The credit crunch precipitated by careless bank-lending policies has taken a bite out of compensation packages offered to top payments-industry executives, and it likely will continue.
Indeed, senior officials with banks, card brands and related payments companies could find their future earnings more tightly tied to their own performance and that of their organizations, especially as shareholders take a larger role in deciding how corporations construct compensation packages. Moreover, the number of top-level jobs is diminishing, in part because of mergers and acquisitions.
Also, with the U.S. economy being unstable, more companies are looking to hire executives with expertise in risk management, observers say.
For payments executives, median total compensation in 2007 was $4.01 million, down 20.4% from $5.04 million in 2006, according to data Standard & Poor's compiled for Cards&Payments from 12 public, U.S.-based companies See chart. It remains difficult, however, to make industrywide conclusions based on the S&P data, experts say.
Such card companies as American Express Co. and MasterCard Worldwide that are economically healthy and have not struggled with debt issues still are able to pay their top executives handsomely, with little movement toward lowering compensation. But senior officials with debt-riddled balance sheets and militant shareholders, particularly at banks, are likely to face diminished salaries and less-robust bonus packages, observers say.
"You're going to see stagnation in compensation both with the card companies and the banks," says Clark R. Beecher, managing director of Magellan International, a Houston-based executive search firm. "Since the market is in flux right now because of debt, it puts a lot of executives in jeopardy for their jobs, even if they're doing good jobs. And if their stock prices fall, it's difficult to compensate them more than before."
Much of the tighter shareholder scrutiny, and, perhaps, even diminished compensation packages, stem from U.S. Securities and Exchange Commission rules enacted a couple years ago mandating more-rigid reporting of executive pay.
"Disclosure is driving a lot of the changes we're seeing in executive pay," points out David Wise, senior consultant with Hay Group, a Philadelphia-based management-consulting firm. "Now that shareholders have more information, they have more power to impact how the companies are rewarding their executives."
As an example, he says, payments-industry companies seem to be cutting back on "tax gross-ups on perquisites" they offer top executives.
Companies use tax gross-ups to ease the tax burden executives must bear on perks by reimbursing or paying the executive for the added tax obligation, says Wise. "But when we saw disclosures [as required by the SEC], we saw a lot of companies had eliminated the tax gross-ups in the past year," he says.
Firms also reduced executives' personal airplane use because they were uncomfortable with the disclosure of such a perk, Wise adds.
Others agree that companies are shaving such executive perks as free travel and entertainment.
Despite the information culled by Standard & Poor's, not everyone believes compensation for top payments-industry moguls is going down.
"If you're a senior vice president or above, the payments industry is a good place to be," says Dennis Simmons, president and CEO of SWACHA, a regional automated clearinghouse payments association in the Southwest.
Intense industry competition exists for senior executives, in part, because of consolidation in the industry, Simmons says. "There is competition for people who know what they're doing," he says. "And I think it's not only banks that are competing for the talent, it's the vendors, too."
Some of S&P's data bears out Simmons' observations.
At such companies as Metavante Holding Co. (which was involved in a spin-off) and Total System Services Inc., total compensation for top execs increased. Of the six Metavante executives cited by Standard & Poor's, total compensation increased for the top five by between 50.8% and 68.3%, and for the sixth by 16.7%. At TSYS, total compensation for the five company officials listed rose between 17.9% and 34.1%. And at AmEx, although the total compensation of President and CEO Kenneth I. Chenault dropped 10%, to $26.2 million in 2007 from $29.1 million the previous year (mainly because of a fall in the value of awarded stock), other officials at the credit card company saw their compensation increase last year.
Performance pay is the prevailing new ethos in the industry, and Beecher says many companies are tending to reward performance with cash bonuses instead of stock options, as they had done in recent years.
"You'll see a trend with the banks and card companies of less equity-based compensation and more cash-based compensation," he explains.
On the other hand, some companies are offering additional equity to executives who meet or exceed their performance goals, according to Ed Schmitt, a practice manager with TopGrading Solutions, an executive-search firm based in Port St. Lucie, Fla.
The emphasis on performance means that "the day of the CEO walking out with $200 million for failing is probably over," though it might take a while for all such golden-parachute contracts to expire, says Beecher.
Along with performance-based pay comes an industry focus on long-term compensation, says Wise. Some firms are offering long-term performance compensation that can zero out if executives or their companies fail to meet prescribed objectives, he says.
"Shareholders have grown tired of seeing CEOs take home compensation they did not earn," Wise explains.
Observers generally agree that expertise in risk management is a growing asset for executive candidates. Corporations need chief executives who can balance the upside with the need to protect assets, Wise explains.
Another important resume entry is the relationships executives have established within the industry. Schmitt says payments firms want to hire executives who bring relationships to their new jobs that can demonstrate instant credibility to their partners.
Companies also are looking for executives who bring with them strategic views on how payments can fit into the overall strategies of financial institutions, Simmons says.
Yet each company has its own requirements for new executives, just as it has its own ideas about compensation.
"From a company-to-company perspective, the only one consistency in executive compensation seems to be inconsistencies," asserts Larry Lebofksy, practice manager at TopGrading Solutions. CP