Code User Group: February Summary

Following the latest user group meeting, I thought I would write up a quick summary of the key points we covered across the three sessions (UK, US and AUS). Any follow-up questions let us know.

Background

We first outlined the three main types of remuneration, namely:

·      base pay (paid monthly after tax)

·      short term bonuses (typically split 50/50 between cash and shares)

·      long-term rewards (i.e. LTIPS, carried interest, etc).

Dividends (on shares that executives have been previously awarded) and perks are other types of remuneration senior executives receive.

Take home

A quick method for high earners - you can usually take 50-55% of their pay as what they take home after tax, for example.

Base salary USD1,000,000

Short term bonus USD1,000,000 (50% cash and 50% shares)

Total cash income USD1,500,000

Tax rate 50%

Take home pay (annual) USD750,000

Who decides pay levels?

In public companies, these rewards are decided by the remuneration committee. 

In private companies it is the directors/owners who set their/the pay. 

Short term bonus targets

Whilst base pay is fixed, the level of short and long term bonuses / rewards are based on meeting certain targets.

These targets include:

·      financial (net income, EPS, EBITDA, market share)

·      non-financials (ESG, strategic)

·      discretionary.

When are bonuses paid

These bonuses are therefore paid once the full year annual financial results have been published. So bonuses are often paid a month or two after year end. This is the case for traders and non-executives.

How liquid are bonuses?

In our view we see:

·      base pay ‘allocated” for usual household bills, events etc

·      bonuses – extra money that is more freely available for one-off purchases and donations. As a result in the Code Career Earnings tool we apply a much higher rate of savings applied to bonuses.

Choosing the level of bonuses

On Code, we provide a range of base pay and bonus data. Where it is a big company, based in a financial centre (i.e., London) or if the company has seen strong revenue / profit growth then you should move up from the CAV towards the higher figures stated on Code.

Whilst public company remuneration is often easily available, Code really supports you in accessing data on private companies and typical remuneration.

Short-term bonus focus

As a rough guide short-term bonuses are split 50/50 between cash and shares.

Bonuses are only paid out in some roles such as

·      executives (cash and shares)

·      senior managers (cash and shares)

·      rainmakers (i.e. those who bring money into the business through sales and fees) (cash)

·      fund / hedge fund managers (based on performance) (cash)

·      private equity managers (based on fund performance) (cash)

·      Investment bankers (cash)

Some senior roles such as Chairman, non-executive directors and even some board members, will not get a bonus.

In some industries individuals not in management positions will get bonuses such as traders, which can be considerable. Therefore look for those who bring in money or have significant responsibility!

Short-term bonuses – shares

Where shares are awarded, these shares are usually vested straight away (i.e. become under the individuals ownership) but cannot be sold for a period of time (i.e. 3-5 years).

Directors are also reluctant to sell the shares in most circumstances as this would send a negative signal to the public.

Shares under their ownership will receive dividends the same as any other shareholder.

The share award will typically be taxed as income at their marginal tax rate. This creates a tax liability for the director who might use some of their bonus to pay the tax liability.

Also note, there are share incentive schemes for staff within the business that are taxed favourably but there are usually limits on these, such as 30k per year.

We will explore long term bonuses in another session, and how they are taxed.

Sector drivers

Finally, the nature of short-term bonuses differs for those in specialist roles such as finance.

Hedge fund managers for instance don’t get long-term incentives but instead will receive an annual bonus in cash based on the performance of the fund.

Private equity will get an annual bonus, but their big pay day will come when the fund closes, typically after 7 years and is called ‘carried interest’ (on Code this is in the LTR result and reflects the typical amount of carried interest at the end of the 7-year period).

Leavers

Good leavers will retain all accrued share awards and will often receive a pro-rata amount of their annual bonus. No further long-term awards will be given.

Bad leavers will retain all accrued share awards and will not receive a short-term bonus. No further long-term awards will be given.

Hopefully the above is a useful insight / summary of what we discussed and any further questions please come back to me!

Jon