NEW YORK (
) -- After fits and starts since the financial market collapse of 2008, shareholder rights activists see upcoming "proxy season" -- when shareholders vote on array of corporate issues -- as an opportunity to force significant changes in executive compensation at the largest U.S. banks.
Carmen Edwards waves her mortgage papers during a demonstration outside JPMorgan Chase's annual shareholder meeting in downtown Manhattan May 18, 2010 in New York City.
"This upcoming season shareholders will be better organized and likely to be more vocal," says Paul Hodgson, senior research analyst with the corporate governance consulting firm The Corporate Library. "Some banks have made minor or cosmetic changes to compensation. Some have gone backwards."
The issue of how bank executives get paid has been in focus over the past several weeks as many financial services companies are winding down their fiscal years.
Indications are that Wall Street is gearing up to hand out healthy bonuses based on a bumper year. New York-based securities firms notched a record-setting $10.3 billion in profits in the first quarter of 2010, followed by a much smaller but still profitable $3.8 billion in the second quarter, according to the New York State Comptroller's Office.
That compares with record losses of $54 billion during 2007 and 2008. Wall Street rebounded strongly in 2009, earning $61.4 billion, the Comptroller's office says.
According to Corporate Library's 2010 CEO Pay Survey released in November, banks and other financial services companies have been less than responsive when it comes to holding the line on compensation. While "capital markets" firms, such as the big Wall Street banks, saw a 7.27% decrease in total compensation between 2008 and 2009, other sectors such as "diversified financial services" companies realized a 12.95% increase, the survey reveals.
But a major concern of shareholders -- especially large institutional investors -- is the not only how much, but
executives are paid. A sticking point for shareholder activists is the continued reliance of Wall Street on so-called "short-term" awards such as cash or stock that reward executives for a healthy 2010 while discounting the destruction in shareholder value that laid waste to investors for the past three years.
"Most shareholders are very focused on pay for performance, where the compensation isn't tied to a specific amount but is tied to long-term performance," says Carol Bowie, head of compensation research at ISS Governance.
So-called deferred compensation, including "claw backs," stock retention and holding periods have been pushed by activist investors over the past few years with limited success. Bowie believes these long-term compensation schemes create a dual benefit: mitigating the temptation to take inappropriate risks and ensuring that executives don't receive windfall pay for short-term results.
From some of the largest Wall Street firms, the push into deferred compensation will come from Uncle Sam. Several bank regulators -- including the
Securities and Exchange Commission
-- are considering forcing large "systemically" important banks like
Bank of America
to limit awards to deferred compensation schemes, according to a report in
The Wall Street Journal
Boosting Bonus Banks
One solution being pushed by shareholders in this year's proxy season for banks will be so-called "bonus banks." These schemes allow for the payment of a portion of top executives' annual awards to be deferred and dependent on sustained performance, sometimes for as long as five years.
"This is a very specific type of economic value-based compensation and is dependent on sustained performance.
Bonus banks were the standard for a long time and then they went out of fashion," Bowie explains
Bonus banks have already started to make a comeback, most notably among European regulators and the banks they oversee.
adopted a bonus banking arrangement last year that calls for one-third of a top manager's annual bonus to be paid out immediately with the rest deposited into an account. According to published reports, the money can be drawn down over three years as long as the executive meets or exceeds certain performance benchmarks. If the executive's performance lags, they stand to lose some -- or even all -- of the funds.
A representative for UBS declined to comment but explained that "variable compensation will only be determined on the basis of the full-year results."
Shareholder activists have previously attempted to push the bonus bank concept in the U.S. Targets of shareholder pay votes during the 2009-2010 proxy season included
Charles Schwab Corp.
with the proposals receiving between 22% to 31% backing from shareholders.
"Not too many
banks considered bonus banks, but it received substantial support for a new proposal. Most new resolutions typically get below 10% support in the first year or two," Bowie adds.
The Corporate Library's Hodgson says bonus bank concept could see some success when proxy season kicks off in February, especially since all publicly traded companies will be required to conduct a pay "advisory vote" as a result of the Dodd-Frank Wall Street Reform and Consumer Protection.
"In the first year
shareholders had two months to prepare
following the 2008 crisis, and in 2009 it was focused on all the money they lost," Hodgson says. "But this year will be different, especially since there seems to be kind of a blind spot for banks and how it will play out in the public eye."
--Written by Christopher Westfall in New York.