In our March update, we highlighted a positive performance trend in revenue and profitability in the banking industry. For a more detailed analysis of the sector’s 2016 financial performance, see “Fourth-quarter pay-for-performance update for the banking industry: Optimistic future ahead,” Executive Pay Matters, March 27, 2017. Our blog this quarter explores how the improved 2016 financial results affected annual incentives for 2016 and long-term incentive plans (LTIP) that culminated in 2016.
Our review of proxy statement disclosures filed this spring showed that annual CEO bonus payouts reflected the performance trends seen throughout the financial services sector. The median payout grew to 103% of target. Compared to 2015, which saw the median payout just meeting target at 100%, a greater percentage of CEOs received short-term incentive payouts in excess of 110% of target, as shown in Figure 1. Though the prevalence of payouts in the 70% - 90% of target bracket grew slightly, payouts under 70% were much less frequent than in 2015. The positive 2016 financial results played an integral role in the upward trend, as many CEOs surpassed their performance goals.
Figure 1. Distribution of CEO bonus payouts in the banking sector
While short-term incentive payouts for 2016 increased versus 2015, it is important to note that most companies did not significantly change their overall payout when compared with the prior year:
- 34% stayed in the same payout range
- Over half (56%) moved moderately up or down by one or two ranges
- 10% increased significantly, moving up or down by three or more ranges
We also reviewed the results of LTIP payouts for performance awards ending in 2016 (generally launched in 2014). We compared the award payout to the award target in two ways: the LTIP payout without the impact the change in stock price has on the share-based plans, and the LTIP payout including the change in the stock price. Figure 2 shows the distribution of these outcomes.
When payouts are examined without the change in stock price, just over a quarter of the sample paid out near target, while the remainder was split between above and below the target range. When considering the impact of stock performance over time, the target-or-better scenarios tend to become more valuable, as the target or higher payout correlates with strong stock performance. Forty two per cent of plans paid out over 170% of target when stock price performance is taken into account, which shows how much upside is attributable to stock price appreciation. Although actual payout amounts can be intriguing, the payout without considering stock changes paints a better picture of the target-setting process. About 60% of the sample received LTIP payouts relatively near target (70% - 130% of target) which shows that firms have a strong handle on the expectations of their leaders.
Figure 2. LTIP payouts ending in 2016 as a percent of target
Reassuring as that may be, companies are increasingly considering how predictive analytics can be used to help calibrate annual and long-term incentive plan goals. In response to market demand, Willis Towers Watson has developed a proprietary approach to simulate future financial and stock performance to estimate the probabilities of various degrees of goal achievement. This modeling helps companies calibrate incentive plan goals and ranges. To learn more about our predictive performance model (PPM), follow the link here.
In our last post, we expressed high expectations for the banking sector in 2017, given less restrictive regulation and the prospect of interest rate hikes, which would ultimately lead to revenue increases. In the first quarter, the banking industry reported one the highest year-over-year earnings growth rates of all sectors. Despite political uncertainty, there is cautious optimism about the global macro environment and even greater positivity in the United States. Stay tuned for our next sector update which will examine mid-year performance and provide a preliminary sense of whether 2017 will continue the upward trend.
For a look at 2016 pay outcomes for CEOs in the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.
Marko Piedmont is an executive compensation analyst in the firm’s Stamford, Connecticut office. Daniel Potter is an executive compensation senior analyst in the New York office. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.