Author: Gordon Platt

UNITED STATES

By Gordon Platt

Regulars_Newsmakers_M2
Bisson: Banks are too reliant on stock options

The populist uprising against paying big bonuses to top executives of banks bailed out with taxpayer money is in large part warranted, according to a study by an independent compensation consulting firm. San Francisco-based Presidio Pay Advisors studied executive compensation at 115 publicly traded banks participating in the Troubled Asset Relief Program (TARP) and found that since 2006, changes in CEO and CFO compensation had no measurable link to changes in performance.

“Many US banks are failing to deliver on their often-stated goal of paying for performance,” says Dave Bisson, author of the study, who is a senior consultant at Presidio Pay Advisors. Based on proxy statements filed in 2009, most banks’ compensation committees say their pay programs are fine and no changes are needed. “We believe this is a short-sighted and counterproductive response and increases the odds regulators or politicians will further set the rules,” Bisson says. Congress has already imposed significant pay restrictions on banks with TARP investments, which will be lifted only once TARP funds are repaid in full. “As the debate surrounding the issue continues in Washington, boards should use this time-out to fix their compensation programs,” Bisson says.

Banks made trillions of dollars in poorly underwritten loans, and these toxic assets are now generating huge losses, he says. It typically takes several years for loans to season and for banks to judge their performance. “There is a disconnect between the period of time used to determine annual incentives and the time needed to determine loan performance,” Bisson says. One solution would be for banks to defer annual incentives and place them in a pool to be paid out over a number of years.

Another problem is an over-reliance on stock options, Bisson says. Direct stock ownership is a better incentive, creating a stronger link with shareholders’ interests, he says. There is an asymmetry in the way options work, he says, because they provide executives with the opportunity for gain without a corresponding risk of loss.