Compensation Calculations

Posted on February 19, 2010


Between “snowmageddon,” (some photos here and here), and a great deal of client work (which is always a good thing, of course), I’ve neglected the blog just a bit. Which is not a good thing, at least according to the blogging gurus – got to keep that content coming . . .

Two interesting items on the topic of executive compensation – more specifically, executive compensation in the context of today’s still unsteady economic climate. The first article, “Compensation Ratios Become Latest Jargon,” by Megan Murphy, appeared in the Financial Times. It discusses the calculations – both business and political – that investment banks perform in deciding how much of their revenue to pay out to their employees. According to Murphy,

Historically, investment banks set aside a hefty proportion of their net revenues – typically between 45 and 65 per cent – to pay staff before calculating profits or paying out dividends to shareholders.

This year, by contrast, some of the industry’s top performers seem to be in a race to announce record-low compensation ratios, in the hope of convincing outraged politicians and the public that they are capable of exercising pay restraint.

Goldman, for example, last month cut the proportion of revenues paid to employees to 36 per cent, the lowest since the Wall Street titan first went public in 1999. Credit Suisse this week announced a historically low compensation ratio within its investment bank, at 41 per cent.

Barclays Capital, Barclays fast-growing investment banking arm, and Royal Bank of Scotland are expected to follow suit later this month, with BarCap bankers looking at a ratio of about 38 per cent and RBS less than 30 per cent.

Bankers, sensing the difficulty in justifying distributing billions in bonuses just 16 months after the near-collapse of the global financial system, seem to be hoping that cutting the proportion of revenues paid to staff will distract attention from eye-popping profits.

But to their critics, the banks are simply engaging in a public relations game.

The second interesting piece of news is about oil giant Royal Dutch Shell which, according to a Reuters article, is “overhauling its pay practices for top management. . . after a shareholder revolt last year.” Shareholders were upset that the company paid performance bonuses to top management in 2008, despite the fact that the company didn’t hit the performance targets that the bonuses were supposedly tied to. Shareholders finally said enough with this heads I win, tails you lose approach to compensation. Royal Dutch Shell has adopted new rules which, according to the article, the company believes “will help align management and investors’ interest.” Whether or not the new rules will in fact accomplish this goal remains to be seen but, if nothing else, the situation at Shell illustrates that shareholders can succeed in making their voices heard and demanding at least some level of accountability from executives when it comes to decisions on compensation.