financial institutions. The peer review report is based on an independent report by Oliver Wyman. The U.S. bill, which awaits action by the full Senate after its sponsor Chris Dodd oversaw its narrow passage in his banking committee last month, includes certain measures affecting compensation. Those include Say on Pay for shareholders (an advisory vote on compensation plans), majority voting for director elections as well as the alignment of compensation plans with risk. While that bill differs somewhat from the House companion that passed in December, there is talk that a compromise could be reached by the Memorial Day recess. I thought now would be a good time to re-publish the comparison of the G-20 Summit FSB Principles for Compensation Practices and The Conference Board Task Force on Executive Compensation. Below is the chart I ran in a blog post on Oct. 22.

Executive Compensation Principles

G-20 Summit Financial Stability Board Principles for Sound Compensation Practices (Released Sept. 25, 2009) 1.) Financial institutions should have an independent board remuneration (compensation) committee that oversees compensation policies. 2.) Compensation should be aligned with long-term value creation by avoiding multi-year guaranteed bonuses and requiring a significant part of variable compensation be deferred, tied to performance and subject to clawback. They should also take into account current and potential risks. 3.) Financial institutions ensure that compensation of senior executives and others who have a material impact on risk exposure align with performance and risk. 4.) Financial institutions disclose compensation policies and structures to guarantee transparency. 5.) Variable compensation be limited as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital base.

The Conference Board Task Force on Executive Compensation (Released Sept. 21, 2009) 1.)  Compensation plans should establish a clear link between pay, strategy and performance. 2.)  Provide compensation that is fair, affordable and clearly aligned with actual performance. 3.)  Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance – such as excessive golden parachutes, overly generous severance arrangements, gross-ups of parachute payments or perquisites, and golden coffins – unless specific justification exists. 4.)  Demonstrate credible board oversight of executive compensation. 5.)  Foster transparency with respect to compensation practices and appropriate dialogue between boards and shareholders.

  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin

     

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