Boyden’s Global Financial Services Practice welcomed special guests Ken Hugessen and John Skinner from Hugessen Consulting to discuss ‘Challenges for Bank Boards in North America Regarding CEO Compensation in a Changing Landscape’. Here we share insights and key trends.
Members of our Global Financial Services Practice were privileged recently to discuss insights from Ken Hugessen, Partner and John Skinner, Principal at Hugessen Consulting based in Canada, on ‘Challenges for Bank Boards in North America Regarding CEO Compensation in a Changing Landscape’.
Hugessen outlined current trends in CEO compensation in North America, including:
Hugessen shares a common approach to variable pay among major North American banks:
At the C-suite level below the CEO, typical weighting tends to see an increase in base salary and a decrease in equity. At the North American banks, the level of incentive pay uses an annual business performance factor, that drives cash bonus and equity award sizing. Executives would have variable compensation, usually a percentage of base salary and, depending on how the bank performs, financial and non-financial metrics would be used, moderated by secondary factors such as individual performance, risk assessment and other elements.
While the operating environment has generally reverted to normalcy post-COVID, the many current executive compensation challenges have been heightened by world events and market disruptions.
The impact on talent of a volatile and unpredictable market highlights issues around recession expectations, different talent pressures by sector, such as layoffs in tech and financials, and sensitivity around larger executive pay packages against the backdrop of mass layoffs and weak shareholder returns. The use of equity may become more selective as organisations face retention concerns and run the risk of outsized payouts when share prices recover.
Going forward, Hugessen expects to see continued focus on pay-for-performance alignment, pressures on agreement between board and management on performance expectations, and an emphasis on how to assess performance in ‘lean’ years, together with considerations around how and when the Board should exercise discretion.
Pay differences in Canada and the United States:
John Skinner comments, “Coming out of COVID, labour markets have been tight and organisations have had to do extraordinary things to retain and attract talent. Financial services and tech were very hot areas, with greater retention awards and larger sign-on bonuses. We have now seen that turn, with salary budgets easing and recessionary expectations playing into mid-term compensation decisions. It’s more of a wait and see proxy season right now as pay levels are released over the next few months”.
In terms of other benefits, notably pensions, these are transitioning away from the traditional client benefit to savings type programmes. Ken Hugessen highlights, “The only exception is in trying to move someone at a very senior, CEO level. If they have the leverage and negotiating power, they could negotiate for a defined benefit programme”.
“ESG is the topic of the day in boardrooms and the broader investment community,” asserts John. “Boards and management teams are reviewing strategy and risk through an ESG lens and other stakeholders are upping expectations on how to measure performance around these metrics. Considerations around incorporating ESG into pay programmes to achieve results will focus on primary concerns such as emissions, diversity & inclusion, health & safety, customer satisfaction and employee engagement”.
He adds, “It’s all about design elements in ESG metrics. Organizations will be at different stages, with larger issuers having more clearly designed ESG strategies, and smaller issuers feeling the pressures of having given less thought to the material risks to the business and what to measure from a compensation perspective. These organisations will need a clearer idea of what their ESG strategy is before incorporating it into compensation”.
The prevalence of ESG in incentive programmes has increased significantly over the last few years, although practical challenges limit broader adoption.
There is a material increase in the proportion of North American issuers integrating ESG measures within their annual incentive plan:
According to Hugessen research, the most prevalent ESG metrics in incentive plans are:
Prevalence within S&P/TSX 60
Prevalence within S&P 500
Hugessen insights around more recent developments in North America and globally:
Thank you to Ken Hugessen and John Skinner for a very interesting discussion that enhances our engagement with boards, as we help them to identify and acquire the best CEOs and senior leaders in a turbulent market.
Ken and John are leaders in executive compensation and respected advisors to boards on performance, governance and other shareholder matters. They work with prominent banking, insurance and asset management organisations in Canada, the United States and the United Kingdom, as well as major Canadian Pension Plans.
Ken Hugessen explains, “Our firm made its reputation in helping boards in their capacity as overseers of compensation, particularly in any situation where there is capital, such as public shareholdings, private capital or public equity, and a need for advice on executive pay. Aside from our technical capabilities, we are ‘peacemakers’, bringing ideas and approaches that people can rally around”.
He adds, “As the public-private landscape changes, we are increasingly advising private equity companies on, for example, how to pay the promoter of a deal, key people in acquired companies and the sensitive area of equity allocation among the parties”.
Hugessen Consulting helps boards of directors make the right decisions on executive compensation and its governance, CEO performance management, and Board effectiveness. The firm has more than 30 professionals in Toronto, Calgary and Montreal, and affiliated relationships with US-based Semler Brossy Consulting and leading UK-based advisors.