Linking Long-Term Pay to Performance

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applause.jpgIn an age when shareholders get an advisory vote on executive pay, there is an increased focus on pay-for-performance.  As a result, more banks are using long-term performance plans.  Unlike traditional restricted stock and stock option awards that vest solely over time, long-term performance plans also include pre-established performance goals that must be met for awards to be earned.

Meridian’s 2012 study of chief executive officer incentive plans at publicly traded banks with assets between $1 and $5 billion indicates that 34 percent include performance-based awards in their long-term incentive program, including more than half of the banks larger than $2 billion in the study. 

We anticipate the use of long-term performance plans will continue to increase. Shareholders and proxy advisors (such as Institutional Shareholder Services) typically respond positively to the implementation of long-term performance plans.  Additionally, well designed performance-based awards help provide balance and risk mitigation to incentive programs.  Many companies have used performance plans in their long-term incentive program to replace stock options, which regulators have discouraged as a riskier way to reward performance. Following are some of the key design elements to be considered in designing a long-term performance plan:

  • Award vehicle.  Banks predominately use full value shares (restricted stock or restricted stock units) in their long-term performance plans.  The number of shares ultimately awarded may vary based on different levels of achieved performance (e.g., threshold, target, and maximum).  While less common, programs can also be cash-based. 
  • Performance period.  Seventy-four percent of performance plans in Meridian’s study use three-year performance measurement periods.  Typically, three-year performance objectives are established at the beginning of the performance period, and awards are paid out based on actual performance at the end of the three-year period.  However, it can be challenging to establish appropriate three-year goals, particularly in an era of high economic uncertainty.  To avoid this challenge, some plans are structured for annual goals to be set each year of the three-year vesting period, while others only establish one-year goals but require additional service before awards are paid out.
  • Absolute and/or relative measurement.  Performance criteria can be absolute goals based on internal expectations, or they can evaluate performance relative to a peer group of companies.  Relative goals can make it easier to establish long-term performance goals, but provide less direct line-of-sight for executives and require a relevant group of companies to use for comparison.  Practices among banks in Meridian’s study are mixed—35 percent use absolute goals, 35 percent use relative goals, and 30 percent use a combination of both.
  • Performance measures.  Measures should tie to key corporate objectives that will drive long-term shareholder value.  Return measures (e.g., return on assets, return on equity) are most common among banks, followed by earnings measures such as earnings per share and net income.  Some banks measure shareholder value directly, tying payouts to the company’s total shareholder return ranking relative to a comparator group.  Most banks use two or three performance measures in their plans.
  • Mix and match.  While performance plans can be a critical part of a bank’s long-term incentive program, they may not meet all of the program’s objectives.  Performance plans are often used in combination with time-based equity grants (e.g., stock options and restricted stock) to provide a balanced program and limit compensation risk.  In most cases, the performance plans are used to deliver 50 percent or more of the target long-term incentive value for senior executives, but are often combined with other award vehicles such as time-based restricted stock.

Several other items must also be considered when designing a long-term performance plan, including: Who will be eligible, how will it be disclosed, what is the accounting expense, what are the tax consequences, and will shareholders approve of the plan? While performance-based long-term incentives require many decisions, they can enhance pay-for-performance and create a balance between short-term and long-term objectives.  Banks that do not currently have long-term performance plans should consider whether introducing one would improve the effectiveness of their executive compensation program.

Groping Toward Mortgage Compensation Rules

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cutting-money.jpgRecently the Consumer Financial Protection Bureau (CFPB) issued a set of proposed rules on mortgage loan originations that include restrictions on compensation that will make it difficult for banks to structure bonus plans for their mortgage loan originators.

I wrote about this issue back in May, after the bureau had issued guidance stating that banks are permitted to make contributions to a mortgage loan originator’s 401(k) or some other type of qualified plan out of a profit pool derived from mortgage loan originations. However, the CFPB declined to indicate at the time whether banks could pay bonuses to originators based on the profitability of a pool of mortgage loans as part of a non-qualified incentive compensation plan. The distinction is important because in the case of a qualified plan like a 401(k) we’re talking about an individual’s future retirement income, while with a non-qualified bonus plan we’re talking about cash in their pocket today.

First a little bit of important background. Underlying this issue of mortgage originator bonuses is the focus of federal regulatory agencies—including the CFPB—on so-called compensation risk. During the subprime mortgage boom, originators often received extra compensation if they steered borrowers to higher cost loans, which often meant low-income borrowers paid more for their loans than they should have. The Federal Reserve Board proposed stricter rules on mortgage origination compensation in September 2010 under the Truth in Lending Act. Rulemaking authority for the Act was transferred to the bureau under the Dodd-Frank Act, and now the bureau is finishing what the Fed started.

Mortgage originators aren’t the only bankers impacted by all this attention on compensation risk. Banks are also being forced to change their incentive compensation practices for other kinds of lending activity, including commercial real estate and C&I lending. Generally speaking, the regulators don’t want lenders to be rewarded purely on volume; they want to see bonus payments spread out over a longer period of time than, say, just one quarter; and they want the size of the payout tied to the performance of the underlying loan portfolio over some reasonable period of time so lenders don’t get paid upfront for loans that later go bad. And in the case of mortgage originators, regulators don’t want them to be incentivized to screw their customers by pushing them unwittingly into high cost loans when they would qualify for a cheaper loan.

It was not clear last May whether the CFPB would allow banks to pay its mortgage originators any kind of bonus that wasn’t tied to a qualified plan. “Every bank is trying to do a better job of tying compensation to the profitability of the underlying business,” says Kristine Oliver, vice president at Pearl Meyer & Partners. But the bureau has now issued a proposed rule for non-qualified bonus plans that will make that goal much more difficult. Under the latest proposal, banks may pay employees a bonus derived from a pool of mortgage loans only if three conditions are met:

  • Compensation may not be based on the terms of the loans that were originated, so an employee can’t be rewarded for producing more of one kind of loan versus another.
  • The employee can’t have originated more than five mortgage transactions during the last 12 months.
  • However, if the individual’s transactions exceed five, the bonus pool can based on mortgage revenue limited to 25 or 50 percent of the overall revenue in the pool. The bureau has proposed two percentage cap alternatives, 25 percent and 50 percent.

The proposal does address the concern some people had that branch managers who originate an occasional mortgage might not be allowed to receive a bonus based on the profitability of their branches if the branch’s revenue included, say, points or mortgage origination fees. Now those individuals can receive a bonus even if the branch’s revenue includes some mortgage related revenue.

“The bureau has proposed a diminutive exemption,” says Richard Andreano, Jr., a partner in the Washington, D.C. office of Ballard Spahr LLP. “That would work for [occasional originators] but doesn’t work for someone who does more than five but still doesn’t do a whole lot of originations.” An example might be someone manages a mortgage production office and originates more than five loans a year, but is still a low volume producer compared to their rest of their team, so they don’t qualify for a bonus based on mortgage revenue.

More importantly, the proposed cap on the percentage of mortgage-derived revenue that can be included in a bonus or profit-sharing plan will make it impossible for banks to structure incentive compensation plans that will reward their originators solely on the profitability of their business. To get around the cap, banks will have to enlarge the categories of revenue that bonus payments are based on to include other kinds of loans in the mix. That would make it more of a company-wide incentive plan—especially if the cap is as low as 25 percent—which might be what the regulators prefer, but could be a less powerful incentive than a plan where mortgage originators were the only participants.

“That’s where the bureau wasn’t willing to go,” says Andreano.

Banks and other financial services companies that are impacted by the proposed rules have until Oct. 16 to submit their comments to the CFPB. Dodd-Frank requires the bureau to adopt final mortgage originator rules by Jan. 21, 2013, so banks should expect a final rule by then. Unfortunately, as Oliver points out, “People are starting to pull together their incentive plans for 2013,” so any assumptions they make now—like, for example, will the allowable cap be 25 percent or 50 percent—could be subject to change.

Pay at the Biggest Financial Companies: Trends, Practices and Outlook

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Regulators now need to sign off on compensation program design for all covered employees among the 25 largest complex banking organizations (LCBOs). Based on client experience and a review of 2012 proxy statements for these institutions, consultants from Compensation Advisory Partners identified key themes among these largest financial companies.

Key themes found in the report:

1. Regulators are highly involved in the compensation design process at large bank holding companies for a sizeable number of employees (ranging from senior executives to employees well below that level).

2. A majority of variable executive compensation is linked to long-term performance and risk outcomes; it is now typical that more than the required 50 percent of incentive pay (annual + long-term) be deferred over at least three years.

3. Performance adjustments are now expected before and after the grant of incentive compensation, and the role of the risk function and formal risk assessments in that process has increased.

4. Long-term incentive goals must now balance business plan and shareholder goals (earnings per share, total shareholder return, etc.) with risk-based ex-post performance features (capital goals, etc.).

5. It is majority practice to have stock ownership requirements for senior executives that go beyond a more traditional guideline (multiple of base or number of shares achieved within a certain number of years).

6. Clawback provisions go beyond what is required by Sarbanes-Oxley or expected under Dodd-Frank.

For the full report, click here.

Trends in CEO Pay: Work Now, Get Paid Later

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The financial crisis has had a huge impact on the way banks pay their executives and even their loan officers, but CEO pay is definitely creeping back upward. The smallest community banks to the international mega-banks have all made changes in the last few years to reduce the likelihood that employees will take big risks that threaten the long-term health of their financial institutions.

Many banks are moving away from short-term incentives, paying smaller amounts in cash bonuses for meeting short-term performance goals, and paying equity gradually over a longer period of time in the form of restricted stock based on performance goals.

One of those banks is First Commonwealth Financial Corp. in Indiana, Pennsylvania, a $6 billion-asset institution with 112 offices.

Bob Ventura, chairman of the board’s compensation and human resources committee, said at Bank Director’s Bank Executive & Board Compensation conference in Chicago recently that the bank has moved from paying a roughly 75 percent/25 percent ratio of compensation in short/long term pay to now using a 65/35 ratio.

Even more changes have been made from a risk standpoint among loan officers.

“We have gotten away from volume goals and put some profitability goals in there,’’ he said, adding that there’s an 18-month time period to get paid the full incentive package.

Even though the bank is not a recipient of Troubled Asset Relief Program money from the federal government, it still follows TARP compensation guidelines. The bank conducts third-party annual reviews of its compensation plans, and has created a position for a chief risk officer who reviews compensation plans and makes recommendations to the risk committee of the board.

 “We have evolved from plans that were primarily paid in cash,’’ he said.

Todd Leone, a principal at McLagan compensation consultants in Minneapolis and a speaker at the conference, laid out some general trends, including:

  • The use of full value equity plans (such as restricted stock) continues to increase.
  • Most banks don’t use stock options as a form of equity compensation, no matter what the bank size is.
  • The larger the bank, the more frequent the use of equity compensation.
  • Banks are increasingly using credit quality measures in performance plans.

Bank CEO pay increased last year as the economy strengthened and bank balance sheets improved, although most of the increases were tied to cash and equity incentives, Leone said. The biggest pay increases were for CEOs at the largest banks, who saw their paychecks drop substantially in 2008 and 2009 following the financial crisis. The median cash compensation for big bank CEOs is now roughly what it was in 2006, $2.3 million, according to McLagan’s analysis of 717 publicly traded bank proxy statements, 41 of them banks with more than $15 billion in assets.

The following table shows the breakdown in CEO pay last year:

Median 2010 CEO Compensation

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*Cash compensation is salary plus all other cash incentives, like bonuses. Direct comp is  cash compensation plus equity. Total compensation adds direct compensation, retiree benefits and all other compensation.

Source: McLagan

Incentive Compensation Plans: The New Normal

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With the increased regulatory conditions, compensation committees are finding themselves knee deep in overseeing compensation plans across their financial institutions. In this video, Robert Ventura, Compensation Committee Chairman, talks about the new normal at First Commonwealth Financial Corp. and how his committee has handled their biggest challenge over the past year.


Incentive Compensation Plans: Balancing Risk vs. Reward

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In today’s risk-focused environment, financial institutions must ensure that their incentive compensation plans are meeting regulatory requirements. In this short video, Kevin Blakely, senior vice president and chief risk officer at Huntington Bancshares of Columbus, Ohio, talks about how his institution addressed this challenge and shares his role in balancing compensation plans throughout the organization.

Highlights include:

  • The risks of incentive compensation plans
  • How to minimize excessive risk taking
  • The role of the chief risk officer

Click on the arrow to start the video.


Balance the Challenge: Executive Compensation & Shareholder Value

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Are your institution’s compensation plans structured to benefit or hurt your shareholders? In this five-minute video, William Flynt Gallagher, president of Meyer-Chatfield Compensation Advisors, offers insight and advice on strategies the compensation committee can use to maximize benefits and structure executive agreements to actually enhance shareholder value. 

Highlights includes:

  • Compensation challenges facing publicly traded banks today
  • Which compensation structures you should avoid
  • Ways to benefit both executives and shareholders

Click the arrow below to start the video.


You Are Not Alone: Reflections on Compensation and Succession Planning Problems

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In connection with another successful Bank Director & Bank Executive Compensation conference, I thought it would be helpful to recap three important issues raised by the attendees, as well as some of the action items that need to be addressed in the short time left before year-end.

You are Not Alone

During the day-long Peer Exchange held prior to the conference, compensation committee directors met in small groups to discuss issues of common interest.  One of the universal feelings was that the directors are feeling awash in new regulations and regulatory guidance that are making it very difficult to do their jobs.  One director noted, to everyone’s agreement, that focusing so heavily on all of the new rules has materially detracted from time spent on truly strategic matters.

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Consistent with prior years, directors conveyed that their time commitment to board activities and the complexity of the rules they have to work through in compensation continue to increase.  When this is combined with the minimal annual increases in director compensation and the increasing threat of personal liability, it is a wonder that these directors continue to be as focused and committed to their institutions as they are.

Succession Planning at the Board Level

Though most directors felt that their boards are in a position to actively oversee their senior executives, including the wherewithal to replace underperforming or otherwise problematic individuals, there was almost universal agreement that this is very difficult (and increasingly more difficult) to do so at the board level.  The smaller the institution, the more likely it is that any given director may be either a founding investor, major business producer or both.  Though many directors indicated they had some level of succession planning for their executive ranks, few have actively planned for succession at the board level, other than using a mandatory retirement age for directors, which only guarantees transition rather than improvement.  This is consistent with the difficulties faced by many of our clients.  We frequently meet with board members to discuss proper succession planning at both the executive and board levels.

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The directors agreed that one of the best methods to surface these issues is to perform a review of each board member and the functionality of each committee.  Prior to nominating board members for each successive term, a summary of these reviews should be considered by the board, or its nominations committee.  If necessary, to arrive at the conclusion to remove a board member, it can be helpful to have a third party involved in the evaluation process.  A third party can take an independent role in the process and may also have a much more robust review process than would otherwise be developed internally.  The resulting evaluation report should be circulated to the relevant board members as part of the annual nominations process.  One director noted at the Peer Exchange that after the first 360-degree review was completed at the board level, the CEO/chairman decided it was best to keep the results of future reviews confidential from the other board members, so as to avoid conflict.  Unfortunately, this is not the end result you would hope for.

Risk is All Around Us

Not surprisingly, the general theme of the conference seemed to be risk.  The issue of risk, as it relates to compensation, was raised and discussed in almost every presentation and each director exchange.  This echoes our experience with our own clients over the past year.  For public and private banks of all sizes, the universal set of rules applicable to incentive compensation and risk is the Joint Guidance on Sound Incentive Compensation Policies (effective June 2010).  This guidance provides the principles-based approach to identifying, monitoring and mitigating risk as it may exist in your incentive compensation plans.  Subsequent risk-based rules found in Section 956 of Dodd-Frank and the proposed Interagency Guidance on Incentive-Based Compensation Arrangements (proposed April 2011) provide great direction on how Congress and the regulatory bodies will look at the risk associated with incentive compensation plans for banks with assets in excess of $1 billion, though they are not all currently effective. 

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Consistent with the Joint Guidance that is currently effective, every banking organization should be reviewing their incentive compensation arrangements to assess the risk such arrangements may pose to the institution.  The company should insure that proper oversight and controls are in place with respect to each plan to monitor ongoing risk and to participate in the design and development of new plans in a manner so that risk is fully understood and actively managed.  Lastly, the board, or a committee of the board, should regularly meet with the individuals responsible for the oversight and controls of these plans and the board minutes should reflect this process.  Together, they can properly judge whether changes need to be made to either the incentive compensation arrangements, or to the procedures and controls to monitor such programs, in order to protect the institution from unreasonable risk.  The board must be actively engaged in this process and have a good understanding of each element of incentive compensation as it exists at the bank.

The Down and Dirty of Compensation Risk

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Recent federal guidance on bank incentive compensation practices, combined with the landmark Dodd-Frank Act, is requiring bank compensation committees and their audit or risk committee counterparts to take a collaborative approach to determining whether their plans pose a material financial risk to the institution. This and other topics were covered at a roundtable discussion on compensation risk that brought together directors and human resources professionals at large, publicly traded banks, representatives of the McLagan consulting firm and the law firm Kilpatrick, Townsend & Stockton. The half-day event was held in late September at the University Club in Washington, DC.

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Released in June 2010, the new rules mandate that banks must review all of their incentive compensation programs annually to make sure they have an appropriate balance of risk and reward, and that the board of directors is providing an adequate level of governance oversight.

Al Moschner, who is chairman of the compensation committee at $13.9 billion-asset Wintrust Financial Corp. in Lake Forest, Illinois, said the compensation committee sponsored a meeting with the chairmen of the other board committees, the chief executive officer, the chief financial officer and the chief risk officer to review the risk profile of the bank in the current environment. A head of the bank’s human resources department also described the various levels of compensation that are being contemplated for the coming year. “And then there was a robust discussion about whether that makes sense from a risk perspective,” Moschner says.

Wintrust also emphasizes an integrative approach to managing compensation risk by having some directors serve on both its compensation and audit committees. “We try to make sure we have some cross-pollination between the two committees,” Moschner explains.

“The compensation committee needs to work collaboratively with the bank’s risk committee,” says Todd Leone, a principal at McLagan. “The risk committee needs to review the goals that drive the bank’s incentive plans. They have to ensure what is being motivated doesn’t have unintended consequences.  The compensation committee drives plan design; the audit/risk committee ensures it is within the bank’s overall risk tolerance.”

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Compensation committees today also face the challenge of developing an appropriate set of performance metrics for long-term incentive plans. Part of the problem is that federal regulators are now focusing greater attention on compensation risk generally, but fundamental changes that have affected the entire industry add to the challenge. “How banks make money now is now very different and that makes it harder to develop incentive compensation plans,” says Clifford J. Isroff, the lead independent director at $14 billion-asset FirstMerit Corp. in Akron, Ohio, and a member of both the compensation and risk committees.

Wintrust’s long-term incentive plan used to be based on a single metric—annual earnings growth?but the current operating environment has led the bank to build multiple performance metrics into its plan, including return on assets and growth in tangible net assets. 

Another controversial issue that compensation committees are being forced to deal with is the clawback provision in the Dodd-Frank Act. The act requires the Securities and Exchange Commission to direct the national securities exchanges like NYSE Euronext and NASDAQ OMX to prohibit companies from listing their stocks if they have not adopted clawback policies that would allow them to recover incentive compensation that has already been paid to former or current executives if it was based on incorrect data.

Gayle Applebaum, a principal director at McLagan, said many of her bank clients are finding some resistance from their senior managers to the very notion of clawbacks, as well as deferrals that are now being built into many incentive plans. “Oftentimes managers don’t want these things for their people,” Applebaum says. “They are worried about their ability to retain talent.”

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One point that most of the participants agreed on was the importance of having a strong risk culture throughout the organization. Although it will still be necessary to vet the bank’s incentive compensation plans annually to satisfy the new federal requirements, a strong risk culture is every bank’s first line of defense.

“If you manage the risk, I’m not worried about the compensation plan,” said Frank Farnesi, who is chairman of the compensation committee at Beneficial Mutual Bancorp Inc., a $4.7 billion-asset mutual holding company in Philadelphia.

Federal Banking Agencies Offer Proposal to Reform Financial Institution Incentive Pay

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Acting on a Dodd-Frank mandate, federal bank regulators have released proposed guidance establishing general requirements for the incentive compensation arrangements of a variety of covered financial institutions. The proposal implements Section 956 of Dodd-Frank, which requires the agencies to prohibit incentive pay arrangements that encourage inappropriate risks by providing excessive compensation or that could lead to a material loss. The application of Section 956 is limited to financial institutions with a $1 billion or more in assets, defining “financial institution” broadly to include all depository institutions, credit unions, broker-dealers, investment advisors, GSEs like Fannie Mae and Freddie Mac and the Federal Home Loan Banks. The rules cover all programs that offer “variable compensation that serves as an incentive for performance” and extends to all officers, employees, directors or 10 percent shareholders that participate in such programs. The proposal will be open for a 45-day comment period after publication in the Federal Register with a final rule expected to be in place by 2012.

Enhanced Reporting of Incentive Pay

The proposed regulation mandates enhanced reporting of incentive compensation arrangements to provide the agencies with a basis for determining whether an institution’s pay practices violate the prohibitions on excessive compensation or encourage inappropriate risk that could lead to a material loss. All covered financial institutions would be required to submit an annual report describing the structure of their incentive pay arrangements in a clear narrative format along with a discussion of the institution’s policies and procedures relating to the governance of incentive pay programs. However, for institutions with less than $50 billion in assets, the regulation does not require reporting of an individual executive’s actual compensation. Institutions with assets of $50 billion or more (large covered institutions) would be required to provide additional specific information on policies and procedures applicable to the determination of incentive compensation for executive officers (see below) and certain other employees identified by the board of directors as having the ability to expose the institution to losses that are substantial in relation to the institution’s size, capital or overall risk tolerance. Large covered institutions would also be required to report on material changes in their incentive pay program since the prior year’s report and to detail the specific reasons why the institution’s incentive pay practices do not provide excessive compensation or encourage inappropriate risk that could lead to a material loss.  

Prohibited Practices

The proposed rules identify two classes of prohibited incentive pay practices: (i) programs that encourage unnecessary risk by providing excessive compensation and (ii) programs that encourage inappropriate risks leading to material financial loss.

Excessive Compensation . The agencies define “excessive compensation” as amounts paid to a covered individual that are unreasonable or disproportionate to the services performed, taking into account a variety of factors, including (i) the individual’s total compensation (both cash and non-cash), (ii) the individual’s compensation history, (iii) the institution’s financial condition, (iv) peer group practices, and (iv) the individual’s connection to any fraudulent act or omission.

Material Financial Loss . The proposed rules ban incentive pay arrangements that encourage either covered individuals or groups of covered individuals to take inappropriate risks that could lead to a material financial loss. The guidance does not identify specific arrangements that fit within this category but makes reference to the three principles identified in the agencies’ prior Guidance on Sound Incentive Compensation Policies released in June 2010: (i) balance of risk and financial reward through the use of deferrals, risk adjusted awards and reduced sensitivity to short-term performance, (ii) compatibility with effective controls and risk management and (iii) support by strong corporate governance, particularly at the board or board committee level.

Deferral Requirements for Large Covered Institutions

For large covered institutions, the proposal requires that at least 50 percent of annual incentive compensation for “executive officers” be deferred for at least three years. The proposal defines “executive officer” fairly narrowly to include only persons holding the title (or function) of the president, chief executive officer, executive chairman, chief operation officer, chief financial officer, chief risk officer or the head of a major business unit. Deferred amounts are also subject to adjustment for actual losses or by reference to other aspects of performance that are realized or become known over the deferral period. The rules allow the deferred amounts to cliff vest, i.e., no vesting or payment prior to three years, or on a graded schedule, i.e., one-third vesting and paid each year of the deferral period.

High Risk Employees

The agencies are also requiring the board or a board committee at large covered institutions to identify persons other than executive officers who have the ability to expose the institution to losses that are substantial in relation to the institution’s size. For such persons, any incentive arrangement is subject to documented approval by the board or a board committee and the board or committee must make a specific determination that the arrangement (i) effectively balances the financial rewards to the employee and the range and time horizon of the risks associated with the employee’s activities, (ii) includes appropriate methods for ensuring risk sensitivity such as deferral, (iii) provides for risk adjustment of awards and (iv) is structured to reduce sensitivity to short-term performance.

New Governance Requirements for Incentive Pay

The proposal also mandates specific governance requirements for the implementation and operation of incentive pay arrangements. All covered institutions are required to adopt board-approved policies and procedures that are designed to ensure continuing oversight of compliance efforts. Specifically, the rules require (i) the inclusion of the institution’s risk management personnel in the incentive pay design process, (ii) ongoing monitoring of incentive pay awards and required risk-based adjustments, and (iii) the regular flow to the Board of critical data and analysis from management and other sources to allow the Board to assess the consistency of incentive pay programs with regulatory requirements.

For covered institutions, regardless of size, we recommend an immediate assessment of how the proposed rules will impact your existing incentive arrangements and a review of related corporate governance practices. The early identification of covered officers and an analysis of the viability of current incentive pay programs under the new rules will help ease the transition to a compliant structure.