Posted: April 9th, 2018
By: Yusuf A. Brown *| Staff Writer
As one of the largest and most successful retail banking franchises, it comes to no surprise that Bank of America (“BOA”) would pay its Chief Executive Officer (“CEO”) the big bucks. In February of 2018, the BOA Board approved its CEO’s, Brian T. Moynihan, 2017 incentive compensation package. This approval will allow Moynihan to enjoy a $3 million increase from 2016 in equity incentive. Although Moynihan continues to receive a relatively modest salary of $1.5 million, he will also receive $21.5 million as an equity incentive, an increase from the $18.5 million he received in 2016.
Moynihan’s compensation is made up of base salary, time-based restricted stock units (“RSUs”), and performance RSUs, which will be paid only if BOA meets specific financial goals.
Compared to other CEOs at other Fortune 500 companies, Moynihan’s compensation is relatively low. According to Bloomberg, the top ten highest paid CEOs were paid no less than $75 million dollars in 2016. Looking at the list of companies dishing out the most dollars, you might not be surprised to see names like Elon Musk (Tesla), Tim Cook (Apple), and Marc Lore (Wal-Mart Stores). Regardless of the size or performance of the company, one is left to wonder what it is about these CEOs that justify such a hefty paycheck.
“‘The concept of nine-figure compensation numbers can be startling,’ said Steven Hall, managing director at Steven Hall & Partners, a compensation-consulting firm. ‘But these are executives whose proven talents make them heavily sought after by other firms.’” Thus, companies have to present attractive compensation packages to these CEOs at recruitment and to increase retention. A popular and cost-effective strategy for recruitment and retention is incentive-based compensation.
Moynihan says “[t]he ability of people to be successful in the future job market is going to come down to the ability to absorb tremendous amounts of information.” For Moynihan, “be[ing] able to process [tremendous amounts of information] and think through it and intellectually assess it” is what earns him and other CEOs top dollar.
But these skills must also produce positive outcomes for the corporation, and that is where incentive-based compensation comes into play. Incentive-based pay allows a corporation to reward positive performance when certain company goals are met, without committing to excessive compensation before the CEO proves worthy. The goal is to give the CEO tangible goals to strive for and allow the company to effectively measure the performance of the CEO.
Common incentive compensation plans include one or a combination of annual incentive plans, discretionary bonus plans, spot rewards, profit and gain sharing plans, retention bonuses, and project bonuses. Although companies make use of these plans to incentive increased performance, others argue that these plans incentivize some nefarious actions to ensure these goals are met.
Research has shown that giving rewards to high-performing CEOs as opposed to punishing poor-performing CEOs leads to greater overall corporate performance. However, in a recent study of incentive compensation plans that focused on specific earnings per share targets, it was revealed that the average firm was manipulating its revenue numbers to hit the target.
The common types of manipulation do not rise to the level of criminality. Some companies would cut expenses paid for research and development, advertising, and in some instances, reduce the number of employees. Which, in the short-term may increase profits and help reach these goals, but researchers fear that if these practices are continued they may negatively impact broader company objectives.
Extreme disparities between CEO and employee compensation has been a topic that has increased concern about income inequality in the United States. As companies continue to fight for market share, they will continue to recruit the most talented CEOs. Because these plans allow the company to justify the many millions paid to CEOs by linking the increased profits for the corporation to his or her performance, these incentive compensation plans will likely be around for some time. Moynihan says all it takes is the ability to understand and assess a tremendous amount of information; it seems to be working for him and BOA.
Yusuf A. Brown is a second-year law student at Wake Forest University School of Law where he is the 2018-19 Managing Editor of the Journal of Business and Intellectual Property Law. He holds a Bachelor of Arts in Public Policy, from the University of North Carolina at Chapel Hill. Upon graduation, he intends to practice corporate law, focusing his attention on Mergers & Acquisitions Law and Tax Law.