Are US Stocks Overvalued?

Are US Stocks Overvalued?

US stock prices rose for seven years in a row through late last year. During that time, the US economy repeatedly underperformed expectations. Popular indicators of stock valuation are above historical norms, even after the declines of the past few weeks. It is therefore no surprise to hear some analysts say stocks are overvalued and we are due for a substantial adjustment. (Somewhat ironically: One of the websites that give (reliable) data on current and past earnings, stock prices, and interest rates, has an ad banner that reads: “Dow to drop 80% in 2016.”)

Are stocks obviously overvalued? The answer is no, and the reason is straightforward. While growth has indeed been weaker than forecast, the rate of return on bonds has also been revised downwards. And what matters for the valuation of stocks is the relation between future growth and future interest rates. Put another way, the equity premium, the difference between the expected rate of return on stocks and the expected rate of return on bonds, has if anything increased relative to where it was before the crisis.

Let’s start with what fuels the fears of some analysts. Perhaps the most widely used gauge of stock valuation is the price-earnings (P/E) ratio, the ratio of a stock’s price to the annual corporate earnings associated with that stock. Figure 1 displays two measures of the average P/E ratio for the firms in the S&P 500 composite equity index. The dotted line is the standard P/E ratio based on reported earnings over the previous four quarters. Because of the unprecedented collapse in earnings during the Great Recession, this P/E measure soared to more than 100 in 2009, literally off the chart. The standard P/E measure reached nearly 22 late last year and is currently around 20, a bit higher than its 60-year average of 19.

A popular alternative measure proposed by Robert Shiller of Yale University uses a 10-year average of past earnings (adjusted for inflation) in order to smooth out temporary fluctuations (the solid line in figure 1). The Shiller P/E measure eliminates the massive spike in 2009 and allows the fall in stock prices that year to show through. Although the two P/E measures were often close to each other in the past, the Shiller measure has been consistently higher than the standard measure since 2010.1 The Shiller P/E ratio reached 26 late last year and is currently around 24, compared with a 60-year average of 20. This elevated Shiller P/E measure is commonly cited as an indicator that stocks may be overpriced,including by Shiller himself.

Figure 1

Note: The Shiller measure adjusts lagged earnings for inflation. The standard measure peaked at 122 in 2009Q2.

Source: Haver Analytics. 2016Q1 is based on January only.

As figure 1 shows, the deviations of the P/E from its historical average are in fact quite modest. But suppose that we see them as significant, that we believe they indicate the expected return on stocks is unusually low relative to history. Is it low with respect to the expected return on other assets? A central aspect of the crisis has been the decrease in the interest rate on bonds, short and long. According to the yield curve, interest rates are expected to remain quite low for the foreseeable future. The expected return on stocks may be lower than it used to be, but so is the expected return on bonds.

The way to make progress is to compute expected returns on stocks and bonds, and look at the equity premium, pre- and post-crisis. With this in mind, table 1 compares expected real returns on stocks, constructed in three different ways, with expected real returns on bonds, constructed in two different ways. To smooth out temporary fluctuations, the measures are based on averages of four quarterly values in each year. We compare expected returns as of 2015 with those of 2005, a time when there was little concern about overvaluation in stock prices. Our results would be similar if we had compared with any year in the mid-2000s.

Table 1. Measures of expected real returns on stocks and bonds

2005 2015

Real equity (S&P 500) returns
Standard E/P 5.4 4.7
Shiller E/P 3.8 3.9
Dividend Yield + Growth 1.8 + 3.1 = 4.9 2.1 + 2.2 = 4.3
Real 10-year bond returns
Nominal – Survey (I10– infe10) 1.8 0.0
TIPS 1.8 0.5
Equity premium over nominal bond
Standard E/P – (I10– infe10) 3.6 4.7
Shiller E/P – (I10– infe10) 2.0 3.9
Yield + Growth – (I10– infe10) 3.1 4.3
Equity premium over indexed bond
Standard E/P – TIPS 3.6 4.2
Shiller E/P – TIPS 2.0 3.4
Dividend Yield + Growth – 3.1 3.8
TIPS

Note: Data are averages over the four quarters in each year. “Survey” is the projected inflation rate over the next 10 years from the Survey of Professional Forecasters. TIPS refers to Treasury Inflation-Protected Securities. Dividend growth rate refers to the long-term GDP growth forecast.Sources: Haver Analytics, Consensus Forecasts surveys, and authors’ calculations.

The first measure is the earnings-price (E/P) ratio, i.e., the reciprocal of the P/E ratio. E/P reflects the real, or inflation-adjusted, rate of return an investor can expect on holding stocks over a long period of time under the assumptions that (1) stock prices rise with overall inflation (reflecting the “real” nature of corporate assets) plus any earnings that are not passed on to investors as dividends, and (2) earnings grow in proportion to the value of corporate assets.2 The first line reports the standard E/P ratio, the second line the Shiller adjusted E/P ratio. The measure in the third line focuses on dividends, and uses the Gordon formula, which states that the expected return on a stock is equal to the dividend yield plus a weighted average of future growth of dividends per share. The computation in the table assumes that dividends per share will grow at the same rate as GDP, and uses long-term GDP growth forecasts fromConsensus Forecasts surveys.3

We measure the real return to holding a bond in two ways. The first is the nominal yield to maturity minus expected inflation. We look at a 10-year bond, but the results would be similar if longer maturity bonds were used. We use as a measure of expected inflation the 10-year projection from the Survey of Professional Forecasters conducted quarterly by the Federal Reserve Bank of Philadelphia. The second is the yield to maturity on a 10-year inflation-indexed bond, or TIPS.

The last two sets of rows give the equity premium, defined as the difference between the expected rate of return on stocks and the expected rate of return on bonds. In all six cases, the equity premium is higher in 2015 than in 2005. Put another way, stock prices were more undervalued in 2015 than they were in 2005, and after the decline of the past few weeks, even more so.4

You may disagree with the assumptions about dividend growth, and find them wildly optimistic. Or you may disagree with expectations embodied in the yield curve, and believe that real interest rates will be much higher in the future, reflecting higher real rates or higher term premiums.5 But, if you accept current forecasts, and you accept the notion that stocks were not overvalued in the mid-2000s, then you have to conclude that stocks are not overvalued today. If anything, the evidence from 150 years of data is that the equity premium tends to be high after a financial crisis, and then to slowly decline over the following decades, presumably as memories of the crisis gradually dissipate. If this is the case, then stocks look quite attractive for the long run. Obviously, anything can happen, be it further bad news on growth or sharp increases in real interest rates. But, in terms of their expected value, stocks are not overpriced today.

Notes

1. The Shiller measure is currently higher than the standard measure mainly because the earnings collapse of 2009 is holding down its denominator. The earnings collapse of 2009 was so large and so unusual that, even when averaged over a period of 10 years, it may provide a distorted view of trend earnings.

2. Of course, stock prices are volatile and can rise by much more or less than implied by these assumptions over periods as long as five or ten years, but in the long run any deviation from these assumptions is not sustainable.

3. We have explored more sophisticated constructions for expected dividend growth, based on the time series behavior of dividends and GDP. Results are very similar to those used in the table.

4. We note that anyone who bought stocks in 2005 and held them to 2015 would have earned an average annual return more than 3 percentage points higher than that on holding a 10-year nominal bond.

5. There is evidence that the Federal Reserve’s bond-buying programs have lowered term premiums in bonds, but not so much as to lower expected returns in long-term bonds below those of short-term bonds. (This estimate of the 10-year term premium is close to zero.) The Fed plans to reduce its bond holdings slowly over many years, so any future rise in term premiums is likely to be gradual.

http://blogs.piie.com/realtime/?p=5367

 

The Rich Are Already Using Robo-Advisers, and That Scares Banks

The Rich Are Already Using Robo-Advisers, and That Scares Banks

  • About 15% of Schwab’s robo-clients have at least $1 million
  • Morgan Stanley, Wells Fargo, BofA planning automated services

Millennials and small investors aren’t the only ones using robo-advisers, a group that includes pioneers Wealthfront Inc. and Betterment LLC and services provided by mutual-fund giants, said Kendra Thompson, an Accenture Plc managing director. At Charles Schwab Corp., about 15 percent of those in automated portfolios have at least $1 million at the company.

“It’s real money moving,” Thompson said in an interview. “You’re seeing experimentation from people with much larger portfolios, where they’re taking a portion of their money and putting them in these offerings to try them out.”

Traditional brokerages including Morgan Stanley, Bank of America Corp. and Wells Fargo & Co. are under pressure to justify the fees they charge as the low-cost services gain acceptance. The banks, which collectively employ about 46,000 human advisers, will respond by developing tools based on artificial intelligence for their employees, as well as self-service channels for customers, Thompson said.

“Now that they’re starting to see the money move, it’s not taking very long for them to connect the dots and say, ‘Whatever I offer for a fee better be better than what they’re offering for almost nothing,”’ Thompson said. Technology will “make advisers look smarter, better, stronger and more on top of the ball.”

Keeping Humans

Robo-advisers, which use computer programs to provide investment advice online, typically charge less than half the fees of traditional brokerages, which cost at least 1 percent of assets under management. The newer services will surge, managing as much as $2.2 trillion by 2020, according to consulting firm A.T. Kearney.

More than half of Betterment’s $3.3 billion of assets under management comes from people with more than $100,000 at the firm, according to spokeswoman Arielle Sobel. Wealthfront has more than a third of its almost $3 billion in assets in accounts requiring at least $100,000, said spokeswoman Kate Wauck. Schwab, one of the first established investment firms to produce an automated product, attracted $5.3 billion to its offering in its first nine months, according to spokesman Michael Cianfrocca.

Bank leaders including Morgan Stanley Chief Executive Officer James Gorman and Wells Fargo Chief Financial Officer John Shrewsberry have said their firms must develop robo-advisers to complement their sales force.

Customers want both the slick technology and the ability to speak to a person, especially in volatile markets like now, Jay Welker, president of Wells Fargo’s private bank, said in an interview.

“Robo is a positive disruptor,” Welker said. “We think of robo in terms of serving multi-generational families.”

http://www.bloomberg.com/news/articles/2016-02-05/the-rich-are-already-using-robo-advisers-and-that-scares-banks?cmpid=BBD020516_BIZ

The CFO may not be necessary anymore…all the C suite is in charge as CoO

The CFO may not be necessary anymore…all the C suite is in charge as CoO

The CFO is dying. Long live the COO

Coupa Software CFO Todd Ford writes on VentureBeat that the CFO’s role is changing so rapidly it might be obsolete. Now that finance chiefs need to be strategic and forward-thinking, Ford says “today’s CFO is more like a COO in disguise” and having both in the org chart may be “redundant.”

COO

I went to two CFO events last fall: a panel for hyper-growth companies in Silicon Valley and a breakfast in Dallas for Fortune 500 CFOs. Each event had a different theme, but the conversation at both ended up being the same: how the role of CFO is changing with the proliferation of technology and big data. In fact, the conversation was so much the same that I found my mind wandering halfway through the second event. That’s when it hit me: Most companies no longer need a CFO in their org chart. I know it sounds crazy, but hear me out.

When I came out of school, the main role of the CFO was to make sure the company had internal controls, that there was no fraud, and that the financials were correct. The only forward-looking aspect of the job was helping set the budget and making sure people didn’t go over it.

That’s table stakes for what a CFO has to do now. CFOs today are being asked to use technology and data to grow the business, to give department heads better information so they make smarter decisions, and to help the company decide where best to invest incremental dollars or dial back spending. When I look at my job now, I spend a lot of my time doing that in three key areas.

Three operations; dozens of questions

The first is “quote to cash”, which encompasses everything the company does to generate leads and make a sale. Automated systems are spitting out metrics all along the way, such as how much it costs to generate a lead and which lead generation programs are resulting in sales.

I’m called on to study the data and answer questions such as: Do we have enough sales reps? Do we need an office in Mexico? What does the pipeline in Salesforce.com look like? How is that going to translate into future revenue?

Then there’s the new product introduction process. Sales people in the field are coming back to product management with product and enhancement requests. Product management hands that off to engineering to build. Then they work with product marketing to create the materials that they’ll need to hand off to sales to take to market. That process is also driven by data: How many customers need a particular product or feature? Which ones will drive the most future revenue?

The third is what I would call post-sales support, which basically means customer support and/or professional services. Some of the questions that arise: Are we charging enough for the level of support that’s needed? Do we have enough of the right people? How efficiently is the group operating? How happy are customers? How many tickets are we averaging? Where are we falling down? It’s metrics-driven, and information from that process feeds into the new product introduction loop.

COOs in disguise

To do all that, obviously you have to speak the language of finance, but you also have to be deeply involved in operations. In fact, today’s CFO is more like a COO in disguise. As Sergio Monsalve, a partner at Norwest Venture Partners wrote last year on VentureBeat, “Over the last decade, CFOs have been taking on more corporate responsibility and expanding their influence far beyond their original number crunching roles.”

That has certainly been my experience. Instead of closing the books and recording and reporting, I’m involved with these constant, circular loops of real-time information, all tied to money and investment. The most valuable thing the CFO can do today is look at these intertwined business processes, understand the metrics, give each business owner the right data, and work with them as a partner to make the best decisions to drive long-term shareholder value.

The hardest thing to do as a CFO is this forward-looking piece. You have to understand these three key operations and the data that’s being generated from them in order to predict — and shape — the future. That’s increasingly what the role is, and there’s so much overlap with what a COO does that it seems to me like having both is redundant.

The new org chart

So what does the CFO-less org chart look like? The record keeping and reporting function is still essential and could be done by the controller or chief accounting officer. Maybe you have a VP of operations, of applications, or a chief data officer. This person’s job is to pull all the systems together and manage the data flows. This is what the COO has historically done, but I think to fill the COO role today, you have to have the finance piece as well.

I see a lot of CFOs now who hold the COO title concurrently, and that makes some sense. But the COO title is the most accurate reflection of the role as it’s evolving, and it signals to everyone that this is the person that’s pulling it all together. The CFO title signals, “finance person,” because for a long time that’s what we were. But that’s not who we are now.

We’re rapidly leaving that behind for a role that’s become much more complex and strategic. I think it’s only a matter of time before titles and org charts change to reflect that. In the future you may only see a COO and a CAO, and the CFO will have become a relic of the past.

 

EU and US reach deal on data sharing

EU and US reach deal on data sharing

The US and EU have agreed a new arrangement for transferring data across the Atlantic — to the relief of technology companies such as Facebook and Google which feared being forced to store information on European servers.

Under the deal, a top US director of national intelligence will personally sign a pledge that the US government will avoid “indiscriminate mass surveillance” of EU citizens when their information is sent from Europe to the US.

The new agreement replaces a previous data-sharing arrangement known as “safe harbour” relied upon by thousands of companies to transfer personal data, including everything from pictures to emails to payslips.

Safe harbour was judged illegal by the European Court of Justice in October. The court explicitly referred to allegations by whistleblower Edward Snowden of mass surveillance of European citizens by US agencies to justify its ruling.

The judgment left tech companies scrambling for alternative means for legally transferring information. In the worse case, they could have been forced to adopt disruptive and expensive plans for storing data in the EU.

Businesses that sign up to the new “EU-US privacy shield” will face regular checks by the US Department of Commerce to ensure they apply data protection standards akin to those found in the EU.

EU citizens will be able to complain to an ombudsman based in the US if they feel a business has not dealt with their complaint properly, according to the agreement.

However, the new arrangement is bound to face renewed legal challenges.

Max Schrems, the Austrian student who brought the initial complaint against “safe harbour”, said that it failed to solve the problems with the initial agreement.

“A couple of letters by the outgoing Obama administration is by no means a legal basis to guarantee the fundamental rights of 500m European users in the long run, when there is explicit US law allowing mass surveillance,” Mr Schrems said.

http://www.ft.com/cms/s/0/7a9954d2-c9c8-11e5-be0b-b7ece4e953a0.html

The crazy world of credit

The crazy world of credit

Where negative yields and worries about default coincide

THERE was much talk at Davos, the global elite’s annual get-together in Switzerland, of wealth inequality: the gap between the haves and the have-nots. The corporate-bond market is currently displaying a similar divide—between the have-yields and the yield-nots.

According to Bank of America Merrill Lynch (BAML), around €65 billion ($71 billion) of European corporate bonds are trading on negative yields; in other words, investors lose money by holding them. Yet the rates paid by issuers of low-quality or junk bonds have been soaring.

The spread (the interest premium over government borrowing rates) paid by junk-bond issuers has risen by nearly three-and-a-half percentage points since March last year (see chart). The gap is now nearly as great as it was during the euro crisis of 2011, although it is less than half as wide as it was after Lehman Brothers collapsed in 2008.

Odd though it may seem, these market movements are part of the same trend. As January’s stockmarket wobbles have shown, investors are very nervous and are looking for safety. Certain corporate-bond issuers, such as Nestlé, a Swiss foods group, are perceived to be very safe. Since the yields on Swiss government bonds (even those with a ten-year maturity) are also negative, it is no great surprise that Nestlé bonds fall into the same camp.

Similarly, investors are willing to accept negative yields on German and Dutch government bonds with maturities of two and five years. Better to suffer a small loss from owning them than risk a big loss by buying a junk bond, which might default. Historically, the average recovery rate on unsecured bonds that default has been just 40 cents on the dollar. Given that risk, investors are demanding a much higher yield from junk bonds.

The proportion of junk bonds deemed “distressed” (defined as having a yield ten percentage points higher than Treasury bonds) is 29.6%, up from 13.5% a year ago. That is the highest ratio since 2009, according to S&P. Unsurprisingly, given the fall in energy prices, the oil and gas sector accounts for the biggest share of issuers in distress, at 30% of the total. The default rate, at 2.77%, has virtually doubled from the low of 2014 (although it is still below the historical average of 4.3%).

Matt King, a credit strategist at Citigroup, thinks the reason for the turmoil is the reduced support that central banks are offering financial markets. For several years the Federal Reserve and the Bank of England used quantitative easing (or QE, the creation of money to buy assets) to drive down yields on government bonds and thus encourage investors to buy riskier assets, both equities and corporate bonds. Both have now stopped using QE (although they have yet to sell their piles of acquired assets); the Fed has also raised interest rates.

Although the European Central Bank and the Bank of Japan are still buying bonds, their efforts are being offset at the global level by sales by emerging-market central banks, including China. Net asset purchases by global central banks dipped last summer (coinciding with another market downturn) and recent data show they have done so again.

Given this backdrop, investors are sensitive to bad news. The fall in commodity prices and the slowdown in emerging markets are two adverse developments; those sectors were “where the growth was”, as Mr King points out. Corporate-bond investors have also noticed that profit forecasts have been revised lower in recent months in every industry in America. In short, Mr King concludes: “When monetary stimulus’s effect on markets fails to be matched by a corresponding improvement in the real economy, we are inevitably vulnerable to a correction.”

The big issue for the corporate-bond markets is whether the sell-off is self-perpetuating. According to BAML, investors in high-yield bonds globally have withdrawn $4.9 billion in the past seven weeks, equivalent to 5% of their assets under management. Those withdrawals force fund managers to sell bonds, creating bigger losses for the remaining investors and encouraging more withdrawals. The impact is exacerbated by the poor liquidity of corporate-bond markets. Banks have reduced their market-making activities in the wake of regulations imposed after the financial crisis of 2007-08.

The sell-off will be stopped if yields rise to a level where long-term investors (pension funds and insurance companies, for example) think the bonds are a bargain. But those investors probably need a dose of good news to persuade them to open their wallets.

http://www.economist.com/news/finance-and-economics/21689631-where-negative-yields-and-worries-about-default-coincide-crazy-world-credit&utm_source=twitter-tools&utm_medium=EconomyWrld&utm_campaign=article?cid1=cust/noenew/n/n/n/2016021n/owned/n/n/nwl/n/n/n/email

 

The Implications of BEPS for CEOs and Boards

Article by Rick Stamm, Vice Chairman, Global Tax, PwC

On October 5, the OECD issued it formal recommendations on the Base Erosion and Profit Shifting (BEPS) Action Plan. These recommendations have been subsequently adopted by the G20. We acknowledge the monumental effort that has been put forth to produce a modernized international system of tax rules through the BEPS initiative. The BEPS recommendations do not address every instance of complexity in the tax laws of the global economy. In fact, they probably will lead to some new challenges. On the other hand, they do lay out an updated outline for solving some of the issues that exist today and most particularly for the alignment of substantive economic activity with related taxation in countries where a business operates. The recommendations as a set make sense, although the optionality in them that was required to get to consensus in areas such as the digital economy, leaves a number of areas open to local country interpretation and some uncertainty, which is unfortunate.

Now on to Implementation

Lawmakers and tax administrators must now move to implementation – and there is a lot to be done. Depending on their form of government, countries will adopt their version of the BEPS concepts either through legislation, regulation, or tax treaty changes. The time frame for these changes will vary depending on the country involved. As I’ve written before, businesses do not have the luxury of curtailing operations and stopping business expansions or innovation, while governments work on updates to their respective tax systems. As such, speed is of the essence in terms of government adoption following consideration of both sovereign interests and the interests of business in general. Reasonable transition rules will be needed.

BEPS has as one of its fundamental principles the alignment of taxing rights with value adding activities. It will require some time and extensive implementation to determine if this is the actual outcome. Some of the unsettled elements of BEPS (e.g., the digital economy) will continue to provide challenges to companies as they plan their operations, and to sovereign governments, as they compete and attempt to have sensible tax rules and regulations. Local alternatives to broad principles are likely to drive increased tax controversy.

BEPS also initiates broad use of the country by country reporting concept which will provide significant additional information to tax administrations around the world. This information will hopefully be used in a constructive manner and not used for unprincipled revenue grabs. After all, trust among taxpayers and tax administrations is critical. Secure systems must be designed to safely and accurately maintain privacy of the very sensitive country by country reporting information as it is collected and shared among tax administrators.

What should CEOs and Company Boards do?

The risk now is that during the multi-year implementation phase, some of the mismatches that result in either double non-taxation or double taxation will continue. Additional mismatches may arise because of uneven adoption of the action items. .During this transitional period CEOs and company boards need to take an active role in tax policy for their companies. They need to factor in current law, possible implications of future law, and the intent or overall spirit of these laws. CEOs and boards will face some difficult decisions. Companies need to determine their risk tolerance across a wide range of constituencies and fit their tax planning to these factors.

What should tax administrators do?

Tax administrators must avoid the temptation to apply BEPS principles before they are embodied in their laws. The uncertainty and negative implications for both trade and foreign direct investment that retroactive or anticipatory BEPS principles application would cause cannot possibly be worth the revenues that it might generate. Further, trust in the system of tax administration for global business activities is central to the reestablishment of trust in many of our national institutions. Any activities by tax administrations that undermine trust and create more uncertainty is something our global economy cannot afford.

Tax policy remains an important consideration for investment

A common theme of these articles is the need for attraction of business and the need for activities that are supportive of international trade. Governments must balance the need to tackle tax avoidance with incentives for investment to create an overall environment that supports and stimulates business. If taxpayers believe that operations will be taxed more than once as a result of laws that are not consistent across borders, it is likely that international trade will be hurt. There is no doubt that foreign direct investment and its related benefits of jobs and innovation will be attracted by countries that are favorable to such investment. Tax laws play an important role in this set of considerations, as does the political stability of investee countries and the stability of their systems of laws. No one aspect of these will be the determining factor, but in total, they do add up to a driver of business decision making.

Sovereign governments will continue to act in their respective best interests. To encourage foreign direct investment, research and development, and other forms of economic activity favorable to each country, they are likely to interpret the BEPS recommendations with a locally-favorable element. BEPS does not envision the end of competition for investment. At the same time, taxpayers will continue to need to focus on their activities, the economics of those activities, and do the things that help them avoid double taxation.

I acknowledge that none of this is easy. These are uncertain times and the complexity of international business has never been greater. Our tax laws are generally out of date and, while not perfect, the BEPS initiative gives us our best chance in years to make some serious progress on these issues.

 

https://www.world.tax/articles/the-implications-of-beps-for-ceos-and-boards.php?utm_source=Newsletter&utm_campaign=4be3c2107a-Newsletter_January_2016&utm_medium=email&utm_term=0_a0fb2c0e2f-4be3c2107a-109090253

JPM’ CeO pay with performance share units

JPM’ CeO pay with performance share units

JPMorgan Chase has given with one hand and taken away with the other — bumping up Jamie Dimon’s pay by more than a third, while subjecting the chairman and chief executive to three years of tests before he is paid out in full.

In a filing on Thursday afternoon the board of the New York-based bank said Mr Dimon’s total pay for 2015 would rise to $27m from $20m last year. His base salary remains at $1.5m, while he receives a cash bonus of $5m, down from $7.4m last year. The remaining $20.5m comes in the form of  (PSUs), earned only if the bank hits certain profit targets over a three-year period.

Last year Mr Dimon’s $11.1m share award came in the form of restricted stock, with no performance hurdles attached.

This marks the first year JPMorgan is using PSUs as part of the variable pay for top management — a move that it says it made in response to a challenge by investor groups at its annual meeting last year. Then, more than a billion votes — a record 38 per cent — were cast against the bank’s pay policy after ISS and Glass Lewis, the proxy advisory firms, called for stronger ties between pay and performance. The firms also queried the chief executive’s $7.4m cash bonus for 2014, a year in which the bank’s shares trailed rivals, saying that it lacked “a compelling rationale”.

Still, the big increase risks stoking criticism among shareholder factions concerned about spiralling pay in the C-suite and its trickle-down effects. Bart Naylor of Public Citizen, a consumer advocacy group, said that it was fine for the proxy firms to push for stronger links between pay and performance at technology firms such as Apple — but not at banks.

“If Apple goes bust the world will survive, but a bank is a different breed of corporation,” he said. “There is a basic toxin when you incentivise through stock, which motivates management to be risk-hungry rather than risk-averse.”

Another governance analyst at a big public pension fund said the award seemed “odd,” in a climate of cost-cuts and flat revenues.

Mr Dimon’s pay award peaked at $30m in 2007, comprising $15.5m in cash and the rest in restricted stock. The following year, after Lehman blew up, it dropped to a salary of $1m and no incentives.

Mr Dimon’s rise also comes as regulators are still thrashing out rules arising from the Dodd-Frank Act that are designed to curb pay at financial-services firms. Under Section 956, banks would be banned from offering any type of incentive-based pay that the final rule says is “excessive,” or that could expose the firm to material financial loss as a result of “inappropriate” risk taking.

Finalising the rule requires agreement between half a dozen agencies including the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve.

JPMorgan said that other senior executives including Daniel Pinto, head of the corporate and investment banking unit, and Matt Zames, chief operating officer, would receive equal shares of PSUs and restricted stock.

The PSUs will be earned based on the bank’s return on tangible common equity over a three-year performance period ending on December 31 2018. Earned PSUs will settle in shares that range from zero to 150 per cent of the number of PSUs awarded on Tuesday’s grant date, the bank said, depending on its ROTCE both on an absolute basis and relative to 11 peers over that period.

Executives must then hold the stock for an additional two years before they can sell it. Mr Dimon, 59, who has just passed a 10-year milestone at the helm of the bank, has not sold a single share of common stock so far, according to filings.

http://www.ft.com/cms/s/0/7274e66e-c09e-11e5-9fdb-87b8d15baec2.html

edoardo ferrario

Sogni e pensieri di uno scrittore

The Malta Photoblog

A photographic blog of my island home

Diario dal Mondo

Tra vent' anni sarete più delusi per le cose che non avete fatto che per quelle che avete fatto. Quindi mollate le cime. Allontanatevi dal porto sicuro. Prendete con le vostre vele i venti. Esplorate. Sognate. Scoprite. - Mark Twain

MIKI-TRAVELLER

PROFUMI E CULTURE DA ALTRI PAESI

thetabike2014

passionbike

SocialEconomy

l'economia della condivisione

La gente pensa troppo a quel che deve fare e troppo poco a quel che deve essere. M.J.E.

AlessandroPedrini Finanza&Mercati

Blog di approfondimento economico di Alessandro Pedrini

MALTAway - Corporate Services, Tax & Legal, Business Advisory, Residence/Visa, Investments, HNWIs, Asset Protection, Relocation

MALTAway is your way to enter the MALTA world of Corporate Services, Tax & Legal, Business Advisory, Residence/Visa, Investments, HNWIs, Asset Protection, Relocation

CASA MALTA

CASA MALTA - per acquistare, affittare, investire a Malta. MALTAWAYTRAVEL per Viaggi, Corsi Inglese e Incentive - Copyright 2014 casamalta Sviluppato da casamalta

Maltaway Viaggi - Offerte e Consigli per VIAGGI a Malta e non solo, INCENTIVE e CORSI INGLESE- Maltaway Travel

Offerte e Consigli per VIAGGI a Malta e non solo, INCENTIVE e CORSI INGLESE

mirco balatti

Thoughts, ideas and news by a finance visionary

alberto balatti board member blog

GOVERNANCE, INVESTMENTS, FINANCE, ECONOMICS, ORGANIZATION, MANAGEMENT, PEOPLE DREAMS, for BOARD'S MEMBERS

Follow

Get every new post delivered to your Inbox.

Join 144 other followers

%d bloggers like this: