SEC Revamps Executive Compensation Disclosure
By Richard Freitag
The SEC’s longstanding goal to revamp executive compensation disclosure is now a reality. Reporting companies must comply with the new rules during their 2007 proxy season. There is now a much higher visibility and an increased focus on senior management and director compensation, benefits and costs, and validation as to what constitutes “competitive compensation” by both publicly traded, as well as non-publicly traded institutions.
The Compensation Discussion and Analysis (CD&A) is the centerpiece of the new disclosure rules and requires a discussion of all elements of compensation. One of the SEC – required CD&A questions for response is “How does each element, and the company’s decision regarding that element, fit into the company’s overall compensation objectives?” One of the specific examples given by the regulations to focus on in the discussion is “Did the issuer ‘benchmark’ total compensation or any material compensation component?” and the description of any benchmarking process.
Most organizations find their executive compensation and benefit programs have grown by bits and pieces, are often not coordinated effectively or integrated and may no longer be accomplishing the objectives that originally drove their creation. Often, there is neither a definitive compensation strategy, nor an updated definitive understanding as to where the institution stands in regard to competitive practices and amongst peers.
A detailed competitive analysis according to senior executive position (i.e. a “benchmarking” of where they stand in base salary and total cash compensation) – coupled with an audit or review of their other senior executive compensation programs and where their programs stand versus competitive standards and current regulations – is the first step in developing a compensation strategy that fits their culture and business market, and importantly, responds to the need to meet the SEC requirements for disclosure and explanation.
An independent compensation consulting firm specializing in financial institution consulting, and with access to the necessary specialized bank compensation databases, can render an independent assessment and evaluation that incorporates the following steps:
• Gather data from industry-specific global and regional compensation databases, based on financial institution size for each senior executive position, as well as for the chairman and director positions.
• Determine an appropriate peer group of 10-15 or so financial institutions and calculate comparable financial ratios for each peer bank and the bank being measured.
• Develop average, median, 60th and 75th percentile data points for salary and total cash compensation comparisons and equity opportunities.
• Average appropriate peer group and database statistics together to produce a relevant “market” at the data points for salary and total cash compensation and compare the bank positions to the “market” data points.
• Evaluate other compensation components, including equity offerings, executive benefits, change of control contracts, etc. as compared to peers and competitive standards.
• Compare the company’s compensation targets to the “market” and determine the company’s relative positioning for competitiveness as to salary and total cash compensation and non-cash compensation.
• Recommend adjustments to salary, total cash compensation and non-cash compensation.
• Restate/revise the compensation committee charter as necessary in order to remain in line with current regulations and best practices.
Through this process, an effective compensation strategy and policy can be established and validated. The institution can then position itself to respond to the new disclosure requirements effectively, concisely and with the confidence that it knows where it stands competitively and that each element of its compensation for senior management and directors is well thought-out and coordinated.
Richard Freitag is president and founder of IFM Group Inc., a Bridgewater, N.J. consulting firm specializing in financial institutions since 1992 in all aspects of executive and director cash compensation, stock program design and benefits. IFM Group may be reached at (908) 707-3286.