We highly value dialogue and engagement with our stakeholders, including stockholders, employees, clients and the communities we serve, with respect to our executive compensation program. Consistent with that, and in accordance with SEC rules, we are asking stockholders to approve the following resolution:
RESOLVED, that the stockholders approve the 2016 compensation of the named executive officers, as disclosed in this proxy statement pursuant to Item 402 of Regulation S-K of the Securities and Exchange Commission (including the Compensation Discussion and Analysis, the compensation tables and other narrative executive compensation disclosures).
- Since our 2009 Annual Meeting, we have provided stockholders with an advisory vote on our executive compensation program each year. We have consistently received strong support for our executive compensation program, with over 97% stockholder approval of our 2015 executive compensation at last year’s Annual Meeting, and over 95% approval of our 2014 executive compensation and over 93% approval of our 2013 executive compensation at prior Annual Meetings.
- In order to ensure that we have investor feedback, we have continued our annual investor outreach process in 2016, resulting in our having conversations with investors representing almost 30% of our outstanding shares as well as with proxy advisory firms and other stakeholders.
- Our approach to compensation continues to be designed to directly link pay to performance, balance corporate and individual performance, promote long-term stock ownership and balance risk and reward, while taking into consideration market trends and practices as well as stakeholder feedback to refine our program.
Your vote on this resolution is an advisory vote. Although the Board is not required to take any action in response to the stockholder vote, the Board values our stockholders’ opinions. As in prior years, the Board intends to evaluate the results of the 2017 vote carefully when making future decisions regarding the compensation of our named executive officers. At our 2011 Annual Meeting, we provided stockholders with an advisory vote with respect to how often the company should hold a say-on-pay vote, and 86% of the votes cast voted in favor of holding such a vote annually. Consistent with the voting results, we have held an advisory vote each year on our executive compensation program. At our 2017 Annual Meeting, in addition to this advisory vote on 2016 compensation, we will hold an advisory vote on say-on-pay vote frequency. For information regarding the advisory vote on say-on-pay vote frequency, see Item 3, on page 72 below.
The Board of Directors unanimously recommends that you vote “FOR” the approval of the 2016 compensation of our named executive officers.
Compensation Discussion & Analysis
Organization and Key Considerations
(see pages 38 to 29)
|Compensation of Named Executives|
(see pages 40 to 51)
(see pages 52 to 58)
|How We Address Risk and Control|
(see page 59)
* For a reconciliation and explanation of these non-GAAP measures, as well as information on the calculation of operating earnings per share and adjusted operating leverage for compensation purposes, see Annex A.
Progress Towards Our Investor Day Goals
1 Compounded annual growth rate for 2015-2017, as announced on October 28, 2014.
2 Assumes (A) “flat” rate scenario NIM of 95-100 bps, (B) operating margin of 28-30% and (C) no deterioration in volatility, volume and short-term interest rates.
3 Assumes (A) “normalizing” rate scenario NIM of 125-150 bps and (B) operating margin of 30-32%.
4 For a reconciliation and explanation of these non-GAAP measures, see Annex A. For 2015, adjusted revenue growth was 2%, operating EPS growth was 19% and adjusted return on tangible common equity was 21%. For 2016, adjusted revenue growth was 1%, operating EPS growth was 11% and adjusted return on tangible common equity was 21%.
2016 Program Outcomes
|Corporate Component Determination||CEO Incentive Award Payout|
*See pages 44 through 45 for further information regarding the CEO’s 2016 incentive award determination.
2016 Program Enhancements
|Strengthen tie between pay and performance||
|Limit executive severance benefits||
CEO Total Direct Compensation¹
1 Total Direct Compensation reflects salary and incentive compensation for the applicable year. Totals may not foot due to rounding.
2 Target and award determinations reflect salary rate for the year and incentive compensation which is awarded after year-end for performance during the year.
3 SEC Reporting reflects salary, stock awards and non-equity incentive plan compensation reported in the Summary Compensation Table set forth on page 60 (and for 2013, reported in the Summary Compensation Table set forth in last year’s proxy statement). SEC Reporting does not reflect how our HRC Committee sets targets and determines awards, largely due to the timing requirements for reporting equity-based pay and our previously disclosed 2013 pay-for-performance enhancements.
4 Percentages represent incentive awarded as a percentage of target.
2016 Executive Pay Practice Highlights
|What we do:||What we don't do:|
|✔||Directly link pay to performance||✗||Do not use employment agreements|
|✔||Require sustained financial performance to earn full amount of long-term awards||✗||No excessive or single-trigger change-in-control or other severance benefits|
|✔||Promote long-term stock ownership through deferred equity compensation||✗||No excessive perquisites or benefits|
|✔||Balance risk and reward in compensation||✗||No tax gross-ups|
|✔||Use a balanced approach for determining incentives with both corporate and individual goals||✗||No hedging or short sales of our stock|
|✔||Balance incentives for short- and long-term performance with a mix of fixed and variable, cash and equity compensation||✗||No dividend equivalents paid on unearned PSUs or RSUs|
|✔||Conduct a robust stockholder outreach program|
Our operating earnings per share (“OEPS”) was $3.17, representing a year-over-year increase of 11% and a 2% increase above our operating plan of $3.10. Combined with our strong OEPS growth last year, compounded OEPS growth for the two-year period from 2015 through 2016 was 15%, which is on track to meet our three-year Investor Day Goals. OEPS reflects GAAP EPS (earnings per diluted common share) as adjusted for significant items, including M&I, litigation and restructuring charges (recovery) in excess of plan. Our GAAP EPS increased year-over-year by 16% from $2.71 to $3.15, which is 5% above our GAAP plan of $2.99, representing a GAAP EPS growth rate at the 93rd percentile relative to our peers.
Our Return on Tangible Common Equity remained strong at 21%*, up 70 basis points year-over-year. Accordingly, our Return on Tangible Common Equity for the two-year period from 2015 through 2016 was also 21%*, which is on track to meet our three-year Investor Day Goals. Our continued focus on implementing expense controls resulted in a year-over-year decrease in expenses of 2%* on an adjusted basis, and our compensation to revenue ratio decreased to 37.6% as compared to 38.4% in 2015.
Although 2016 adjusted revenue of $15.2 billion* was below our operating plan of $15.5 billion, it represented a year-over-year increase of 1% and, when coupled with our strong operating expense controls, resulted in net operating income of $3.45 billion* (7% higher than 2015 net operating income and 3% above our operating plan). Our adjusted revenue growth for the two-year period from 2015 through 2016 was 2%.
In 2016, we achieved industry leading operating margins, and our adjusted pre-tax operating margin increased to 33%* (from 31% in 2015). Additionally, we attained positive adjusted operating leverage of 274 basis points.
* For a reconciliation and explanation of these non-GAAP measures, as well as information on the calculation of OEPS and adjusted operating leverage for compensation purposes, see Annex A.
In 2016, we executed on our capital plan and returned nearly $3.2 billion to our stockholders in the form of common dividends and share repurchases. We distributed $778 million of common stock dividends to our stockholders in 2016 and also repurchased 5.4% of outstanding common shares for approximately $2.4 billion in 2016. We have repurchased 20% of common shares over the last five years and our 2016 dividend distributions and share repurchases resulted in a combined payout ratio of about 93%, one of the highest payout ratios in our peer group.
Although our total shareholder return (TSR) was below the median relative to our peer group and the S&P Financials Index as a whole for 2016 (25th and 48th percentiles, respectively), our TSR has outperformed the median of our peer group and the S&P Financials Index over both a three-year period (61st and 59th percentiles, respectively) and a five-year period (72nd and 69th percentiles, respectively).
We continue to maintain our strong capital position and further strengthen our balance sheet, remaining a safe and trusted business partner to our clients. Our estimated common equity Tier 1 ratio, calculated under the the Advanced Approach on a fully-phased in basis, was 9.7%* at December 31, 2016, exceeding the fully phased-in requirements plus applicable buffers of 8.5%.
Our strategic priorities for 2017 are designed to leverage our scale and expertise while delivering innovative strategic solutions with strong upside potential. The 2017 strategic priorities include: enhancing the client experience; driving profitable revenue growth; executing our business improvement processes to increase productivity and effectiveness while controlling expenses; being a strong, trusted counterparty by maintaining our safety and soundness, low-risk profile and strong liquidity and capital positions; generating and effectively deploying excess capital; and attracting, developing and retaining top talent. We believe that by executing on these priorities, we will ensure that we are making appropriate investments in our business to sustain long-term growth and value creation for our clients and stockholders.
We are also focused on improving the performance of our investment management business in 2017. In 2016, our investment management business achieved below-plan returns. To improve our performance and drive profitable revenue growth for 2017, we are focused on improving our investment performance, optimizing our distribution and infrastructure, repositioning certain products and developing new ones that are better aligned with evolving market conditions and curtailing initiatives that are not core to our strategic priorities. Our disciplined execution against these areas of focus is helping drive near-term performance, positioning us to attract new asset flows and drive improved margins.
* For a reconciliation and explanation of this non-GAAP measure see Annex A.
Compensation of Named Executives
2016 Target Total Compensation Structure*
2016 Target Incentive Compensation Elements*
* Excludes Curtis Y. Arledge, former Vice Chairman and CEO of Investment Management, whose employment with the company terminated effective March 23, 2016. Because compensation determinations for Mr. Arledge were made in connection with his departure, he is not included in this discussion. Mr. Arledge’s compensation is described below in “Separation Benefits for Mr. Arledge” on page 57.
2016 Incentive Compensation Determinations
The following table shows the HRC Committee’s determinations of the form and amount of 2016 compensation awarded to our named executive officers, as well as corresponding 2014 and 2015 information. The amounts reported in the table differ substantially as reported for 2016 in the Summary Compensation Table set forth on page 60.
Pursuant to SEC rules, the Summary Compensation Table is required to include for a particular year only those equity-based awards granted during that year, rather than awards granted after year-end, even if awarded for services in that year.
We consider the PSU and RSU awards granted during February of a given year to be part of the prior year’s compensation. For example, we consider PSU and RSU awards granted in February 2016 to be part of 2015 compensation. The following table depicts the manner in which the HRC Committee has considered named executive officer compensation determinations:
NEO Compensation Determinations¹ ²
1 Dollar amounts shown in millions. Totals may not foot due to rounding.
2 Our named executives also include Curtis Y. Arledge, former Vice Chairman and CEO of Investment Management. Mr. Arledge’s employment with the company terminated effective March 23, 2016. Because his compensation was determined in connection with his departure, he is not included in this table; his compensation is described below in “Separation Benefits for Mr. Arledge” on page 57.
Blue shading represents incentive determined by balanced scorecard results, reflecting the change to a “one decision” model in 2016 to (1) better align compensation with current year performance, (2) increase upside and downside program leverage and (3) simplify the program to enhance employee understanding of performance objectives
3 As previously disclosed, Ms. Peetz retired effective December 31, 2016. In recognition of the fact that Ms. Peetz is no longer able to influence our go-forward performance, the HRC Committee determined to award the deferred equity portion of her 2016 incentive award solely in the form of RSUs (rather than a combination of RSUs and PSUs).
2016 Target Compensation
In the first quarter of each year, the HRC Committee considers competitive data, executive position and level of responsibility and, for executives other than our CEO, our CEO’s recommendation, and establishes annual target total direct compensation for each executive. Targets are reviewed annually but only adjusted if determined appropriate by the HRC Committee.
As disclosed last year, after having remained unchanged since 2012, 2016 target incentive compensation was increased for Mr. Hassell by $2 million to position his total target direct compensation in line with that of our peers. Additionally, for 2016, compared to the prior year, total target direct compensation was increased for each of Messrs. Gibbons and Shea by $1 million (including, for Mr. Shea, a salary increase from $600,000 to $650,000), in each case, to better align with their current responsibilities. Total target direct compensation was increased for Mr. Harris by $900,000 (including a salary increase from $600,000 to $650,000) in connection with his promotion to CEO of Investment Management.
2016 Incentive Awards
Starting with our 2016 compensation program, our HRC Committee determined to move to a “one decision” incentive structure to (1) better align compensation with current year performance, (2) increase upside and downside program leverage and (3) simplify the program to enhance employee understanding of performance objectives. Under the “one decision” structure, total incentive compensation is based on a single incentive award decision based on the balanced scorecard results and then delivered in the form of cash, PSUs and RSUs, rather than two separate incentive award decisions — one for annual incentive, delivered in the form of cash and RSUs, and one for long-term incentive, delivered in the form of PSUs. One hundred percent of the total incentive award is conditional upon meeting a minimum funding requirement and subject to reduction or elimination based on a risk assessment.
Minimum Funding Requirement
A common equity Tier 1 ratio of at least 8.5% on a fully phased-in basis was established as a minimum funding requirement for our incentive compensation, with such percentage equal to the regulatory threshold ratio for a well-capitalized bank to which we expect to be held on a fully phased-in basis, including estimated buffers.
Payment of incentive compensation is conditioned upon our meeting this goal. This threshold funding goal was met, with an estimated common equity Tier 1 ratio of 9.7%* at December 31, 2016, calculated under the Advanced Approach on a fully phased-in basis.
We have used a “balanced scorecard” approach for our incentive compensation determinations since 2009 and have adapted it for our “one decision” 2016 incentive compensation determinations. Our approach is designed to be a comprehensive analysis of corporate and individual performance determined in the discretion of the HRC Committee. Our balanced scorecard provides for the following:
- Corporate Component. The corporate component of the balanced scorecard is based on a single set of objective company-wide performance metrics that are designed to drive achievement of near-term business strategies. The HRC Committee establishes the applicable metrics at the start of the performance period and has discretion to consider other factors to obtain a holistic picture of our performance.
* For a reconciliation and explanation of this non-GAAP measure, see Annex A.
- Individual Component. The individual component of the balanced scorecard focuses on individual performance and consists of (1) a business unit goal (as applicable) based on pre-tax income of the specific business unit for which the individual is responsible and (2) an individual modifier to recognize and differentiate individual actions and contributions in final pay decisions.
The HRC Committee determines the corporate component payout and the business unit payout, then applies the individual modifier to increase or decrease the total incentive award by up to ±25%. Finally, the HRC Committee has the discretion to reduce an individual’s corporate component, individual component and/or total incentive award based on an assessment of the individual’s risk profile. Incentive awards, including the effect of the individual modifier, can range from 0% up to 150% of the individual’s target award.
As illustrated below, incentive awards are paid out in a combination of cash, PSUs earned between 0 – 150% based on the achievement of performance metrics over a three-year performance period and RSUs deferred over three years. In calculating the number of PSUs and RSUs to grant, the HRC Committee divided the value of PSUs and RSUs awarded by $45.19, the average closing price of our common stock on the NYSE for the 15 trading days from January 13, 2017 through February 3, 2017, to mitigate the impact of short-term volatility in our stock price.
* Percentages reflect incentive award payment to our CEO. For our other named executives, incentive awards are generally paid 30% in cash, 45% in PSUs and 25% in RSUs. As described below, Ms. Peetz’s incentive award was paid 30% in cash and 70% in RSUs in light of her retirement on December 31, 2016.
For Messrs. Hassell and Gibbons, the corporate component weighting was 100% due to their roles as the Company’s CEO and CFO, respectively. For Ms. Peetz, the corporate component and business unit were weighted 75% and 25%, respectively, due to her role as the Company’s President as well as the sizable impact her role has on the investment services business. For Messrs. Shea and Harris, the corporate component and business unit were weighted equally (50% each) due to their roles as the head of our investment services and investment management businesses, respectively.
Corporate Component Payout
The corporate component metrics are reviewed annually to select measures that align with our strategy and are appropriate for measuring annual performance. The same corporate component metrics and goals apply to each named executive officer. In February 2016, the HRC Committee determined to focus management on OEPS and adjusted operating leverage, weighted 75% and 25% respectively. The HRC Committee retains the discretion to consider other factors (including our performance relative to our peers, market conditions and interest rate environment) in assessing the strength of the Company’s OEPS and adjusted operating leverage achievements and also retains the discretion to determine the overall corporate component payout.
- OEPS (weighted 75%). OEPS is defined as reported earnings per share excluding merger and integration, restructuring, litigation expense and other significant, unusual items added or subtracted at the HRC Committee’s discretion. Our 2016 OEPS budget was set at $3.10 and, in February 2016, the HRC Committee established the guidelines below for a range of incentive payouts. These guidelines include the intended upside and downside leverage, which is the amount by which each percentage point difference between our budgeted and actual OEPS is magnified to determine the OEPS earnout portion of the corporate component.
- Adjusted Operating Leverage (weighted 25%). Adjusted operating leverage is defined as the percentage change in operating revenue growth less operating expense growth for the same period (with revenue and expense items calculated on the same basis as the calculations for OEPS). In February 2016, the HRC Committee determined that the adjusted operating leverage portion of the corporate component would be earned at 100% if adjusted operating leverage is equal to, or more than, 100 basis points and at 0% if it is less than 100 basis points. There is no upside leverage associated with this metric, as the adjusted operating leverage portion cannot be earned above 100%.
HRC Committee Determinations. Our actual 2016 OEPS was $3.17 and 2.3% above our operating budget, resulting in an earnout range of 100% to 150% for the OEPS portion of the corporate component per the guidelines shown above. The HRC Committee determined that an earnout of 106.9% in respect of the OEPS portion of the corporate component was appropriate, which reflected an earnout of 3 percentage points above target for each percentage point by which actual 2016 OEPS exceeded our operating budget (consistent with our intended leverage shown above).
For 2016, our adjusted operating leverage was 274 basis points, which exceeded the 100 basis point target described above. The adjusted operating leverage portion of the corporate component was therefore earned at 100%.
The OEPS earnout of 106.9%, weighted 75% of the total corporate component payout, and the adjusted operating leverage earnout of 100%, weighted 25% of the total corporate component payout, yielded a corporate component payout of 105.2%, based solely on the objective performance metrics. The HRC Committee then exercised its discretion to review the following factors with respect to our 2016 performance:
- TSR results relative to peers over a 1, 3 and 5-year period were at the 25th, 61st and 72nd percentiles, respectively. When compared to the S&P Financials Index, our relative TSR results were directionally similar, ranking at the 48th, 59th and 69th percentiles over a 1, 3 and 5-year period, respectively.
- EPS growth results relative to peers were at the 92nd percentile (at the time the HRC Committee made its determination, which excluded Prudential Financial, Inc.).
- Expenses were under control, decreasing by 3% compared to 2015.
- Adjusted revenue grew 1% over the prior year, below plan by 1.8 percentage points.
Notwithstanding our strong multi-year TSR and EPS growth performance relative to peers and our disciplined expense management, management recommended and the HRC Committee agreed to limit the corporate component payout to 103% to reflect our below-plan revenue and the Company’s emphasis on quality growth based on earnings and revenue.
Individual Component (Business Unit Payout and Individual Modifier)
In February 2016, the HRC Committee approved the pre-tax income goal for each business unit and determined to apply similar payout range guidelines and the same intended leverage ratios as those applicable to the OEPS portion of the corporate component, as set forth above. At that time, the HRC Committee also approved individual modifier strategic and leadership objectives for our CEO, after discussion with the other independent directors, and for our other named executive officers, which were set by our CEO after discussion with the HRC Committee. None of the individual strategic and leadership objectives had any specific weighting; the objectives are intended to be used, together with other information the HRC Committee determines relevant, to develop a holistic evaluation of individual performance.
In the first quarter of 2017, the HRC Committee evaluated 2016 business unit performance and determined each named executive officer’s individual modifier. For Mr. Hassell, the HRC Committee reviewed his performance self-assessment, obtained feedback from each independent director, and finalized its decision after reporting its preliminary evaluation to the other independent directors and soliciting their input. For each of the other named executive officers, the HRC Committee reviewed his or her performance self-assessment, considered Mr. Hassell’s recommendation and summary of performance, and finalized its decision after soliciting input from the other independent directors.
In determining the individual component for Mr. Hassell, the HRC Committee considered the following key results:
- Strategic: met or exceeded key financial metric targets; developed and executed corporate strategies to achieve our Investor Day Goals; evaluated and developed strategic vision for investment services and investment management businesses and successfully led risk management initiatives
- Leadership: continued to enhance our performance-based culture; continued to build a robust and diverse leadership team and succession pipeline and assisted in building a robust and diverse Board; made a number of strategic and diverse hires and demonstrated commitment to providing superior client experience as a driver of new business
Based on the above strategic and leadership results, the HRC Committee approved an individual modifier of 120% for Mr. Hassell.
The HRC Committee then granted Mr. Hassell 25% of his total incentive award in the form of cash, 50% in the form of PSUs and 25% in the form of RSUs.
In determining the individual component for Mr. Gibbons, the HRC Committee considered the following key results:
- Strategic: achieved targets for key components of our operating plan; implemented process to assist business partners deliver run-rate improvements; assisted in the strategic review and restructuring of several businesses and executed use cases to explore benefits of potential fintech innovations
- Leadership: drove initiatives to increase employee engagement in support of company-wide performance initiatives; advanced our diversity and inclusion agenda and continued to evolve business line financial reporting and analysis and risk management initiatives
Based on the above strategic and leadership results, the HRC Committee approved an individual modifier of 120% for Mr. Gibbons.
The HRC Committee then granted Mr. Gibbons 30% of his total incentive award in the form of cash, 45% in the form of PSUs and 25% in the form of RSUs.
In determining the individual component for Mr. Shea, the HRC Committee considered the following key results:
- Business Unit Payout: Our 2016 budgeted pre-tax income for the investment services business unit was $3.790 billion and, in February 2016, the HRC Committee established the guidelines below:
Our actual achievement was $3.933 billion, representing 104% of budget, resulting in a payout range of 85% to 150%. The HRC Committee determined that a business unit payout percentage of 106% was appropriate.
- Strategic: exceeded business improvement process target; executed multiple strategic investment initiatives and drove improvements to bolster growth; sustained business line performance; significantly advanced technology platforms and agenda and completed a number of major systems conversions
- Leadership: implemented talent management tools and processes to support company-wide development initiatives; advanced our diversity and inclusion agenda; advanced our risk management agenda and attracted and developed key leaders for several businesses
The HRC Committee then granted Mr. Shea 30% of his total incentive award in the form of cash, 45% in the form of PSUs and 25% in the form of RSUs.
In determining the individual component for Ms. Peetz, the HRC Committee considered the following key results:
- Business Unit Payout: as described above, the HRC Committee determined that a business unit payout percentage of 106% was appropriate for the investment services business unit
- Strategic: improved competitive positioning relative to peers through development of change initiative and training program and enhanced communications with employees and clients; transformed treasury services team to position group for innovation and successfully oversaw critical regulatory deliverables
- Leadership: drove initiatives to increase employee engagement in support of company-wide performance initiatives; advanced our diversity and inclusion agenda and outperformed relative to peers with respect to corporate social responsibility
Based on the above strategic and leadership results, the HRC Committee approved an individual modifier of 120% for Mr. Shea.
The HRC Committee then granted Ms. Peetz 30% of her total incentive award in the form of cash and 70% in the form of RSUs. The HRC Committee determined not to grant Ms. Peetz any PSUs because she retired on December 31, 2016 and consequently will not impact our performance going forward.
In determining the individual component for Mr. Harris, the HRC Committee considered the following key results:
- Business Unit Payout: Our 2016 budgeted pre-tax income for the investment management business unit was $1.156 billion and, in February 2016, the HRC Committee established the guidelines below:
Our actual achievement was $1.053 billion, representing 91% of budget, resulting in a payout range of 40% to 100%. The HRC Committee determined that a business unit payout percentage of 72% was appropriate.
- achieved net margin growth in a margin contraction environment; created investment performance standards for boutique investment capabilities; exceeded target for customer contacts; restructured and/or shut down a number of underperforming businesses and reduced structural costs
- achieved below-plan returns on strategic initiatives and underperformed relative to peers with respect to revenue growth and growth of assets under management
- Leadership: realigned senior leadership team; implemented talent management tools and processes to support company-wide development initiatives and advanced our diversity and inclusion agenda
Based on the above strategic and leadership results, the HRC Committee approved an individual modifier of 90% for Mr. Harris.
The HRC Committee then granted Mr. Harris 30% of his total incentive award in the form of cash, 45% in the form of PSUs and 25% in the form of RSUs.
We adopted the use of a risk scorecard in 2011 to formally connect compensation and risk-taking. The risk scorecard takes into account liquidity, operational, reputational, market, credit and technology risk categories by measuring:
- maintenance of an adequate compliance program, including adhering to our compliance rules and programs;
- protection of the company’s reputation, including reviewing our business practices to ensure that they comply with laws, regulations and policies, and that business decisions are free from actual or perceived conflicts;
- management of operational risk, including managing operational losses and maintaining proper controls;
- compliance with all applicable credit, market and liquidity risk limits, including understanding and monitoring risks associated with relevant businesses and new client acceptance, as well as appropriately resolving or escalating risk issues to minimize losses; and
- meeting Internal Audit expectations, including establishing an appropriate governance culture, achieving acceptable audit results and remediating control issues in a timely manner.
The HRC Committee’s review of the risk scorecard results for each named executive was taken into account by the HRC Committee in determining each of the corporate and individual components of the balanced scorecard. The HRC Committee has the ability to reduce or fully eliminate the incentive award if the risk scorecard result is significantly below expectation. No downward adjustments were made for 2016.
Reduction or Forfeiture in Certain Circumstances
The company may cancel all or any portion of the RSUs and PSUs that constitute a portion of our named executives’ incentive award if, directly or indirectly, the named executive (1) engages, or is discovered to have engaged, in conduct that is materially adverse to the company’s interests during his or her employment, (2) violates certain non-solicitation or non-competition restrictions during his or her employment and for a certain period thereafter, (3) violates any post-termination obligation or duties owed to the company or (4) has received, or may receive, compensation that is required to be forfeited and/or repaid to the company pursuant to applicable regulatory requirements. In addition, in the event that the named executive’s risk scorecard rating is lower than acceptable risk tolerance, any unvested RSUs and PSUs will be subject to review and potential forfeiture, as determined by our HRC Committee.
In 2013, we reintroduced PSUs as part of our incentive compensation program. The PSUs are granted each year based on prior-year performance. We consider PSUs granted during a given year to be part of the prior year’s compensation; for example, we consider the February 2016 PSU grant to be part of 2015 earned compensation. Any earned PSUs cliff vest after the end of three-year performance periods based on continued service with certain exceptions. The PSUs granted in 2014 and 2015 are earned between 0 – 125% and the PSUs granted in 2016 are earned based between 0 – 150%, in each case based on the achievement of performance metrics. Granting awards annually with overlapping, multi-year performance periods allows the HRC Committee to annually review and update, as appropriate, the structure and performance metrics that we use in our PSU program.
February 2016 PSUs
As discussed in last year’s proxy statement, in February 2016, the HRC Committee granted PSUs to each of our then-current named executives based on target values, as adjusted based on prior-year risk scorecard results and strategic milestones. The February 2016 PSUs are earned based on 2018 OEPS, with the potential of a negative risk modifier should risk-weighted assets (“RWA”) grow at an unacceptable rate.
In particular, to emphasize our focus on pay for performance, the HRC Committee pre-established two sets of 2018 OEPS targets (one set for a “normalizing” scenario, where the daily average Fed target rate is greater than or equal to 100 basis points in 2018, and one set for an alternative “flat” scenario):
The actual percentage of PSUs that are earned will be determined in the HRC Committee’s discretion within the payout range set forth above. In addition, the percentage may be adjusted downward by a risk-based modifier should risk-weighted assets grow at an unacceptable rate during the three-year performance period as set forth below:
For 2016, our OEPS was $3.17 and the one-year growth rate of our RWA was 0.43%.
Our outstanding PSU awards are illustrated below:
For the February 2014 PSU award, PSUs were earned in separate tranches over each year of the performance period based on return on risk-weighted assets (“RRWA”). RRWA was generally defined as net income available to common stockholders, adjusted for capital charges on acquisitions as incurred, divided by the simple average of quarter-end risk-weighted assets (estimated per a fully phased-in Basel III, based on assumptions and approaches existing at the commencement of the performance period as reported in our reports on Forms 10-Q and 10-K). For awards beginning in February 2015, RWA is generally defined as, for each fiscal year, the simple average of the preceding four quarter-end risk-weighted assets (estimated on a fully phased-in basis in Basel III using, for PSUs granted in 2015, the Advanced Approach, for PSUs granted in 2016, the higher of the Advanced or Standardized Approach and for PSUs granted in 2017, the Standardized Approach) based on existing assumptions at the commencement of the performance period and as reported in the company’s SEC filings.
Other Compensation and Benefits Elements
Retirement and Deferred Compensation Plans
After the merger in 2007, we assumed certain existing arrangements affecting the provision of retirement benefits to our named executives, maintaining qualified and non-qualified defined benefit and defined contribution plans in which eligible employees, including our named executives, may participate. Our named executives are eligible to participate in deferred compensation plans, which enable eligible employees to defer the payment of taxes on a portion of their compensation until a later date. To limit pension accruals, we froze all accruals under the Legacy BNY SERP as of December 31, 2014 and under our other U.S. defined benefit pension plans (including the BNY Mellon Tax-Qualified Retirement Plan and the Legacy BNY Excess Plan) as of June 30, 2015. For a description of these plans and our named executive officers’ participation therein, see “Pension Benefits” and “Nonqualified Deferred Compensation” below.
Our named executives are eligible to participate in company-wide benefit plans. In addition, we provide certain benefits, consistent with market practices, that are reportable under SEC rules as perquisites (see footnotes to the Summary Compensation Table below). The following perquisites were provided in 2016 and are substantially unchanged from 2015:
|Car and Driver||Each named executive has access to a pool of company cars and drivers for security purposes and to allow for more effective use of travel time. The pool is also available for use by our other executives.|
|Personal Use of Corporate Aircraft||Company aircraft are intended to be used by employees, directors and authorized guests primarily for business purposes. Our policy provides that the CEO should make prudent use of the company aircraft for security purposes and to make the most efficient use of his time. The HRC Committee receives an aircraft usage report on a semi-annual basis.|
|Charitable Gifts Matching||We maintain a matching gift program for gifts to eligible charities. All of our employees are eligible to participate in the matching gift program, and our named executives are eligible for an additional match of up to $30,000.|
In addition to the perquisites described above, certain named executive officers are covered by legacy life insurance plans assumed in the merger.
In determining our governance practices, we believe it is important to consider feedback and input from our stakeholders, including stockholders, employees, clients and the communities we serve.
We have consistently received strong support for our executive compensation program, with over 97% stockholder approval of the say-on- pay proposal at our 2016 Annual Meeting, over 95% approval at our 2015 Annual Meeting and over 93% approval at our 2014 Annual Meeting. We continue to actively engage with our stakeholders throughout the year (including webcasting our Annual Meeting to allow broader stockholder participation).
In total, in advance of our 2017 Annual Meeting and as a result of our annual outreach process, we invited feedback from investors representing about 45% of our outstanding shares and reached investors representing almost 30% of our outstanding shares, and we actively engaged with proxy advisory firms and other stakeholders on governance and performance matters. We further engaged stockholders and analysts at industry conferences, in meetings at our offices or at our stockholders’ offices, through conference calls and at our Investor Day conference held on October 28, 2014. We also regularly engage in direct meetings with local leaders and advocacy groups in our communities as well as with our employees.
Changes for 2017
We are focused on driving quality growth based on earnings and revenue, which we believe is the key to sustainable progress. Having achieved industry leading operating margins, we want to ensure that we are making appropriate investments in our businesses to sustain long-term growth and value creation for our clients and stockholders. Although we are still committed to maintaining our culture of expense control, our HRC Committee eliminated operating leverage from the corporate component of the balanced scorecard to make OEPS the primary performance metric for 2017. In addition to reinforcing our focus on topline growth, this adjustment to the corporate component more closely ties pay to performance by increasing the upside and downside leverage of our compensation program. Under our balanced scorecard for prior years, adjusted operating leverage, weighted 25% of the overall corporate component, was earned at either 100% or 0%, but was not itself subject to upside or downside adjustment. By eliminating the operating leverage component and increasing the weighting of the OEPS component, an incremental 25% of the corporate component is now subject to upward adjustment (in the case of above-target performance) and downward adjustment (in the case of below-target performance). The HRC Committee retains discretion to determine the corporate component payout and to consider other factors (including performance relative to our peers) in assessing the strength of the Company’s OEPS results.
Key Compensation Practices
To further our commitment to good corporate governance practices and mitigation of inappropriate risk-taking, our 2016 compensation program for the named executives has the following features:
|Directly link pay to performance||
|Balanced approach for incentive compensation||
|Promote long-term stock ownership||
|What we don’t do||
HRC Committee Role and Process
In the first quarter of 2016, for each named executive, the HRC Committee approved base salary levels; established target amounts for the 2016 incentive award to be earned or granted, as applicable, in the first quarter of 2017 based on 2016 performance; and granted PSUs based on targets established in 2015, following consideration and adjustment based on prior-year risk scorecard results and strategic milestones.
In setting 2016 compensation targets, the HRC Committee, assisted by its independent compensation consultant, considered a variety of factors over multiple meetings, including our financial performance and data concerning peer companies’ executive compensation programs. Factors were considered holistically, and no one factor had an assigned or specific quantifiable impact on the target compensation levels established by the HRC Committee.
During the year, the HRC Committee received regular updates on performance forecasts versus performance goals, regulatory and legislative developments and other relevant matters. In the first quarter of 2017, the HRC Committee evaluated 2016 corporate performance, using a combination of financial and qualitative measures, as well as each named executive’s individual performance to make 2016 incentive compensation determinations under the “one decision” model as described above.
The HRC Committee also provided each named executive with incentive compensation targets for their 2017 incentive award, with the actual award amount to be determined in the first quarter of 2018 based on prior-year performance.
With respect to our CEO, the HRC Committee reports its preliminary conclusions and compensation decisions, and information on the process used by the HRC Committee, to the other independent members of our Board in executive session and solicits their input prior to finalizing determinations. With respect to our other named executive officers, the
HRC Committee also advises and discusses with the other independent directors compensation decisions and the process used by the HRC Committee.
Role of Compensation Consultants
Since February 2014, the HRC Committee has retained Compensation Advisory Partners LLC, which we refer to as “CAP,” as its independent compensation consultant. CAP regularly attends HRC Committee meetings and assists the committee in its analysis and evaluation of compensation matters related to our executive officers. For more information on CAP, see page 29.
The HRC Committee and our management use a peer group to provide a basis for assessing relative company performance and to provide a competitive reference for pay levels and practices. In evaluating and selecting companies for inclusion in the peer group, the HRC Committee targets complex financial companies with which we typically compete for executive talent and business. In particular, the HRC Committee selected these companies based on:
- mix of businesses (e.g., asset management, asset servicing and clearing services) and other financial services companies with similar business models that operate in a similar regulatory environment;
- relative size in terms of revenue, market capitalization and assets under management, as well as total assets and net income;
- position as competitors for customers and clients, executive talent and investment capital; and
- global presence.
The 2016 peer group selected by the HRC Committee was unchanged from 2015.
Compensation information is collected from the peer group proxy statements to provide data for the HRC Committee to assess the competitiveness of targeted and actual compensation. Peer group information is also used to analyze market trends and compensation program practices. For certain named executive officers, data relating to the peer group is supplemented with industry data from surveys conducted by national compensation consulting firms and other data to assess the compensation levels and practices in the businesses and markets in which we compete for executive talent. Peer group data and other information provided to the HRC Committee by CAP was used by the HRC Committee as a consideration in setting 2016 target compensation levels for our named executives.
Financial Performance Benchmarking
The peer group is also used to provide the HRC Committee with relative financial performance assessments. The metrics reviewed include revenue growth, EPS growth, operating leverage, return on equity, return on tangible common equity as well as TSR on a one- and three-year basis. This analysis provides additional context for the HRC Committee in their review of compensation outcomes as well as compensation program design. When making annual compensation determinations for prior year performance, the HRC Committee reviews additional relative performance metrics as part of their considerations, as discussed above on pages 44 to 45.
Peer group data reviewed by the HRC Committee was considered holistically, and was used as an input, but not the sole input, of their compensation decisions.
Stock Ownership Guidelines
Under our stock ownership guidelines, each named executive is required to own a number of shares of our common stock with a value equal to a multiple of base salary within five years of becoming a member of our Executive Committee. The officer cannot sell or transfer to a third party any shares until he or she achieves the ownership guideline.
* Applies to shares received from the vesting of RSUs, PSUs, restricted stock and other long-term equity awards granted after appointment to the Executive Committee and that were unvested as of August 2012.
Our CEO is subject to a 6-times base salary, and our other named executives are subject to a 4-times base salary, ownership guideline. All of our ongoing named executives are also expected to hold, as an administrative practice, an additional amount of company shares above their guideline amount equal to 1 times base salary to provide a cushion against stock volatility. All of our ongoing named executives meet the stock ownership and administrative guidelines. To determine their ownership stake we include shares owned directly, shares held in our employee stock purchase and retirement plans and shares held in certain trusts. We include 50% of unvested restricted stock and RSUs that do not have performance conditions or for which the applicable performance conditions have been met. Unearned performance shares, awards that remain subject to performance conditions and stock options are not counted toward compliance with the stock ownership guidelines.
In addition, named executives are subject to a retention requirement relating to shares received from the vesting of RSUs, PSUs, restricted stock and other long-term equity awards that were granted after their respective appointment to the Executive Committee and that were unvested as of August 2012. For the CEO, 50% of the net after-tax shares from these awards must be held until age 60; for other named executive officers, 50% of the net after-tax shares must be held for one year from the vesting date.
Our executive officers, including each named executive officer, and directors are subject to a robust anti-hedging policy which prohibits them from entering into hedging transactions with their company stock and derivative securities relating to BNY Mellon. Prohibited transactions include engaging in short sales of our stock, purchasing our stock on margin and buying or selling any puts, calls or other options involving our securities (other than options granted pursuant to our compensation program). Prior to engaging in any transaction in company stock or derivative securities (including transactions in employee benefit plans, gifts and pledges), our executive officers and directors are required to pre-clear such transaction with our legal department and obtain that department’s affirmative approval to enter into the transaction.
Our anti-hedging policy applies to all securities which our executive officers and directors beneficially own and, with the exception of Trian, any entity for which an executive officer or director is attributed ownership.
Clawback and Recoupment Policy
In addition to forfeiture provisions based on risk outcomes during the vesting period, we have a comprehensive recoupment policy administered by the HRC Committee that applies to equity awards granted to our executives, including the named executive officers. Under the policy, the company may cancel all or any portion of unvested equity awards made after the policy was adopted and require repayment of any shares of common stock (or values thereof) or amounts that were acquired from the award if:
- the executive directly or indirectly engages in conduct, or it is discovered that the executive engaged in conduct, that is materially adverse to the interests of the company, including failure to comply with the company’s rules or regulations, fraud or conduct contributing to any financial restatements or irregularities;
- during the course of employment, the executive engages in solicitation and/or diversion of customers or employees and/or competition with the company;
- following termination of employment with the company for any reason, the executive violates any post-termination obligations or duties owed to the company or any agreement with the company; or
- any compensation otherwise payable or paid to the executive is required to be forfeited and/or repaid to the company pursuant to applicable regulatory requirements.
In addition, we have a cash recoupment policy, which provides that the company may claw back some or all of a cash incentive award within three years of the award date if, during the award performance period, the employee (including each of the named executives) is found to have engaged in fraud or to have directly or indirectly contributed to a financial restatement or other irregularity. The company continues to monitor regulatory requirements as may be applicable to its recoupment policies.
Stockholder Approval of Future Senior Officer Severance Arrangements. In July 2010, the Board adopted a policy regarding stockholder approval of future senior officer severance arrangements. The policy provides that the company will not enter into a future severance arrangement with a senior executive that provides for severance benefits (as defined in the policy) in an amount exceeding 2.99 times the sum of annual base salary and target bonus for the year of termination (or, if greater, for the year before the year of termination), unless such arrangement receives stockholder approval.
Executive Severance Plan. In July 2010, we adopted The Bank of New York Mellon Corporation Executive Severance Plan (the “Executive Severance Plan”). In August 2016, the HRC Committee reviewed the Executive Severance Plan in light of competitive market data and determined it was appropriate to amend the plan to bring the severance benefits available thereunder more in line with those offered by peer institutions. Accordingly, participants terminated by the company without “cause” after August 11, 2017, will be eligible to receive severance in the amount of 1 times base salary. In addition, for participants terminated by the company without “cause” after August 7, 2016, eligibility for a pro-rata annual bonus for the year of termination is determined on a case by case basis and if awarded, paid at year end after an evaluation of corporate, business unit and individual performance, among other considerations. The following table sets forth the severance benefits available under the Executive Severance Plan, both before and after the HRC Committee’s August 2016 amendment.
Executive Severance Plan participants are selected by the HRC Committee and include each of our named executives. To receive benefits under the plan, the participant must sign a release and waiver of claims in favor of the company and agree not to solicit our customers and employees for one year.
We do not provide any severance-related tax gross-ups. If any payment under the Executive Severance Plan would cause a participant to become subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986 (“IRC”), then payments and benefits will be reduced to the amount that would not cause the participant to be subject to the excise tax if such a reduction would put the participant in a better after-tax position than if the participant were to pay the tax. In addition, the amount of payments and benefits payable under the plan will be reduced to the extent necessary to comply with our policy regarding stockholder approval of future senior officer severance arrangements as described above.
Separation Benefits for Mr. Arledge
Mr. Arledge’s employment with the company terminated effective March 23, 2016. In connection with his termination, the company determined that he was eligible to receive payments under the Executive Severance Plan for a termination by the company without “cause.” In accordance with the plan, Mr. Arledge received a severance payment of $1,300,000 equal to two times his base salary payable over two years; a 2016 incentive award pro-rated for the portion of the year during which he was employed by us, with such benefit determined by the company’s actual performance during such period; benefits continuation for two years; and outplacement services for one year.
In determining the 2016 incentive for Mr. Arledge, the HRC Committee awarded him an individual modifier of 100%. Combined with the corporate component payout of 103% (weighted 50%) and the business unit payout for the investment management business of 72% (weighted 50%), the total incentive compensation awarded to Mr. Arledge was 88% of target. Mr. Arledge had a target of $13,350,000 and his award was pro-rated for the portion of the year during which he was employed by us, resulting in an incentive award of $1,456,964. 30% of Mr. Arledge’s incentive compensation was paid in cash and 70% was deferred in the form of RSUs, which vest in equal installments over three years.
Additionally, as a result of his departure prior to the completion of the applicable performance periods, Mr. Arledge vested in a pro-rated portion of the 2016 tranche of his February 2014 PSU awards and is eligible to vest in a pro-rated portion of his unvested February 2015 and 2016 PSU awards. Accordingly, Mr. Arledge vested in 9,055 shares under the 2016 tranche of the February 2014 PSU awards and the number of shares under the February 2015 and February 2016 PSU awards in which Mr. Arledge will vest will be based on the company’s actual performance as determined by the HRC Committee at the end of the applicable performance periods, and pro-rated to reflect the portion of each such performance period during which he was employed by us.
The HRC Committee considers certain tax implications when designing our executive compensation programs and certain specific awards. The HRC Committee considered that Section 162(m) of the IRC generally imposes a $1 million limit on the amount that a public company may deduct for compensation paid to its CEO and the three other most highly compensated officers each year. This limitation does not apply to “qualifying performance-based” compensation as defined in the IRC. We generally design our compensation programs so that compensation paid to the named executives can qualify for available income tax deductions. Our incentive awards are granted under our stockholder-approved Executive Incentive Compensation Plan and intended to be “qualifying performance-based” compensation. In that regard, incentive compensation paid to any individual for the calendar year cannot exceed the sum of $3 million plus 0.5% of our positive pre-tax income from continuing operations, before the impact of the cumulative effect of accounting changes and extraordinary items, as disclosed on our consolidated statement of income for such year included in our Annual Report on Form 10-K.
However, the HRC Committee believes that stockholders’ interests may best be served by offering compensation that is not fully deductible, where appropriate, to attract, retain and motivate talented executives. Accordingly, the HRC Committee has discretion to authorize compensation that does not qualify for income tax deductibility.
How We Address Risk and Control
On a regular basis, our Chief Risk Officer and our HRC Committee review the company’s risk appetite, practices and employee compensation plans, including sales incentives, for alignment with sound risk management. Our Chief Risk Officer also met with the HRC Committee to specifically discuss and review our 2016 compensation plans, including the plans in which members of the Executive Committee participate. With respect to employees broadly, we also monitor the company’s compensation plans through a management-level compensation oversight committee that includes our Chief Risk Officer, Chief Human Resources Officer, Chief Financial Officer and the Risk Management and Compliance Chief Administrative Officer. The committee receives regular reports, meets at least on a quarterly basis and reports to the HRC Committee on risk-related compensation issues.
We identify employees who, individually or as a group, are responsible for activities that may expose us to material amounts of risk, using a risk-related performance evaluation program with adjustments determined by a senior management committee responsible for control functions, with such adjustments later reviewed by the HRC Committee. The incentive compensation of identified employees is directly linked to risk-taking either through a “risk scorecard” or through the inclusion of a standard risk goal as part of our performance management process.
With respect to our named executive officers, a common equity Tier 1 ratio of at least 8.5% on a fully phased-in basis calculated under the Advanced Approach was established as a minimum funding requirement for our incentive compensation, with such percentage being equal to the regulatory threshold ratio to which we expect to be held on a fully phased-in basis, including estimated buffers. Our incentive compensation also takes into account a risk assessment for both the company as a whole and for each individual. In addition, all of our named executive officers’ equity awards are subject to 100% forfeiture during, and clawback following, the vesting period and all of their cash incentives are subject to 100% clawback within three years following the award date, in each case based on ongoing risk assessments under our comprehensive recoupment policy.
We are also subject to regulation by various U.S. and international governmental and regulatory agencies with respect to executive compensation matters and the consideration of risk in the context of compensation. Our programs have been designed to comply with these regulations, and the HRC Committee regularly monitors new and proposed regulations as they develop to determine if additional action is required.
Based on the above, we believe that our compensation plans and practices are well-balanced and do not encourage imprudent risk-taking that threatens our company’s value or create risks that are reasonably likely to have a material adverse effect on the company.
Report of the HRC Committee
The HRC Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. On the basis of such review and discussions, the HRC Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the company’s Annual Report on Form 10-K and this proxy statement.
By: The Human Resources and Compensation Committee
|Edward P. Garden, Chairman
Jeffrey A. Goldstein
|Edmund F. “Ted” Kelly||Samuel C. Scott III|
Executive Compensation Tables
Summary Compensation Table
The Summary Compensation Table and Grants of Plan-Based Awards Table, on this page 60 and on page 62, are in accordance with SEC rules and do not reflect the manner in which our HRC Committee thinks about and determines compensation. In particular, the SEC rules require that we report equity-based awards for the year that they are granted, even though the equity-based portion of our incentive compensation is awarded for services performed the prior year and our long-term equity incentives are awarded after adjustment for performance during the prior year.
(1) The amounts disclosed in this column include the grant date fair value of RSUs and PSUs granted in 2016, 2015 and 2014. For 2016, the grant date fair values of PSUs were: $4,091,945 for Mr. Hassell; $1,824,324 for Mr. Gibbons; $1,841,370 for Mr. Shea; $1,289,825 for Ms. Peetz; $1,734,624 for Mr. Harris; and $3,166,824 for Mr. Arledge. At the maximum level of performance, the PSU values would be: $6,137,917 for Mr. Hassell; $2,736,486 for Mr. Gibbons; $2,762,055 for Mr. Shea; $1,934,738 for Ms. Peetz; $2,601,936 for Mr. Harris; and $4,750,235 for Mr. Arledge.
(2) The amounts disclosed in these columns are computed in accordance with FASB ASC Topic 718 (“ASC 718”) using the valuation methodology for equity awards set forth in note 15 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016.
(3) The amount disclosed in this column for 2016 represents the amount of increase in the present value of the executive’s accumulated pension benefit and, for Mr. Harris, also includes $21,341 representing the portion of interest accrued on deferred compensation above 120% of the applicable federal long-term rate at the maximum rate payable under the Mellon Elective Deferred Compensation Plan for Senior Officers (see page 68 for additional information about this plan). Present values are determined in accordance with the assumptions used for purposes of measuring our pension obligations under FASB ASC 715 as of December 31, 2016, including a discount rate of 4.35%, with the exception that benefit payments are assumed to commence at the earliest age at which unreduced benefits are payable. The increase in present value of accumulated benefit for Mr. Hassell is negative $212,805 (this negative amount is not reflected in the amount disclosed above for Mr. Hassell). The increase in present value of accumulated benefit for Ms. Peetz is negative $7,717 (this negative amount is not reflected in the amount disclosed above for Ms. Peetz).
(4) The items comprising “All Other Compensation” for 2016 are:
(a) “Perquisites and Other Personal Benefits” are for Mr. Hassell, use of company car and driver ($53,237), use of company aircraft ($66,684) and enhanced charitable gift match ($30,000); for Mr. Gibbons, use of company car and driver ($42,597), use of company aircraft ($8,061) and enhanced charitable gift match ($5,052); for Mr. Shea, use of company car and driver ($65,650) and enhanced charitable gift match ($30,000); for Ms. Peetz, enhanced charitable gift match ($30,000); and for Mr. Arledge, use of company car and driver ($26,177) and enhanced charitable gift match ($30,000).
The amounts disclosed represent aggregate incremental costs as follows: use of the company car and driver determined by the company’s net cost associated with the individual’s personal use of the pool of vehicles and drivers; personal use of corporate aircraft determined by the direct hourly operating cost for use of the aircraft multiplied by the number of hours of personal use; and the enhanced charitable gift match determined by matching contributions to eligible charities made by the company in excess of those provided for other employees under the company’s gift matching programs.
We calculated the direct hourly operating cost for use of the aircraft by adding the total amount spent by us for fuel, maintenance, landing fees, travel and catering associated with the use of corporate aircraft in 2016 and divided this number by the total number of flight hours logged in 2016.
(b) “Contributions to Defined Contribution Plans” consist of matching contributions under our 401(k) plans and non-discretionary company contributions under The Bank of New York Mellon Corporation Defined Contribution IRC Section 401(a)(17) Plan (the “BNY Mellon 401(k) Benefits Restoration Plan”). See “Nonqualified Deferred Compensation” below on page 67 for more details regarding the BNY Mellon 401(k) Benefits Restoration Plan. In addition, for Messrs. Hassell, Gibbons, Shea and Harris and Ms. Peetz, the amount includes non-discretionary company contributions totaling 2% of base salary under our 401(k) plan.
(c) Represent taxable payments made by us for universal life insurance policies.
(d) Represents the following severance payments made by us pursuant to the Executive Severance Plan: two times base salary ($1,300,000) and two years of benefits continuation (valued at $34,445).
(5) Because Mr. Shea was only a named executive in 2016 and 2015, no disclosure is included as to Mr. Shea for 2014. Because Mr. Harris was only a named executive in 2016, no disclosure is included as to Mr. Harris for 2015 or 2014.
(6) Mr. Arledge’s employment with BNY Mellon terminated on March 23, 2016.
Grants of Plan-Based Awards
(1) Represents incentive compensation amounts to be paid for performance during 2016 under The Bank of New York Mellon Corporation Executive Incentive Compensation Plan (the “EICP”). Amounts earned under the EICP in 2017 (for 2016 performance) were made 25% in the form of cash, 50% in the form of PSUs and 25% in the form of RSUs for Mr. Hassell; 30% in the form of cash and 70% in the form of RSUs for Ms. Peetz and Mr. Arledge; and 30% in the form of cash, 45% in the form of PSUs and 25% in the form of RSUs for our other named executives. There was no threshold payout under this plan for 2016.
The table above does not reflect the RSUs that were granted on February 19, 2016 with respect to each named executive‘s 2015 annual incentive award, which was made 20% in the form of cash and 80% in the form of RSUs for Mr. Hassell and 45% in the form of cash and 55% in the form of RSUs for our other named executives. The RSUs vest in equal installments over three years. In the event that the named executive’s risk scorecard rating is lower than acceptable risk tolerance, any unvested RSUs will be subject to review and potential forfeiture, as determined by our HRC Committee. The 2015 annual incentive award was previously reported in the 2015 Grants of Plan-Based Awards Table.
(2) Represents the portion of the named executive’s incentive compensation award granted in the form of PSUs under The Bank of New York Mellon Corporation Long-Term Incentive Plan. The amounts shown under the Maximum column represent the maximum payout level of 150% of target; there is no threshold payout level. Upon vesting, the PSUs will be paid out in shares of BNY Mellon common stock. PSUs cannot be sold during the period of restriction. During this period, dividend equivalents on the PSUs will be reinvested and paid to the executives at the same time as the underlying shares. These units will be earned between 0 – 150% based on our 2018 OEPS and growth in Risk Weighted Assets from 12/31/2015 to 12/31/2018 with a negative risk modifier should risk-weighted assets grow at an unacceptable rate. The earned units generally will cliff vest after the end of the performance period if the executive remains employed by us. In the event that the named executive’s risk scorecard rating is lower than acceptable risk tolerance, any unvested PSUs will be subject to review and potential forfeiture, as determined by our HRC Committee.
(3) The aggregate grant date fair value of awards presented in this column is calculated in accordance with ASC 718.
Outstanding Equity Awards at Fiscal Year-End
The market value of unvested or unearned awards is calculated based on $47.38 per share, the closing price of our common stock on the NYSE on December 30, 2016.
(1) Refers to the year of grant for stock options and RSUs, and to the performance period for PSUs.
(2) RSUs vest in accordance with the following schedule:
PSUs are earned and vest in accordance with the following schedule:
Option Exercises and Stock Vested
(1) Benefit accruals under the Legacy BNY SERP were frozen as of December 31, 2014, and benefit accruals under the Legacy BNY Excess Plan and the BNY Mellon Tax-Qualified Retirement Plan were frozen as of June 30, 2015.
(2) The present values shown above are based on benefits earned as of December 31, 2016 under the terms of the various plans as summarized below. Present values are determined in accordance with the assumptions used for purposes of measuring our pension obligations under FASB ASC 715 as of December 31, 2016, including a discount rate of 4.35%, with the exception that benefit payments are assumed to commence at the earliest age at which unreduced benefits are payable.
BNY Mellon Retirement Plans
The BNY Mellon Tax-Qualified Retirement Plan was previously amended effective January 1, 2009, to change the benefit formula for participants under age 50 as of December 31, 2008 and for new participants to a cash balance formula for service earned on and after January 1, 2009. Plan participants who were age 50 or older as of December 31, 2008 continued to earn benefits through June 30, 2015 under the provisions of the legacy plan in which they participated as of that date. Because each of Messrs. Hassell and Gibbons and Ms. Peetz were all over age 50 as of December 31, 2008, they continued to earn benefits under the provisions of the legacy plans in which they participate.
Because Messrs. Hassell and Gibbons and Ms. Peetz have attained at least age 55, they are each eligible for immediate retirement under the BNY Mellon Tax-Qualified Retirement Plan and the Legacy BNY Excess Plan. Unreduced benefits are payable under these plans at age 60, or at age 57 with 20 years of service. Messrs. Hassell and Gibbons and Ms. Peetz are currently entitled to unreduced benefits from these plans. Since Mr. Hassell is over age 60, he is also entitled to an unreduced benefit from the Legacy BNY SERP. Messrs. Shea, Harris and Arledge do not participate in any plan that provides for specified payments and benefits (other than defined contribution plans) and accordingly, are not included in the Pension Benefits table above.
BNY Mellon Tax-Qualified Retirement Plan — Legacy BNY Provisions. The Legacy BNY Tax-Qualified Retirement Plan (the “Legacy BNY Plan”) formula is a career average pay formula subject to IRC limits on eligible pay for determining benefits. Benefits are based on eligible base pay (maximum of $265,000 in 2016). Employees who participated in the Legacy BNY Plan prior to January 1, 2006 may choose between a monthly benefit and a lump sum at retirement, while other participants will receive monthly benefits at retirement.
Legacy BNY Excess Plan. This plan is an unfunded nonqualified plan designed to provide the same benefit to Legacy BNY employees as under the BNY Mellon Tax-Qualified Retirement Plan to the extent their benefits are limited under such plan as a result of IRC limits on accrued benefits and eligible base pay. Benefits are paid in a lump sum.
Legacy BNY SERP. The Legacy BNY SERP is an unfunded nonqualified plan that provides benefits according to a benefit formula similar to that of the BNY Mellon Tax-Qualified Retirement Plan benefit formula but includes an annual bonus (capped at 100% of base salary after 2005) for senior executives who were selected to participate in this plan by The Bank of New York’s board of directors prior to July 8, 2003. Benefits are paid in a lump sum. Participants are entitled to benefits in this plan only if they terminate service on or after age 60.
All of these plans are closed to new participants and were frozen as of December 31, 2014 for the Legacy BNY SERP and as of June 30, 2015 for the BNY Mellon Tax-Qualified Retirement Plan and the Legacy BNY Excess Plan. Beginning with 2006, all of the plans generally provided benefits under a career average pay formula, rather than the final average pay formula under which benefits were based prior to 2006. From January 1, 2006 through the applicable date on which the plan was frozen, benefits accrued for all three plans were equal to 1% (increased to 1.1% effective January 1, 2009 and with respect to the BNY Mellon Tax-Qualified Retirement Plan and the Legacy BNY Excess Plan, decreased to 0.9%, effective January 1, 2011) of eligible pay earned after 2005. Benefits accrued before 2006 were based on a final average pay formula and service as of December 31, 2005 using a five-year average period for the BNY Mellon Tax-Qualified Retirement Plan and the Legacy BNY Excess Plan and a three-year average period for the Legacy BNY SERP. Prior to the applicable date on which each plan was frozen, the benefit accrued prior to 2006 was indexed at a rate of 1% per year. Accrued benefits under each of the plans were provided solely for service at The Bank of New York or with us.
Nonqualified Deferred Compensation
The following table provides information with respect to each defined contribution or other plan that provides for nonqualified deferred compensation in which the named executives participate. For 2016, each of our named executives participated in the BNY Mellon 401(k) Benefits Restoration Plan, and Mr. Harris participated in the BNY Mellon Deferred Compensation Plan and the Mellon Elective Deferred Compensation Plan for Senior Officers. Each of these plans is described below.
(1) These amounts represent contributions under the BNY Mellon 401(k) Benefits Restoration Plan and are included in the All Other Compensation column of the Summary Compensation Table on page 60.
(2) Amounts for Mr. Harris reflect aggregate balances and earnings in the BNY Mellon 401(k) Benefits Restoration Plan, the BNY Mellon Deferred Compensation Plan, and the Mellon Elective Deferred Compensation Plan for Senior Officers. Mr. Harris received a distribution of $252,988 pursuant to his election to receive his balance in the BNY Mellon Deferred Compensation Plan in 5 annual installments.
(3) Mr. Arledge received a distribution of his balance in the BNY Mellon 401(K) Benefits Restoration Plan as a result of the termination of his employment.
BNY Mellon Nonqualified Deferred Compensation Plans
BNY Mellon 401(k) Benefits Restoration Plan. The BNY Mellon 401(k) Benefits Restoration Plan is a nonqualified plan designed for the purpose of providing deferred compensation on an unfunded basis for eligible employees. The deferred compensation provided under the BNY Mellon 401(k) Benefits Restoration Plan is intended to supplement the benefit provided under the BNY Mellon 401(k) Savings Plan, our 401(k) Plan, for employees not accruing benefits in our defined benefit pension plans where the employee’s retirement contributions under the 401(k) Plan are limited due to the maximums imposed on “qualified” plans by Section 401(a)(17) of the Internal Revenue Code (the “IRC”). Pursuant to the BNY Mellon 401(k) Benefits Restoration Plan, we set up a notional account that is credited with an amount, if any, of non-discretionary company contributions that would have been credited to each eligible employee’s 401(k) Plan account absent those tax limitations, including for prior years in which the BNY Mellon 401(k) Benefits Restoration Plan was not yet in effect. The amounts credited to the notional accounts generally vest after three years of service, as defined and calculated under the 401(k) Plan. As of December 31, 2016, all of our named executives participate in the BNY Mellon 401(k) Benefits Restoration Plan.
BNY Mellon Deferred Compensation Plan. The BNY Mellon Deferred Compensation Plan permits eligible employees, including our named executives, to defer receipt of cash bonus/incentive amounts above the Social Security wage base (which was $118,500 in 2016) until a later date while employed, upon retirement or after retirement not to exceed age 70. Changes are permitted to the payment election once annually; however, they must comply with the regulations contained in The American Jobs Creation Act of 2004. Deferred compensation may be paid in a lump sum or annual payments over 2 to 15 years. If an executive terminates employment prior to age 55, his benefit is paid in a lump sum shortly after termination. Investment alternatives, based on a selection of variable rate options, must be selected when the executive makes a deferral election and may be changed each quarter for future deferrals. Previously deferred amounts may generally be reallocated among the investment options at the beginning of each quarter. The plan is a nonqualified unfunded plan. As of December 31, 2016, Mr. Harris is the only named executive that participates in the plan.
Mellon Elective Deferred Compensation Plan for Senior Officers. The Mellon Elective Deferred Compensation Plan for Senior Officers is a nonqualified, unfunded plan that permitted executives, including Mr. Harris, to defer receipt of earned salary and cash bonus/incentive amounts above the Social Security wage base until a later date while employed, upon retirement or after retirement not to exceed age 70. Deferred compensation may be paid in a lump sum or annual payments over 2 to 15 years. If an executive terminates employment prior to age 55, his benefit is paid in a lump sum shortly after termination. The executive may allocate his deferrals to receive earnings based on multiple variable rates or a declared rate (for 2016, 4.31%). Previously deferred amounts allocated to the declared rate must remain in the declared rate. Although the plan is unfunded, funds have been set aside in an irrevocable grantor trust for the purpose of paying benefits under the plan to participants.
Potential Payments upon Termination or Change in Control
The following discussion summarizes any arrangements, agreements and policies of the company relating to potential payments upon termination or change in control.
As shown in the Pension Benefits and the Nonqualified Deferred Compensation Tables above, we provide qualified and non-qualified pension retirement benefits and qualified and non-qualified defined contribution retirement benefits (with the specific plans varying depending on when participation began).
In addition, we provide accelerated or continued vesting of equity awards for participants who are eligible for retirement, with the eligibility dependent on the individual’s age and length of service and the terms of the applicable plan and award agreements. At December 31, 2016 and using the same assumptions as used for the Table of Other Potential Payments below, our named executives were eligible to receive accelerated or continued vesting of stock awards in the following amounts: for Mr. Hassell, $35,708,927; for Mr. Gibbons, $8,900,269; for Mr. Shea, $8,478,092; and for Mr. Harris, $13,055,365. Mr. Arledge was not retirement-eligible when his employment with BNY Mellon terminated on March 23, 2016. Ms. Peetz is not included above because her employment with us terminated due to her retirement on December 31, 2016. Accelerated or continued vesting is not provided on termination by the company for cause.
Other Potential Payments upon Termination or Change in Control
Change in Control and Severance Arrangements. Since 2010, our Board has implemented a “Policy Regarding Stockholder Approval of Future Senior Officer Severance Arrangements.” The policy provides that the company will not enter into a future severance arrangement with a senior executive that provides for severance benefits (as defined in the policy) in an amount exceeding 2.99 times the sum of the senior executive’s annual base salary and target bonus for the year of termination (or, if greater, for the year before the year of termination), unless such arrangement receives approval of the stockholders of the company.
Under the Executive Severance Plan, if an eligible participant is terminated by the company without “cause” (as defined in the plan), the participant is eligible to receive a severance payment equal to two times (if terminated after August 11, 2017, one times) the participant’s base salary for the year of termination (or, if greater, for the year before the year of termination), benefit continuation for two years (if terminated after August 11, 2017, one year) and outplacement services for one year. The participant is also eligible for a pro-rata annual bonus for the year of termination in the Company’s sole discretion. If a participant’s employment is terminated by the company without cause or if the participant terminates his or her employment for “good reason” (as defined in the plan) within two years following a “change in control” (as defined in the plan), then instead of receiving the benefits described above, the participant is eligible to receive a severance payment equal to two times the sum of the participant’s base salary and target annual bonus for the year of termination (or, if greater, for the year before the year of termination), a pro-rata target annual bonus for the year of termination, benefit continuation for two years and outplacement services for one year. The payments and benefits under the plan are subject to the participant signing a release and waiver of claims in favor of the company and agreeing not to solicit our customers and employees for one year. If any payment under the plan would cause a participant to become subject to the excise tax imposed under Section 4999 of the IRC, then payments and benefits will be reduced to the amount that would not cause the participant to be subject to the excise tax if such a reduction would put the participant in a better after tax position than if the participant were to pay the tax.
Payments and benefits that are payable under the plan will be reduced to the extent that the amount of such payments or benefits would exceed the amount permitted to be paid under the company’s “Policy Regarding Stockholder Approval of Future Senior Officer Severance Arrangements” and such amounts are not approved by the company’s stockholders in accordance with the policy.
Unvested Equity Awards. Equity awards granted to our named executives through December 31, 2016 were granted under The Bank of New York Mellon Corporation Long-Term Incentive Plan, as applicable. Each award is evidenced by an award agreement that sets forth the terms and conditions of the award and the effect of any termination event or a change in control on unvested equity awards. Accordingly, the effect of a termination event or change in control on outstanding equity awards varies by executive officer and type of award.
Table of Other Potential Payments. The following table is based on the following:
- The termination event listed in the table is assumed to be effective as of December 31, 2016.
- The value of our common stock of $47.38 per share is based on the closing price of our common stock on the NYSE on December 30, 2016, the last trading day in 2016.
- The amounts shown in the table include the estimated potential payments and benefits that are payable as a result of the triggering event and do not include any pension, deferred compensation, or option/stock award vesting that would be earned on retirement as described above. We have only included amounts by which a named executive’s retirement benefit is enhanced by the triggering event, or additional option/stock awards that vest on the triggering event that would not vest on retirement alone. See “Retirement Benefits” on page 68 above for information on the acceleration or continued vesting of equity awards upon retirement.
- The designation of an event as a termination in connection with a change of control is dependent upon the termination being either an involuntary termination by the company without cause or a termination by the named executive for good reason.
- “Cash Compensation” includes payments of salary, bonus, severance or death benefit amounts payable in the applicable scenario.
The actual amounts that would be payable in these circumstances can only be determined at the time of the executive’s separation, would include payments or benefits already earned or vested and may differ from the amounts set forth in the tables below. In some cases a release may be required before amounts would be payable. Although we may not have any contractual obligation to make a cash payment or provide other benefits to any named executive in the event of his or her death or upon the occurrence of any other event, a cash payment may be made or other benefit may be provided in our discretion. The incremental benefits that would be payable upon certain types of termination of employment as they pertain to the named executives are described below.
Mr. Arledge is not included in the table below because his employment with us terminated in 2016; see “Separation Benefits for Mr. Arledge” on page 57 for information on payments he received in connection with his termination. Mr. Arledge also will continue to vest in the stock awards disclosed in “Outstanding Equity Awards at Fiscal Year-End” on page 63 in accordance with the applicable award agreements.
Ms. Peetz is not included in the table below because her employment with us terminated due to her retirement on December 31, 2016. Ms. Peetz did not receive severance in connection with her retirement. She will continue to vest in the stock awards disclosed in “Grants of Plan-Based Awards” on page 62 and “Outstanding Equity Awards at Fiscal Year-End” on page 63 in accordance with the applicable award agreements.
(1) Amounts shown assume that no named executive received payment from any displacement program, supplemental unemployment plan or other separation benefit other than the executive severance plan. Amounts have been calculated in accordance with the terms of the applicable agreements. For terminations by the company without cause, amounts will be paid in installments over a two-year period following termination. For terminations in connection with a change of control, amounts will be paid in a lump sum.
(2) Amounts shown include amounts that would be payable automatically in a lump sum distribution upon death. For benefits that would not be payable automatically in a lump sum, the amount included is the present value based on the assumptions used for purposes of measuring pension obligations under FASB ASC 715 (formerly SFAS No. 87) as of December 31, 2016, including a discount rate of 4.35%. Amounts shown include only the amount by which a named executive’s retirement benefit is enhanced as a result of termination, pursuant to, where applicable, required notices given after the existence of a right to payment. Information relating to the present value, whether the amounts are paid in a lump sum or on an annual basis and the duration of each named executive’s accumulated retirement benefit can be found in “Pension Benefits” on page 65 above.
(3) The value of Additional Stock Award Vesting represents the value at December 31, 2016 of all shares of restricted stock, restricted stock units (along with cash dividends accrued on the restricted stock units), and earned PSUs (along with dividend equivalents on the PSUs) that on that date were subject to service-based restrictions, which restrictions lapse on or after certain terminations of employment, including following a change of control, to the extent such restrictions would not lapse on retirement alone. Information relating to the vesting of stock awards on retirement can be found in “Retirement Benefits” on page 68 above.