CEO Compensation Review 2014 - Pretium Partners 博盛亚洲

This document is confidential and intended for use solely by the client to which it is distributed. The document is confidential and intended for use solely by the client to which it is distributed.

CEO Compensation Review

September 2014

Pretium Partners Asia Limited

Executive Summary

Compensation Levels

Compensation Mix & Incentive Quantum

Key Performance Indicators

Long-Term Incentive Plans

CEO Compensation Review in Actions

About CEO Compensation Review and Pretium Partners

Table of Contents

2 | 2014 CEO Compensation Review


Compensation package for CEOs is under increased scrutiny recently and annual decision making

has been a tough task for Remuneration Committee as the package should not only be attractive

enough to retain the CEO, but also provide sufficient motivation to drive value creation for the

shareholders.

Based on our deep experience on CEO compensation review, below are five areas of focus:

Target Comparator Group – Select appropriate target comparator group based on business

model, company scale, geographic coverage, competition for talent, etc.

Compensation Mix – Keep a right mix of salary, short-term incentive (STI) and long-term

incentive (LTI); design LTI plans to manage excessive risk taking and drive long-term

performance

Compensation Levels - Ensure external competitiveness among comparator groups and

internal relativity among the senior management team

KPIs – Adopt balanced scorecard including financial and non-financial KPIs to drive and assess

CEO’s performance; choose appropriate financial KPIs, such as ROE, pre-tax profit and

revenue, with reference to industry norm and firm’s own uniqueness

Pay and Performance Alignment - Ensure more robust alignment of interest between CEO pay

and firm-wide performance to reinforce short/long-term business strategy and sustainable

creation of shareholder value

Executive Summary



International Banks

Bank of America

Barclays

BNP Paribas

Citigroup

Credit Suisse

Deutsche Bank

Goldman Sachs

HSBC

J.P. Morgan

Morgan Stanley

Nomura

RBS

Société Générale

Standard Chartered

UBS

Regional Banks

ANZ

CIMB

Commonwealth Bank

DBS

Maybank

Mizuho

MUFG

National Australia Bank

OCBC

UOB

Westpac

Local Banks – China/Hong Kong

ABC

Bank of East Asia

BOC China

BOC Hong Kong

BOCOM

CCB

Chong Hing Bank

China CITIC Bank

China Merchant Bank

China Minsheng Bank

Dah Sing

Wing Hang Bank

Hang Seng Bank

ICBC

Benchmark List


www.pretium-asia.com Accelerate growth and profitability through reward and performance strategy

Compensation Levels


A Top-down View : CEO Total Compensation as a Percentage of Revenue

A top-down view is to look at CEO total compensation as a percentage of revenue to provide a

benchmark of the sharing rate

The CEO total compensation as a percentage of revenue in regional/local banks experienced a

declining trend for past three years whereas the percentage for international banks was more

steady year over year . Actually, both CEOs’ total compensation and revenue of regional/local

banks picked up in these years, though the latter was in a slightly stronger magnitude

-

1

2

3

4

5

6

2011 2012 2013

CEO Total Compensation as a Percentage of Revenue

International Banks Regional Banks Local Banks

Basis Point



2013 CEO Compensation – A Snapshot

USD’000 International

Banks Regional Banks Local Banks

Base Salary

P25 1,493 785 74

Median 1,500 981 699

P75 1,908 2,633 1,028

Upfront Bonus

P25 697 1,081 86

Median 936 2,050 196

P75 3,390 2,657 515

Long-Term Incentive

P25 4,109 546 0

Median 6,727 3,469 95

P75 8,308 3,792 557

Total Compensation

P25 6,441 2,920 250

Median 9,599 7,167 1,016

P75 14,250 7,590 1,884



2013 CEO Compensation – Base Salary

International Banks: Despite different locations and regulatory environments, international banks

pay their CEOs at similar salary levels (around USD 1.5 million)

Regional Banks: Australian banks tend to pay their CEOs close to the high end of the regional

market, usually higher than USD 2.5 million; banks from other countries generally pay their CEOs

close to median or low end

Local Banks: The salaries for CEOs in Hong Kong banks are usually higher than USD1 million.

Chinese banks, especially the 5 biggest state-owned banks, pay their CEOs as low as USD70,000

since they are government officials at the same time



Base Salary

P25 1,493 785 74

Median 1,500 981 699

P75 1,908 2,633 1,028



2013 CEO Compensation – Base Salary (Cont’d)

Almost all the international banks have frozen salaries for their CEOs in 2013. Only two firms

increased CEO’s salaries as they are shifting more variable compensation to fixed pay for risk

management purpose as well as catching up with their peers in terms of base salaries

BOA: 58% increase

Morgan Stanley: 88% increase

Regional and local banks have a more diverse picture regarding salary increase for CEOs in 2013


Singapore Australia

2% Freeze Freeze

US UK Europe China Hong Kong

3%

6%

Median CEO Base Salary Change in 2013



International Banks: Tend to de-emphasize on upfront bonus due to increasing risk management

orientation as well as regulatory compliance

Regional Banks: Pay the highest level of upfront bonus among these 3 categories. Both Australian

and Singaporean banks are aggressive in term of upfront bonus, whereas Malaysian and Japanese

banks are more conservative and pay their CEOs close to the low end of the range

Local Banks: Similar to base salary, CEOs in local banks have the lowest upfront bonus among

the 3 categories, and CEOs in Chinese state-owned banks have the lowest upfront bonus among

all the local banks

2013 CEO Compensation – Upfront Bonus



Upfront Bonus

P25 697 1,081 86

Median 936 2,050 196

P75 3,390 2,657 515



International Banks: CEOs in US banks have the highest long-term incentive (LTI) level, followed

by CEOs in European banks. CEOs in UK banks receive the lowest LTI level

Regional Banks: Singaporean and Australian banks are both high on LTI levels for their CEOs,

whereas banks in other countries tend to pay LTI close to the low end of the range

Local Banks: A number of local banks does not provide LTI to their CEOs. For those do provide

LTI, the amount is significantly behind their counterparts in other countries

2013 CEO Compensation – Long-Term Incentive



Long-Term Incentive

P25 4,109 546 0

Median 6,727 3,469 95

P75 8,308 3,792 557



International Banks: US firms provide the highest amount of total compensation among international

banks

Regional Banks: The total compensation package for CEOs from Singaporean and Australian banks

are comparable with their western peers, whereas CEOs from Malaysian and Japanese banks are

compensated close to the low end of the range

Local Banks: Total compensation for CEOs in Hong Kong banks are more market driven and close

to the high end of the range, whereas total compensation for CEOs in Chinese banks are more stable

and close to the low end.

2013 CEO Compensation – Total Compensation



Total Compensation

P25 6,441 2,920 250

Median 9,599 7,167 1,016

P75 14,250 7,590 1,884



2013 CEO Compensation – Total Compensation (Cont’d)

CEOs in international banks enjoyed a substantial total compensation increase in 2013, partly to

reward their good performance in 2013 and partly to offset the pay cut in 2012

The total compensation for CEOs in regional and local banks are increasing in a more steady pace


Singapore Australia

5%

0%

21%

US UK Europe China Hong Kong

5% 7% 9%

12%

Median CEO Total Compensation Change in 2013



Compensation Mix & Incentive Quantum


2013 Compensation Mix Comparison

Among all the 3 categories, international banks are more incentive oriented, especially

focusing on LTI which comprises around 60% of CEOs’ total compensation

Compared with international banks, the regional ones tend to pay out more in base salary and

upfront bonus, yet LTI is still the most significant compensation component, accounting for

around 40% of total compensation

Local banks have a more balanced compensation mix among base salary, upfront bonus and

LTI. Benefits account for a higher portion when compared with their international and regional

counterparts

0%

20%

40%

60%

80%

100%



Base Salary Upfront Bonus LTI Benefits



0%

20%

40%

60%

80%

100%



Base Salary Upfront Bonus LTI Benefits

2013 Compensation Mix Comparison (Cont’d)

Among international banks,

guaranteed portion, i.e. base

salary, accounts for the smallest

percentage in total

compensation for CEOs in US

banks

European banks pay out the

smallest amount of incentive as

upfront bonus compared with

their peers

LTI comprises a similar

percentage, i.e. around 60%, of

total compensation across US,

UK and European banks

Benefits account for higher

percentage in total

compensation for CEOs in UK

banks


0%

20%

40%

60%

80%

100%

US Banks UK Banks EU Banks



Incentive Quantum as Percentages of Salaries in 2013

International Banks

Regional Banks Local Banks

Total Incentive as a Percentage of Salary

P25 230% 190% 110%

Median 400% 210% 230%

P75 850% 600% 240%

Upfront Bonus as a Percentage of Salary

P25 20% 60% 70%

Median 60% 90% 120%

P75 140% 290% 130%

LTI as a Percentage of Salary

P25 210% 120% 20%

Median 380% 150% 120%

P75 550% 240% 130%

Leverage in compensation (incentive pay versus salary) was still high among international banks,

with total incentive reaching more than 8 times of salaries. This provided the opportunities for

CEOs to tap into that leverage had increased the risk in the overall compensation packages.

CEO incentives in regional/local banks were less leveraged (around 2 times of base salaries), so

they were more in line with prudent incentive principles.



Key Performance Indicators


40%

60%

KPI Weighting

Non-financial Financial

Key Performance Indicators More Popular

ROE

Pre-Tax Profit

Revenue

Cost to Income Ratio

Core Tier 1 Capital

EPS

TSR

Strategy Planning and Execution

Customer

Leadership

Risk and Control

Firm Culture and Value Promotion

People, Diversity and Inclusion



Key Performance Indicators (Cont’d)

Banks usually use balanced scorecard, including financial and non-financial KPIs, to assess CEOs’

performance and make compensation decisions. The 60-40 weighting between financial and non-

financial KPIs are consistently found among banks across different countries.

Due to the complexity in making CEO compensation decisions, banks generally would not assign a

certain weighting to each KPI so as to leave more room for the Remuneration Committee to make

discretionary decisions

After the financial crisis, banks become more focused on KPIs related to capital adequacy, risk and

cost control. Lots of firms include KPIs such as Core Tier 1 Capital and Cost to Income Ratio in their

balanced scorecard for CEO

Other important financial KPIs include Return On Asset, Leverage Ratio, Economic Profit, Value

Added Report, Risk Weighted Asset, Risk Appetite Ratio, Profit After Tax, Dividend Payout, Value of

the New Business, Strong Credit Rating



YOY Change of Financial Performance and Total Compensation

Below is the median year over year changes in revenue, profit before tax, ROE and total compensation.

There is still room for better pay and performance alignment as reflected in the change in financial

performance and total compensation in the last two years.

Regional/local banks are more stable in terms of both financial performance and total compensation,

while international banks are more volatile

7% 4% 12%

82%

7% 13% 10% -3% -4%

18%

-4%

3%

-50%

0%

50%

100%


Financial Performance & Total Compensation - 2013 vs. 2012

Operating Income

Profit Before Tax

ROE

Total Compensation

-8%

8%

15%

-32%

11% 15%

-35%

8% -2%

-7%

3% 4%

-40%

-30%

-20%

-10%

0%

10%

20%


Financial Performance & Total Compensation - 2012 vs. 2011

Operating Income

Profit Before Tax

ROE

Total Compensation


Revenue

Revenue


Long-Term Incentive Plans


Most of the international and regional banks

have both deferred bonus plan and additional

LTI plan in place. Deferred bonus plans focus

more on talent retention and risk management

while additional LTI plans include more

performance conditions to encourage long-term

value creation

Half of the local banks have deferred bonus

plan, whereas only two Hong Kong banks have

additional LTI plans since Chinese government

has imposed restrictions on share-based

long-term incentive plan among state-owned

financial institutions

Long-Term Incentive Prevalence

With Deferred Bonus Plan

With Additional LTI Plan

Long-Term Incentive Prevalence


Without LTI Plan


Most of the banks use total annual bonus to set deferral rate

The median deferral as a percentage of total bonus is around 70% for international banks and around

45% for regional/local banks

It is worth noting that some firms use total incentive instead of total bonus to define the deferral

eligibility and the corresponding deferral rate could differ a lot in those 2 approaches

Deferral Rate

0%

20%

40%

60%

80%

100%


Deferral Rate

P75

Median

P25



Time vested Restricted Stock (RS) / Restricted Stock Units (RSU) and cash are the two most

prevalent deferred bonus vehicles among banks

International and regional banks prefer to use time vested RS/RSU or a combination of cash and time

vested RS/RSU for bonus deferral, whereas local banks tend to defer bonus in cash only

Time vested RS/RSU serves as a useful tool to retain employees and align their interest with the

shareholders. Currently, it is uncommon to impose performance condition on RS/RSU to avoid

demotivating employees by the potential downside

However, regulatory requirements in Europe and US entail risk (and performance) adjustments prior

to the grant of incentive compensation (ex-ante / upfront) as well as prior to vesting (ex-post / look-

back). Regulators do not recognize market based (stock price) adjustments alone as an adequate

form of risk based performance adjustment. These explain the growing use of performance share/unit

and the role of the risk function and formal risk assessments in bonus determination

Deferred Bonus – Vehicle

87%

13%

Local Banks

12%

88%

Regional Banks

Cash Time Vested RS/RSU Others

28%

67%

5%

International Banks

Note: Other vehicle may include performance share and performance right



Deferred Bonus – Vesting Schedule

To ensure alignment of compensation with long-term performance and risk outcomes, global

regulatory requirements stipulate that at least 40% to 60% of incentive compensation (annual and

long-term incentives) should be deferred over a period of at least 3 years

3-year ratable vesting is the most popular vesting schedule worldwide, though some European banks

would adopt a longer back-end loaded vesting schedule (e.g. one third of the awards vests in the 3rd,

4th, 5th anniversary) and some regional banks would use a shorter vesting schedule (e.g. 2 year

ratable vesting)

Note: Example of other vesting schedule: half of the award vests in the 2nd , 3rd anniversary or one third of the award vests in the 3rd, 4th,

5th anniversary

67%

12%

21%

Vesting Schedule

3-Year Ratable

2-Year Ratable

Others



Additional LTI Plan – Vehicle

Performance based RS/RSU is the most popular LTI vehicle among international banks.

Although some regional banks are still using share options as additional LTI, it continues to lose

popularity in recent years - there are fewer existing plans and limited fresh grants under these plans.

Share options are not seen as appropriately performance based among regulators and

shareholders. There is concern that value can be realized based on macro economic conditions,

rather than company specific performance/financials, particularly over a 10-year timeframe.

7%

79%

14%

International Banks

8%

42%

33%

17%

Regional Banks

Time Vested RS/RSU

Performance BasedRS/RSU

Share Option

Others

Note: Other additional LTI vehicles include deferred notional bond, share appreciation right, etc.



Additional LTI Plan – Vesting Schedule

As additional LTI is not carved out nor deferred from annual bonus amount, more stretched vesting

schedule is typically applied. Unlike deferred bonus plan, 3 to 5-year cliff vesting is the most prevalent

vesting schedule to coincide with the multi-year performance period to better reward execution of

firms’ long-term strategy.

As most of the firms have already extended their vesting period in the past, little change has been

made to the vesting schedule this year

For banks using share option, 1 to 3-year ratable vesting is the most popular vesting schedule

46%

25%

29%

Vesting Schedule

3-Year Cliff

4 or more year cliffvesting

Others

Note: Example of other vesting schedule: 1 year vesting, 3 year ratable vesting, half of the award vests in the 2nd , 3rd anniversary or one

third of the award vests in the 3rd, 4th, 5th anniversary



Additional LTI Plan – KPIs

With increasing shareholders’ scrutiny, long-term incentives need to balance business plan and

shareholder goals (EPS, TSR, etc.). This is reflected by the fact that relative Total Shareholder

Return (TSR) is the most widely used KPI among financial services firms. Firms usually compare its

own TSR with a pre-determined peer group or a market index to measure relative firm performance

Most of the US, European and Asian firms have 2 KPIs with equal weighting, whereas UK firms

could have 3 or more KPIs

Dozens of firms have made certain changes to their KPI metrics (e.g. changed the type of KPIs or

adjusted the weighting) to pay more attention on risk management and long-term performance

Number of

Companies

10

6

2 2 2

0

2

4

6

8

10

12

Relative TSR ROE Profit EPS ROA

Additional LTI Plan – KPIs Prevalence



0%

20%

40%

60%

80%

100%

120%

Additional LTI Plan – Median Payout Range

Additional LTI Plan – Payout Range

Depending on firm achievement of KPIs, final

payout of additional LTI could be adjusted upward

as well as downward. As a risk management

technique, some international banks have reduced

annual incentive plan upside leverage, by either

reducing target opportunities or capping maximum

payout opportunities

The median threshold payout opportunity is around

30%. As for the maximum payout opportunity, UK

Asian banks tend to set it to be 100% of the award

granted, whereas other US and European banks

would award firms’ superior performance by

providing an upside up to 150%

Limited change on maximum and threshold payout

opportunity in 2013 since most of the banks have

already adjusted the payout opportunity in the past

few years

Maximum

Payout

Threshold

Payout



CEO Compensation Review in Actions


The right design of CEO compensation package has far reaching impact on firm’s development. Based on the

previous study findings and our experience, we would conclude the following key ingredients for the review:

Key Ingredients Required to Put CEO Compensation Review in Actions


Define the target comparator group

It is important to determine the appropriate target comparator group– always the most difficult part

since every firm is unique…

Selecting a group of firms that are of similar size and structure, and compete for business and talent

could be a starting point. The target comparators used for benchmarking will have a significant

impact on the target compensation mix, pay and incentive positioning and subsequent payout levels

Play around the compensation components

A right compensation mix is important to reinforce the linkage between compensation and short/long-

term business performance. It serves as an integral part in articulating reward strategy to maximize

the value of total compensation package and respond to regulatory requirements

As a forward looking view, a decent base salary and bonus are not sufficient to drive healthy

business performance. More and more firms pay less upfront bonus and emphasize more on

deferral/LTI with performance conditions to strike a balance between performance and risk

management

LTI vehicles have their own pros and cons. For instance, share options are not seen as appropriately

performance based among regulators and shareholders. There is concern that value can be realized

based on macro economic conditions, rather than company specific performance or financials


Ensure external competitiveness and internal relativity of compensation levels

CEO pay review is an art rather than science, market data provides a source of reference but

interpreting the numbers is not straightforward. The capability of interpreting market data, translating

it into business messages, and making sensible forecast, would be essential when the Remuneration

Committee put forward CEO compensation recommendation

Firm-wide performance alone does not always tell the full story of CEO’s performance. Pay decision

for CEO should align with other executives to ensure appropriate relativities and differentiation. The

credit and contributions from other executives for driving those results should be taken into

considerations

This highlights the need to clearly articulate the performance objectives for the CEO and other senior

executives as a whole – there is no surprise at the year-end and the progress against performance

objectives provides strong reference to determine compensation accordingly

What gets measured gets done

CEO performance is commonly measured by KPIs such as profits or revenue growth, return on

equity, or share price appreciation. However, simple financial metrics and annual share price gains

are sometimes not seen as fair metrics of how well a CEO is performing

Firms tend to miss out the long-term performance and focus too much on previous year. CEO can

get unfairly penalized for one-time events and tough choices that might hurt performance or cause

negative reactions from the market. The short-term focus ends up hurting the long-term development

of firm.

Key Ingredients Required to Put CEO Compensation Review in Actions (Cont’d)



Tie CEO compensation with firm-wide performance

The top priority is to ensure CEO’s pay is at risk, i.e. the “pay for success” rather than “pay for

failure” culture. However, compensation might not necessarily correlate consistently and in same

magnitude to performance (see chart at the bottom) due to different weighting of various KPIs and

to what extent the results are controllable. If incentive does not vary with performance, then it is

considered as fixed rather than variable compensation


0%

50%

100%

150%

200%

250%

300%

350%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Bank of East Asia

Revenue Profit Before Tax TSR Total Compensation



The pay and performance alignment review could assess the linkage of CEO compensation on both

absolute (compare pay levels to firm performance) and relative (compare pay levels and firm

performance against a pre-selected industry comparator peer group) angles. On an absolute basis,

this assessment evaluates the efficacy and alignment of CEO’s pay packages on a long-term basis

from a shareholder’s perspective. On a relative basis, this assessment compares the pay levels and

company performance among a group of companies that are reasonably similar in terms of industry

profile, size and market capitalization. This articulates a robust pay-for-performance assessment for

the Boards and shareholders to determine the CEO package


Tie CEO compensation with firm-wide

performance (cont’d)

The graph shows TSR of Standard

Chartered dropped significantly in 2008

due to the global financial crisis albeit

profit before tax was still in an upward

trend. The CEO pay index decreased

slightly to reflect the slump in TSR which

was one of the KPIs of annual

performance award and the performance

share awards for the CEO. This

illustrates how CEO pay could highly

correlate with company performance and

shareholders’ interest.

0%

50%

100%

150%

200%

250%

300%

350%

400%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Standard Chartered

Revenue Profit Before Tax TSR Total Compensation



All in all, good business understanding and strong market sense would be critical in putting the CEO

compensation review into actions. HR leaders should also bear in mind the following fundamental

questions during the pay review:

Has CEO pay been aligned as an integral part of a business strategy, i.e. to incentivize CEO to

accomplish that strategy?

Are there sufficient incentive measures that address both firm performance and its sustainability?

Are the potential payouts confined at reasonable level to support long-term firm capability?

Are the proposed LTI programs vigorous enough in aligning CEO’s pay with the shareholders’

interests?




About CEO Compensation Review and Pretium Partners


The CEO Compensation Review analysed the compensation and financial performance data among

40 reputable international, regional and local universal banks from 2011 to 2013 performance year.

The analyses were conducted based on public disclosure research as well as extraction of relevant

proprietary data from previous consulting work and our on-going client discussions to maximize the

value propositions and data comprehensiveness of the study

For firms with change of incumbents during this period, annualized compensation data for the new

incumbent were used. If the annualized data was not reasonable based on our experience, it would

be excluded.

All individual firms’ data was treated in the strictest confidence and only aggregate data or public

information was presented in the report.

Data reporting rule:

Less than 4 data points: market range was presented

4 to 8 data points: market median was presented

More than 8 data points: market P25, median and P75 were presented

About CEO Compensation Review



Definition of Total Remuneration Components

Base Salary Upfront Bonus Deferred Bonus Additional Long-Term Incentive

Annual Bonus

Benefits

Total Incentive

Total Compensation

Total Remuneration

Long-Term Incentive



Base Salary: A fixed amount, typically paid in monthly payments based on job scope, experience,

market comparable positions and internal grading structure. Fixed allowance such as housing

allowance, car allowance are excluded here

Upfront Bonus: The portion of annual bonus that is paid immediately or within one year after the

performance year ends

Deferred Bonus: The portion of annual incentive that is payable after not less than one year. It is

mandatory for employees to defer part of their annual bonus in cash or shares when their total

incentive / compensation levels reach or exceed a pre-determined deferral threshold. The deferred

bonus are normally forfeited on cessation of employment during the vesting periods. These awards

are not typically subject to performance targets

Additional Long-Term Incentive: All the long-term incentives, other than deferred bonus, which are

usually granted on top of annual bonus. Participants are entitled to awards after a performance period

(at least three years) provided service and/or performance conditions are met

Participation is typically confined to senior executives but may be extended to other employees

Awards are normally subject to comparative and graduated performance targets which are

designed to be stretching in order to align the interests of senior executives and shareholders

Benefits: All the benefits provided by employers, usually including retirement benefit, medical

insurance, life insurance, housing benefit, car benefit, etc.

Definition of Total Remuneration Components (Cont’d)



About Pretium Partners

Pretium is a niche management consulting firm that helps accelerate clients’ growth and increase

profitability through effective reward, performance and strategic human resource strategy

We facilitate Board and Management partnership by reinforcing

corporate governance model, reviewing composition and fees for INED

and ED, strengthening incentive review & design and conducting pay-

for-performance alignment assessment

We help our clients create value and architect change through our

unique spectrum of management consulting services which includes

short/long-term incentive plan review and design, organization

transformation, business performance management

Our extensive experience in clients’ projects and ongoing proprietary

benchmarking researches enable clients fully utilize the value of

market intelligence at the strategic & implementation level

Board & Management Partnership

Consulting Services

Market Intelligence

& Benchmarking



Our Recent Studies & Thought Leadership

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Asset Management Regulatory Updates and Market Trends on

Performance and Compensation

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Global Incentive Review Study

Year-end Compensation Trend Survey

Retail Brokerage Study


Documents

CEO Compensation Review 2014 - Pretium Partners 博盛亚洲