S&P 500 Banking Industry’s Response to COVID-19

CGLytics examines how S&P 500 banks responded to the volatility of the pandemic prior to the Fed’s announcement to cap bank dividends and prohibit share repurchases until Q4 following its annual stress test of banks.

08.13.2020

On June 25, 2020, the US Federal Reserve Bank issued a statement following its annual stress test of banks, saying that it would cap Q3 dividends for banks and prohibit share repurchases until Q4.  COVID-19 has created a tumultuous economic environment for many companies.  This has prompted many to respond with executive pay cuts and dividend reductions, and suspensions of share buyback programs.

In the wake of this economic situation and announcement by the FED, it is worth looking at how the banking sector responded to the COVID-19 crisis and its corporate governance implications.  This article analyzes the S&P 500 Banks Industry Group Index which is broken up into two sub-indexes; S&P 500 Regional Bank Index and S&P 500 Diversified Bank Index.

Looking at the banking sector’s performance during the COVID-19 pandemic, when comparing the S&P 500 Bank Industry Group Index to the S&P 500, Year to Date (YTD) change in value as of July 22, 2020; the S&P 500 Banks decreased in value by 34.31% while the S&P 500 increased  by 0.82%.  When breaking the S&P 500 Bank Industry Group down further into its two sub-indexes, the S&P 500 Regional Bank Index decreased in value by 32.66% while the S&P 500 Diversified Bank Index decreased by 34.74%.

While the S&P 500 has rebounded significantly since its steep decline following the COVID-19 outbreak. The banking industry has yet to see the same recovery.

Source: CGLytics Data and Analytics

Prior to the FED’s announcement, not one of the banks in the S&P 500 Diversified Banks Index announced a suspension, reduction, or change in their dividend.  Also, during this time, none of these banks recorded any changes to executive compensation due to COVID-19.  All five of these banks (JPMorgan Chase, U.S. Bancorp, Citi Group, Wells Fargo, and Bank of America) announced on March 15, a suspension of share repurchases.

Examining the S&P 500 Regional Banks Index prior to the FED’s announcement in June 2020, seven banks (Region Financial Corp, Citizens Financial Group, Fifth Third Bancorp, KeyCorp, PNC Financial Services Group,. Trust Financial Corp, Comerica) all announced plans to temporarily suspend their share repurchase plans in the middle of March 2020. Hunting Bancshares however announced that it planned to continue its share buyback program during this same period.  First Republic Bank, M&T Bank Corporation, People’s United Financial, Zion Bancshares, and SVB Financial Group all did not comment regarding share buyback programs during this time period.  Concerning dividends, no bank in the Regional Bank Index suspended or changed their dividend during this period.

Source: CGLytics Data and Analytics

However, when analyzing Russel 3000 companies during the time period from March 15th through to April 17th, at least 105 companies reduced or adjusted executive and director compensation in response to the COVID-19 according to research by CGLytics’s.  In addition, over the same period at least 47 companies reduced or suspended their dividend and at least three companies suspended share buyback programs.

When analyzing Diversified Banks in the S&P 500 and their response to the FED’s announcement at the end of June to cut dividends, only Wells Fargo announced a reduction in its dividend, with all five companies (JPMorgan Chase, Citigroup, Bank of America, US Bancorp, and Bank of America) announcing that they would maintain their current dividend.

Regional Banks provided a similar response as Diversified Banks following the FED’s June 25 stress test.  Out of the 13 banks labeled as Regional banks, six provided responses to the FED’s stress test (Truist Financial Corp., Region Financial Corp., Huntington Bancshares Incorporated, Fifth Third Bancorp., KeyCorp, Citizens Financial Group).  All six stated that the company would maintain its dividend.  The other seven companies (Zion Bancshares, SVB Financial Group, PNC Financial Services Group, M&T Bank Corporation, People’s United Financial, Comerica, First Republic Bank) did not provide a statement regarding the results of the FED’s stress test.

Ultimately, COVID-19 has exposed the vulnerability of the banking industry to external shocks and their readiness for market developments. The pandemic has generated significant uncertainty and high volatility in global capital markets and the banking industry is of no exception. While the full impact is yet to be determined, it’s predicted that the adverse effects are expected to linger from the virus’ knock-on effects and are likely to affect liquidity, profitability and valuation of these issuers eventually affecting returns to investors.

To understand how companies are adapting their executive pay practices and adhering to regulations during the pandemic, institutional investors and proxy advisors use CGLytics data and analytics software tools.

CGLytics offers the broadest and deepest global compensation data set in the market for reviewing corporate executive compensation plans, assessing Say on Pay vote proposals and performing benchmarking analysis.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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How to independently and efficiently benchmark executive remuneration for Say-on-Pay

There are many software applications and tools now available to support remuneration decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Remuneration Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for remuneration decisions.

07.28.2020

A 5-minute guide to support Remuneration Committees, Heads of Reward and Compensation Professionals when selecting software and tools for remuneration decisions. Read and learn about the four considerations that should be taken into account before purchasing.

1. Look for tools that support peer group modeling functionality

2. Access the same peer groups as leading proxy advisor Glass Lewis

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

4. Check the quality of data available in the software platform you choose

We live in a digital age where access to information has never been easier. No longer having to scroll through complex and endless spreadsheets and obtain an analytical degree to understand trends – insights and information is at our fingertips.

For Remuneration Committees, Heads of Rewards and Benefits, and Compensation Professionals it is no different.

Ensuring executive remuneration, bonuses, and incentives are in line with market standards, has never been under such scrutiny.

Activist activity has increased in 2020, with traditional investors changing their position from passive to active engagement and focusing on executive pay. In a recent article by the Financial Times, it was reported that misalignment of incentives and negative say-on-pay votes at annual meetings increase the likelihood of a company suffering share price underperformance.

Software that provides flexibility for assessing remuneration in comparison to peers, and supports say-on-pay resolutions, is available and increasingly implemented by companies, activist investors, and proxy advisors.

When a user begins searching for remuneration software there are questions typically asked:

  • – Does it contain information on the executive remuneration practices of – peers and competitors?
  • – How does is support benchmarking my company’s executive remuneration practices?
  • – Does it show me how my company’s remuneration practices are perceived in the market?
  • – Can I find tailored insights in seconds to be sure my company’s CEO, NEO and Director pay is aligned to market standard and company performance?

 

Sustainable and justifiable decisions surrounding executive remuneration has kept compensation professionals up at night, with additional key questions that should be asked:

  • – How can I access high-quality, reliable executive compensation information that I do not need to maintain?
  • – Where can I find standardized remuneration information for efficient comparison and instant benchmarking?
  • – What software and tools are available in the market that other compensation professionals, activist investors, proxy advisors and compensation consultants currently use?

 

How to utilize software for fast, efficient, and flexible executive remuneration and rewards benchmarking, and the tools that are available.

 

Greater scrutiny calls for companies and their boards to be one step ahead

Transparency encourages market confidence. With the current pandemic causing havoc on stock prices and resulting in employee layoffs, salary and bonuses paid to executives has again been pushed to the front and center.

Remuneration policies and reporting are continuing to come under scrutiny from investors, shareholders, employees and the media. Boards must have clear and transparent remuneration processes in place that allow for investors to see a fair comparison has been made of executive payouts and promised rewards, against peers and taking into account the broader market context.

How peer companies are adapting their executive remuneration practices and adopting new measures needs to be clearly understood for socially responsible decisions about executive pay – continuing to be highlighted again by the events and happenings of 2020.

Decisions made need to be based on fact, not fiction, with easy to understand explanations for investors to digest. Granted, no one wants to become a media headline or attract attention from activist investors.

 

How can Remuneration Committees, Heads of Reward and Compensation Professionals model different scenarios with software tools, and benchmark against their companies’ peers?

 

1. Look for tools that support peer group modeling functionality

 

Generating your own peer groups allows for benchmarking and comparison on a like for like basis. Companies that have very few similar peers in their region, index and sector might need to look further afield to design an appropriate group to justify the competitiveness of pay plans. Modeling against different peers can significantly change the scenario and perception of pay. Using CGLytics platform, fit-for-purpose peer groups can be created in seconds with access to 5,900+ globally listed companies, for instant comparison of remuneration practices.

2. Access the same peer groups as leading proxy advisor Glass Lewis

 

Do you know how your compensation is viewed by activist investors and proxy advisors? As Glass Lewis and large activist investors are already using data and software provided by CGLytics, Remuneration Committees should be doing the same. This allows Remuneration Committees and Heads of Reward to proactively plan for, and justify, any compensation decisions that may attract unwanted attention.

Glass Lewis CEO and Executive Compensation analysis (used in their proxy papers globally) is found in the CGLytics platform ready for companies use.

As stated in the recent webinar by Glass Lewis’ SVP & Global Head, Research & Engagement, Aaron Bertinetti:

“All the data that we now use, whether it’s compensation data, peer data, or other types of governance data that we may need…we exclusively source from CGLytics. Not just within the United States but globally. The only other firm outside of Glass Lewis that has access to our methodology is CGLytics.”

Using the same data set, peer modeling and analytical tools as Glass Lewis, and leading institutional investors, for reviewing public company CEO compensation and Say on Pay proposals, results in Remuneration Committees being market intelligent and one step ahead. This fosters better dialogue with stakeholders and data-based decisions justified with relevant and real-time information.

learn how Glass Lewis Europe improved their executive compensation analysis with governance data from CGLytics

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

 

Remuneration Committees and Compensation Professionals are empowered by modeling scenarios against different KPIs and measurements using software tools. With the recent volatility in market performance, justifying indictors used to design compensation plans mitigates risk. Boards need to be equipped with in-depth analysis of their company’s pay practice and compare against their peers to preempt say on pay risk.

As mentioned by Ronald Kliphuis, Global Head of Rewards at Randstad (a large market leading global HR company):

“In the past only consultants had access to the information that CGLytics provides. We can now play with data and information and make fair comparisons. We understand the potential risks and vulnerabilities a lot better.”

Learn more about Randstad’s Head of Rewards making data-based decisions going into the AGM

Powerful pay-for-performance benchmarking tools allow for efficient comparison and automated output of CEO and executive compensation against competitors and peers.

4. Check the quality of data available in the software platform you choose

 

Where the data is sourced from and how often it is updated should be a concern when deciding on insights to trust for effective engagement. In addition to how many years of compensation data is recorded in the software platform. A wealth of global and structured data for meaningful comparison of executive compensation practices across industries and borders, should be a large consideration of tools purchased to support remuneration decisions.

Remuneration Committees, Head of Rewards and Benefits, and other Compensation Professionals can ensure reliability when using CGLytics software with executive compensation data sourced from millions of publicly listed company filings, proxy materials and social networks, which undergoes rigorous checks by a dedicated team of equity market research analysts 24/7. More than 10 years of historical compensation data is standardized for efficient comparison of 5,900+ companies’ pay and rewards across different regions, industries, and sectors.

Downloadable data and insights in an array of formats (such as excel) allow compensation professionals to model and easily transport charts directly into their board decks and presentations, for the ultimate time and cost savings.

 

CGLytics offers the broadest and deepest global remuneration data set in the market for reviewing corporate executive remuneration plans, assessing Say on Pay vote proposals and performing benchmarking analysis.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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The DOs and DON’Ts when rethinking incentive plans

Why have 75% of first-time say-on-pay votes failed in 2019? A large number of negative votes can be attributed to incentives. Companies need to rethink their incentive plans and make sure metrics truly benchmark performance.

Seventy-five percent of first-time say-on-pay (SoP) votes failed in 2019, and a large number of these negative votes focused on incentives.

There is an increasing need for companies to fully rethink their incentive plans, as the CGlytics whitepaper “How to take the testing of equity-based compensation plans into your own hands” points out.

“It is imperative that companies design their equity pay plans to ensure they receive shareholder approval first time, every time. In order to meet investor expectations, companies need to understand how they, and the proxy advisors they rely on, evaluate equity plans and make voting decisions.”

Marc Ullman, a partner with Meridian Compensation Partners explains what to do and what not to do in rethinking incentive plans.

First of all, companies need to fully rethink their compensation plans, and not to just tweak them. Making just a few cosmetic changes will not suffice to ensure that incentives are effective. At least every two years, a real restructuring is needed.

Often shareholder pushback will incite a rethink, but even with shareholder support, benchmarking for effectiveness is critical as priorities change and the business climate evolves. The plan must reflect the new realities the business faces.

Or the incentive plan may simply become too complicated to be useful, as continually including more metrics and other add-ons makes application confusing. This often happens as businesses try to simply tweak the plan instead of really rethinking it.

 

Here are the do’s and don’ts to achieve as near optimal alignment between pay and performance as possible:

– If you need a full-scale rethink, don’t settle for a mere tweak. Make sure that what you do matters, don’t nibble around the edges. Make sure the metrics truly benchmark performance.

– But don’t overdo it. Pick out the key metrics and focus on that; don’t try to transform the whole structure unless you really feel that you have to.

– As the rethinking process is underway, take note of the solid rationale that stems from the business model. This will be something to communicate at the end of the process, and one that can be used for grounding the basis of your thinking.

– Make sure you include all the right people: Finance, HR, Corporate leadership, corporate leadership and the business unit. Everyone should buy in to the metrics and the targets that are being set.

– Make sure your plan pays something in year one. After a big rollout you need to make sure that design provides results. Otherwise it could hurt your credibility.

– Take advantage of feedback from shareholder outreach. More and more companies are actively talking to shareholders, and their points of view should at least be considered as the design is taking shape. Consider investor relations and investor perspective and proxy advisors like ISS and Glass Lewis.

– Communicate internally and externally. You have multiple audiences internally.

 

Predict Shareholder Approval with Glass Lewis’ Equity Compensation Model

 

The Glass Lewis Equity Compensation Model (ECM) allows you to instantly test and review your incentives plan using the same key criteria and scoring system as leading proxy advisor Glass Lewis. The ECM supports testing of 4,300+ publicly-traded U.S. firms including the Russell 3000 and exclusively available via CGLytics.

With the ECM you can confidently engage, knowing the strengths and weaknesses of your current and future equity plans. Ensure you get the votes to legally grant equity compensation to your executives, board members and staff.

Click here to learn more about the ECM application or request a no-obligation demonstration.

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Basic Energy Services, Inc. (BAS): Hitting the Brakes on Dilutive Granting Practices

Basic Energy Services, Inc. could well have benefited from some foresight when plotting out the award schedule under its new 2019 Long-Term Incentive Plan. Glass Lewis use their equity compensation model to examine the shareholder opposition and how it could have been potentially avoided.

A little foresight can go a long way. Glass Lewis’ new Equity Compensation Model (ECM) tool allows users to predict the likely Glass Lewis voting recommendation for equity plan proposals, allowing companies to modify share requests, avoid potential pitfalls, and reduce the uncertainty that surrounds securing shareholder approval.

Simulating the eleven tests used in Glass Lewis’ equity plan analysis framework, the ECM tool predicts the proxy advisor’s recommendation for an equity plan proposal based on the size of the share request, the company’s granting history, plan terms and features, and other user-inputted datapoints. In addition, the ECM tool generates specific datapoints from the tests exactly as they would appear in Glass Lewis’ proxy paper. This data includes information that is closely monitored by the proxy advisor’s institutional clients, informing their ultimate voting decisions for both equity plan proposals and Say on Pays.

Basic Energy Services, Inc. could well have benefited from some foresight when plotting out the award schedule under its new 2019 Long-Term Incentive Plan (2019 LTIP). Announcing its 2019 annual shareholder meeting, the company sought approval of the 2019 LTIP, which would have authorized 1.8 million new shares for future issuance. However by the time the meeting took place, investor opposition had forced last-minute amendments to the agenda, including a cancellation of the share request.

In its analysis of the equity plan and the broader advisory vote on executive compensation, Glass Lewis raised concerns regarding massive grants made to executives after the 2018 fiscal year. In fact, much of the additional 1.8 million share request that would be voted upon at the May 2019 annual meeting was already ear-marked for April 2019 incentive awards to named executive officers, pending shareholder approval. After the plan failed a number of Glass Lewis’ tests, including measures of the company’s historic pace of grants and cost of the share request, the proxy advisor recommended that shareholders vote AGAINST the proposal.

An AGAINST recommendation for an equity plan proposal from Glass Lewis is infrequent and typically driven by particularly egregious granting practices and/or highly shareholder-unfriendly provisions. Cost concerns drove 21.97% of the advisor’s AGAINST recommendations during the 2019 proxy season; dilution issues accounted for 13.64%; and evergreen and repricing/buyout provisions together spurred 62.12% of the negative recommendations.

Glass Lewis’ voting recommendation contributed to growing investor momentum against the proposal. However, it appears that Basic Energy Services’ board and management had not anticipated the scope of opposition. As a result, the company, which had climbed out of Chapter 11 bankruptcy in 2016, found itself in what appeared to be another scramble — this time to revise its equity plan proposal with only eight days to go before the annual meeting.

On May 6th, with some investors having already cast their votes, the company filed an amendment to its 2019 proxy statement announcing that it was no longer seeking an additional share request. Instead, shareholders would vote on whether to move currently available shares from prior plans into the 2019 LTIP for future issuance.

Meanwhile, to compensate for the elimination of the 1.8 million share request, the large April 2019 grants that the company made to its named executive officers were revised to rely less on equity-settled payouts and more heavily on cash. Subsequent to the amended proposal, and in the absence of either a share request or associated problematic features (such as repricing provisions or evergreen replenishment authority), Glass Lewis revised its voting recommendation to FOR.

Basic Energy Services’ revision of its equity plan proposal and NEO grants represented more than just a minor hiccup in front of a public audience of voting shareholders. While the equity plan was ultimately approved, it received just 75% support, relatively low for this type of proposal. Obtaining that approval required a costly last-minute engagement campaign, a series of supplementary fillings, and an outsized outlay to fund the switch of executives’ 2019 awards from equity to cash—all with the company’s shareholder meeting looming.

Well before filing its proxy statement, the company could have understood that the rate of granting over the last three fiscal years would be an important concern—and one that would be exacerbated by the additional awards granted in April. Using the intelligence provided by CGLytics’ ECM tool, the company could have foreseen concerns regarding plan costs and granting pace under the equity analysis plan framework, designed a proposal that was more widely acceptable to investors, and avoided the costs and uncertainty associated with renegotiating proposals and compensation policies in the days before a shareholder meeting.

Set the Agenda

The benefits of the ECM go well beyond its predictive proposal recommendation abilities. The tool is an integral part of the executive pay decision-making process and longer-term compensation program planning with real-time calculations of cost, burn rate and overhang information.

Well before equity awards are granted, the ECM can identify policies and practices that draw shareholders ire. For Basic Energy Services, which failed Glass Lewis’ tests on its historical pace of grants, the ECM tool could be used to evaluate the impact of potential grants, and help the company manage its available share pool to avoid excessive dilution.

More than just an internal planning tool, the ECM provides important intel to prep directors and executives during shareholder engagement efforts. The analyses generated on the platform provide comparisons to industry benchmarks relating to cost, overhang, burn-rate and grants to named executive officers, which can help a company control and inform its messaging during its annual outreach to shareholders.

Armed with such information, a company could not only avoid missteps such as the one experienced by Basic Energy Services. It could also use the data to more effectively formulate its message to its shareholders on matters related its executive compensation program for its annual say on pay vote.

Another interesting insight is that Hampton is not currently sitting on any other company’s board, unlike Symonds who is currently sitting on four different boards (including HSBC Holdings plc). One could easily argue about the effectiveness of that choice when it comes to availability and focus/time dedication for the heavy incoming agenda.

The Glass Lewis Equity Compensation Model

Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

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