What's Market: Incentive Compensation for Banking and Financial Services Executives

Practical Law Article w-003-1835 (Approx. 6 pages)

What's Market: Incentive Compensation for Banking and Financial Services Executives

by Practical Law Employee Benefits & Executive Compensation

Published on 23 Aug 2016 • USA (National/Federal)

A comparison of compensation provisions from certain banking and financial services industry executive employment agreements, including KCG Holdings, Inc., E*TRADE Financial Corporation, and TCF Financial Corporation, using What's Market, Executive Employment Agreements: Detailed Analysis.

The banking and financial services industry continues to languish in an environment of increasing regulation, low interest rates, and decreasing money management fees. For performance-based compensation, these stressors have created a period of uncertainty, which, in addition to the pending Brexit, is being exacerbated by a proposed rule seeking to reshape incentive compensation practices at large financial institutions.

On July 22, 2016, the comment period for the proposed rule ended and, if enacted without change, will regulate incentive compensation practices at certain financial institutions with over $1 billion in total consolidated assets. For covered individuals identified as executive officers or "significant risk-takers," the rule may:

Limit the maximum incentive compensation opportunity to 125% of the target amount for senior executive officers and 150% of the target amount for significant risk takers.
Require deferral of a substantial portion of incentive compensation, up to 60%, which would need to be composed of a balance of cash and equity-like instruments.
Prohibit incentive compensation that could lead to material financial loss to the covered institution.
Prohibit compensation, fees, or benefits that would be unreasonable or disproportionate to the value of the services performed by a covered person, taking into account all relevant factors, including compensation history, financial condition of the institution, and compensation practices at comparable institutions.
Require a balancing of risk and reward by examining financial and non-financial measures of performance, and allowing non-financial measures to override when appropriate.
Subject incentive compensation to adjustment for actual losses, inappropriate risks taken, compliance deficiencies, or other measures or aspects of financial and non-financial performance.
Require incentive compensation to be subject to clawback for seven years after the compensation vests.

For more on the proposed rule, see Legal Update, Financial Regulator Issues Proposed Rule on Incentive Compensation for Financial Institutions.

It remains to be seen how new regulation and the industry's changing environment will shape incentive compensation. However, for a snapshot of current compensation provisions from certain recently filed banking and financial services executive employment agreements, see the chart below.

EMPLOYMENT AGREEMENT	KCG Holdings, Inc. Chief Executive Officer April 21, 2016	ETRADE Financial Corporation Chief Executive Officer* January 1, 2016	TCF Financial Corporation Chief Executive Officer January 1, 2016
ANNUAL RATE OF BASE SALARY	$1,000,000, subject to increase, but not decrease, except in connection with across the board reductions that similarly apply to all senior executives. Section 4(a) Terms Schedule to Employment Agreement, Salary	$1,000,000, subject to adjustment from time to time. Section 3(a)	$850,000, subject to adjustment from time to time beginning in 2017. Section 3(a)(i)
ANNUAL BONUS AND CASH INCENTIVES	Target annual incentive (Annual Incentive) is $7,000,000, payable under the employer's annual incentive plan. 50% of the annual incentive is determined based on the employer's achievement of ROE targets, 25% is determined based on the achievement of EBITDA targets, and 25% is determined based on the achievement of other metrics determined by the board. Except as otherwise provided in the case of payment of the earned or accrued Annual Incentive in connection with certain terminations of employment, 35% of the Annual Incentive will be paid in cash and 65% will be paid in restricted stock units (RSUs) (see Ongoing equity grants). The employment agreement provides for payment above and below target, from $0 to $14,000,000 ($4,900,000 for the cash component). The executive receives any earned but unpaid Annual Incentive for the fiscal year immediately preceding termination on termination by the employer without cause, termination by the executive for good reason, or termination due to death or disability. Any earned Annual Incentive paid in connection with such terminations of employment shall be paid entirely in cash. Section 4(b) Section 6(c) Section 6(f) Terms Schedule to Employment Agreement, Annual Incentive Terms Schedule to Employment Agreement, Annual Incentive Equity	Current annual target bonus is $3,000,000, payable based on the achievement of executive and employer performance targets. The executive must be employed on the bonus payment date to receive the annual bonus. Section 3(b)	Eligible to receive a bonus under the employer's incentive plan for the Chief Executive Officer, as determined by the board. The executive receives any earned but unpaid bonus for completed fiscal years on termination by the employer without cause or termination by the executive for good reason. Section 3(a)(ii) Section 4(a)
ONGOING EQUITY GRANTS	Target Annual Incentive is $7,000,000, payable under the employer's annual incentive plan. 50% of the Annual Incentive is determined based on the employer's achievement of ROE targets, 25% is determined based on the achievement of EBITDA targets, and 25% is determined based on the achievement of other metrics determined by the board. 35% of the Annual Incentive will be paid in cash (see Annual bonus and cash incentives) and 65% will be paid in RSUs (the Annual Incentive Equity), subject to time vesting in three equal installments on each of the first three anniversaries of the grant date. The employment agreement provides for payment above and below target, from $0 to $14,000,000 ($9,100,000 for the equity component). The employment agreement modifies the scheduled term of certain performance options and performance stock appreciation rights (SARs) previously granted to the executive. Section 4(b) Section 4(d) Section 6(c) Section 6(f) Terms Schedule to Employment Agreement, Annual Incentive Terms Schedule to Employment Agreement, Annual Incentive Equity	Eligible to receive discretionary equity grants from time to time. For 2016, the target grant value is $4,000,000, payable under the employer's omnibus incentive plan, 50% in restricted stock units (RSUs) and 50% in performance stock units (PSUs). Section 4	Eligible to receive equity awards under the employer's stock incentive plans, as determined by the board for the Chief Executive Officer. Section 3(b)

What's Market, Executive Employment Agreements: Detailed Analysis provides summaries for a variety of executive positions and a diverse group of employers, based on size, industry, and location. The summaries cover terms that are typically heavily negotiated, such as compensation, severance, and non-competition provisions, and often reflect emerging trends.

For additional executive employment agreement summaries, see What's Market, Executive Employment Agreements, which provides a broader sampling of publicly filed executive employment agreements summarized at a higher level. Each detailed summary contains a link to the underlying publicly filed executive employment agreement.

What's Market: Incentive Compensation for Banking and Financial Services Executives | Practical Law