State Street Global Advisors GmbH Remuneration Disclosure. As of December 31, 2014 According to Section 16 (2) InstitutsVergV

Transcription

1 State Street Global Advisors GmbH Remuneration Disclosure As of December 31, 2014 According to Section 16 (2) InstitutsVergV

2 Remuneration Disclosure for the Financial Year 2014 according to Section 16 (2) of the German Remuneration Ordinance for Institutions ( InstitutsVergV ) Compensation structure External regulatory requirements and internal drivers for change continued to shape the compensation structure of State Street Global Advisors GmbH ( SSGA GmbH ) following the new remuneration requirements under the Capital Requirements Directive IV ( CRD IV ) of the European Union ( EU ). The remuneration requirements of CRD IV were transposed into national law through the revised German Remuneration Ordinance (Institutsvergütungsverordnung/ InstitutsVergV ) that came into effect on January 1, The InstitutsVergV determines the way in which SSGA GmbH has to operate and report on its remuneration policy and practices. The InstitutsVergV contains a set of remuneration principles that are applied to varying degrees depending on whether a firm is considered major by the German regulator, German Federal Financial Supervisory Authority ( BaFin ). As a Financial Services Institution according to Section 1 (1a) of the German Banking Act ( KWG ) with licenses for Investment Brokerage, Contract Brokerage and Portfolio Management, SSGA GmbH was not considered as a major institution for the 2014 financial year as it did not meet BaFin s relevant criteria under Section 17 InstitutsVergV. Hence, the remuneration requirements for major institutions do not apply to SSGA GmbH (e.g. the requirement to establish a Remuneration Control Committee or to ensure that remuneration paid those categories of staff whose professional activities have a material impact on the risk profile (so-called Risk Takers ) is compliant with the structural remuneration requirements set out in the InstitutsVergV). As State Street group has taken the position in EMEA for 2014 to identify Risk Takers on a remuneration regulated group basis rather than on an individual legal entity basis, SSGA GmbH was included for the purpose of identifying Risk Takers as it forms part of the German remuneration regulated group for this purpose. Given the structure and size of the company, which has fewer than 20 employees, there is also no requirement for SSGA GmbH to establish a Supervisory Board. However, as a subsidiary of State Street Corporation ( SSC ), SSGA GmbH is fully integrated into the group-wide compensation strategy and subject to the global and regional governing body structure of the SSC to provide appropriate and effective control of the remuneration system (incl. compliance with CRD) across the State Street group of affiliated entities. The Executive Compensation Committee ( ECC ) of the SSC Board of Directors has oversight of the compensation system at State Street. ECC members are senior professionals with strong financial/business knowledge, who are independent members of the Board of State Street Corporation, in accordance with the listing standards of the New York Stock Exchange. They are appointed by the Board on the recommendation of the Nominating and Corporate Governance Committee of the Board. There are currently five members of the ECC. The Chair of the Risk Committee ( RC ) of the SSC Board of Directors is also a member of the ECC, providing continuity between the committees. It should be noted that the RC is responsible for reviewing and discussing with management State Street s assessment and management of risk. The ECC oversees all of State Street s compensation plans, policies, and programs in which senior executives participate and incentive, retirement, welfare and equity plans in which certain other employees of the group participate. It also oversees the alignment of the group s incentive compensation arrangements with the group s financial safety and soundness consistent with applicable related regulatory rules and guidance. In its annual process, the ECC receives regular updates, including by its independent compensation consultant and outside legal counsel, on regulatory and governmental actions and initiatives concerning compensation and related risk and governance considerations, particularly with respect to the financial services industry (incl. guidance and regulations from banking regulators in Europe and Asia concerning compensation and risk principles). The ECC also receives updates on compensation actions, including publicly reported new design elements, taken by other major financial services firms. These updates focused on developments in the 2

3 alignment of incentive compensation with risk principles, and they informed the decisions of the ECC in making its incentive compensation decisions for State Street has also established a committee (reporting to the Compliance and Ethics Committee ( CEC ), with annual reporting to the ECC) of senior representatives of Enterprise Risk Management, Compliance, Internal Audit, Finance, Legal and Global Human Resources departments to serve as a forum for the risk management and internal control functions to formally review and provide their assessment of incentive compensation arrangements throughout the organization. This review and assessment is intended to promote the consistency of our incentive compensation arrangements with the safety and soundness of State Street and the alignment of these arrangements with applicable regulatory guidance and regulations. State Street also annually reviews the design and governance of the incentive compensation plans applicable to all employees for alignment with applicable regulatory guidance. The ECC also engages Meridian Compensation Partners, an executive compensation consulting firm, to provide compensation consulting as part of its review of executive compensation, and retains its own external legal counsel. The ECC approves the overall funding rate and amount of the corporate incentive compensation pool ( IC pool ). The Chief Executive Officer ( CEO ) of State Street Corporation allocates the IC pool to business units and corporate functions based upon a variety of factors, which may include budget performance, achievement of key goals and other considerations. State Street had implemented a Remuneration Policy that also applies to SSGA GmbH. Those categories of staff whose professional activities have a material impact on the risk profile of the institution (so-called Risk Takers ) are also covered under this policy. The policy was primarily designed by the Global Human Resources department and also includes input from the Compliance department. The policy is designed to comply with CRD IV and was coordinated in close consultation with human resource employees in State Street s global total rewards function ( GTR ) to maintain a high degree of consistency of compensation strategy across the State Street group of affiliated entities. Compensation Strategy SSGA GmbH s overall aim is to attract and retain high-performing employees via its compensation strategy. We recognize that for the business to succeed, it must remain competitive and cultivate an environment that encourages employees to learn and grow in their careers. There are five key principles that define our compensation strategy: 1. An emphasis on total compensation. 2. A pay-for-performance philosophy. Company, business unit and individual performance drives overall compensation levels. 3. A competitive compensation package to attract and retain key talent. 4. An alignment with shareholder interests as reflected through the mix of cash, instruments and equity compensation. 5. Compliance with applicable regulations and related guidance, including limiting incentives to take excessive risks. Through a process of structured discretion in determining IC pool funding and individual incentive award decisions, and the use of deferred awards (e.g., equity, SSGA LTI) as a pay delivery vehicle (with ex-post adjustments during the deferral period), our compensation system is made appropriately risk-sensitive and links current decisions and actions to future risk outcomes. A comprehensive set of factors such as risk and capital are considered in addition to business performance and competitiveness. SSGA GmbH operates a fully flexible, discretionary bonus program which is structured so as to achieve a balance between fixed and variable remuneration components (see below). The IC pool is based on 3

4 the overall profits of the entire State Street group of companies. The primary component in the calculation of the IC pool is operating-basis Net Income Before Tax and Incentive Compensation ( NIBTIC ). The ECC reviews operating-basis NIBTIC calculations and identifies any applicable adjustments to reflect its assessment as to elements of revenues and expenses that should or should not apply for IC purposes. The ECC has flexibility to adjust the overall global IC pool and, in doing so, evaluates a number of factors, including capital, risk, business and other considerations. Specific capital measurements taken into consideration include, for example, the Tier 1 risk-based capital ratio; the tangible common equity ratio; unrealized portfolio gains and losses; and the Tier 1 leverage ratio. Further, the allocation of the overall global bonus pool of State Street group to each business unit is determined by the CEO/Chairman by reference to business unit performance and considers many factors including those considered by the ECC. The sub-allocation of the business unit bonus pool to an individual is then also further determined by an individual s business manager with reference to the individual s performance measured on both financial and non-financial criteria. Individual incentive awards are completely discretionary. In addition to the formal ex-ante adjustment process described below, in making individual incentive awards, State Street permits the use of discretionary adjustments to awards for both financial and non-financial criteria, including (but not limited to) compliance and risk performance factors, such as noncompliance with internal policies and procedures or significant audit findings, instances where there is a significant downturn in the financial performance of, or a material risk management failure, in respect of State Street or a material business unit. To confirm that employees do not use personal hedging strategies or remuneration-related contracts of insurance to undermine the risk alignment effects embedded in their remuneration arrangements all State Street staff are required to certify to a personal account dealing policy and the Standard of Conduct which prohibits them short selling, purchasing and selling futures and options in State Street stock. All purchases and sales of State Street stock outside of the IC schemes require prior clearance. Broker statements are submitted which are reconciled to the employee records to ensure all trades have been submitted. 4

5 There are also blackout periods for relevant staff which are implemented and monitored to prohibit employees from trading State Street stock during such periods. Any violations are escalated to the ECC for consideration and action to be taken. Under the Global Compliance Enforcement Procedure, for Risk Takers, enforcement actions in instances of non-compliance may include one or more of the following: Escalation to GHR and senior management, as required, with a minimum enforcement action to include: exclusion of employee from promotion eligibility in the next promotion cycle; to make the employee ineligible to post for internal positions, for the period of 180 days; or to terminate employment Escalation to the ECC with a recommended enforcement action by the Compliance and Ethics Committee to reduce year-end incentive compensation. To ensure the independence of the control functions, each control function has a reporting line which is independent from the business units which they supervise. Each function has a reporting line which feeds into a European or Global Head of Department for the control function. The global management for each respective control function is responsible for determining compensation to control function staff, within overall State Street guidelines. Funding and performance assessment for these employees is based on overall corporate results and not by reference to the business units which individual control function employees supervise. SSGA GmbH also employs the State Street performance planning and review process ( PPR ), which is State Street's performance management process, for employee compensation that involves a collaborative planning process in which employees and their managers establish performance goals that align individual with corporate goals. Mid-year and year-end progress reviews are conducted and the employee s performance level is reviewed and rated on a five-point scale. This rating is a key factor used by managers in determining incentive compensation and salary decisions during the annual compensation planning process. Performance management employs consistent processes to cascade goals, create "line of sight" and measure actual individual and organizational performance. Where applicable, individual financial targets will be incorporated into the Performance Planning stage of the PPR process and the level of achievement against these financial goals will form part of the year-end review process and contribute to the performance rating along with qualitative assessment. SSGA GmbH also makes use of State Street s Talent and Reward Differentiation Tool ( TRDT ) to further assist managers in making compensation decisions. The TRDT system guides managers in assessing employees, and making compensation decisions, on the basis of factors, such as criticality of role and retention risk, that are in line with State Street s values and long-term interests. The TRDT allows managers to assign a relative score (on a seven-point scale) to employees at the Vice President level and above based on five factors. These include relative performance, potential, criticality of role, critical skills or expertise and retention risk, and combined with the PPR rating, are used to help guide compensation decisions. Once the individual performance has been determined, the performance level will be reflected in the individual compensation that is composed of the following remuneration structure. 5

6 Remuneration Structure SSGA GmbH s key remuneration components are as follows: Fixed Compensation Base Salary and Benefits Base Salary is one element of an employee s compensation. Employees base salaries are determined by role, and by a number of other factors such as individual performance, proficiency level, year-overyear increase guidelines, budget and position to market. Employees are entitled to various benefits (such as company cars) based on their position in the hierarchical structure and their location. Role-Based Allowance Role-Based Allowance is a new element of an employee s fixed compensation introduced for a very limited number of individuals for the 2014 performance year to ensure that State Street can continue to deliver compensation that is reflective of the competitive market place, an individual s role, responsibility, experience and performance, in compliance with its regulatory obligations. The key characteristics are: Contractual cash payment No fixed term, continuous Paid in equal monthly installments Not subject do deferral or performance conditions Amount subject to change only if there is a change in role and responsibilities. The following are summaries of the variable remuneration plans for Risk Takers: Variable Remuneration (i.e. Incentive Compensation / Institutional Sales Incentive Plan) SSGA GmbH s Incentive Compensation ( IC ) plan is an integral part of the State Street compensation strategy. The IC Plan is the primary scheme for the provision of annual discretionary bonuses to State Street s staff globally, including SSGA GmbH, and is intended to motivate staff at various levels within State Street s operations to perform as well as possible and produce superior results whilst not incentivizing inappropriate risk-taking. Except as described below with respect to employees who participate in business unit sales incentive plans, all SSGA GmbH employees, including all Risk Takers, are eligible to participate in the IC Plan. A number of employees in sales participate in the Institutional Sales Incentive Plan ( ISIPs ), which aims to bring the variable compensation granted to plan participants into line with the revenues they generate as well as taking into account non-financial qualitative performance indicators. All such participants have fixed compensation. Variable compensation is assigned on an individual basis by way of a review of both quantitative and qualitative factors. All ISIPs are reviewed annually by GTR and by a risk control committee comprised of State Street s control functions, including Risk and Compliance. An employee s eligibility to participate in an ISIP, and all amounts paid under an ISIP, are subject to management approval. 6

7 The Variable Pay Structure of Risk Takers 1 Variable Pay is delivered in two separate elements, 1. The immediate non-deferred award (delivered partly in cash and partly in equity) and 2. The deferred award (delivered partly in equity and partly in cash that notionally tracks an Exchange Traded Fund managed by SSGA). 1. The Immediate Award The immediate Award is the portion of variable pay that is delivered immediately following the date of communication of the award to the employee. This typically takes place during the first quarter following the year to which the award relates. Any Immediate Equity is subject to a 6-month retention period during which the recipient is prohibited from sale or other transfer of the Immediate Equity. 2. The Deferred Award All Risk Takers receive a Deferred Award, which is delivered partly in equity instruments and partly in deferred cash that notionally tracks an Exchange Traded Fund managed by SSGA. All Deferred Equity is awarded in the form of Deferred Stock Awards ( DSAs ). DSAs are effectively a contractual right to receive, on each vesting date, a set number of shares in the common stock of State Street Corporation. The number of shares to be delivered on each vesting date is set at the award date, but may be adjusted between the award date and each vesting date through the ex-post performance adjustment measures described below. Upon vesting, all Deferred Equity is subject to a 6-month retention period during which the recipient is prohibited from sale or other transfer of the Deferred Equity. Risk Takers receive at least 50% of the Deferred Award as DSAs. Risk Takers who are employees of SSGA receive 50% of the Deferred Award as DSAs and 50% as an SSGA Long-Term Incentive ( LTI ) Plan award ( SSGA LTIP ). An SSGA LTIP award notionally tracks the value of an Exchange Traded Fund ( ETF ) managed by State Street Global Advisors and is delivered in cash on the vesting date. Similar to DSAs, SSGA LTIP awards may be adjusted between the award date and each vesting date through the ex-post performance adjustment measures described below. Award Vehicle Distribution Deferral Amounts - At least 40% of IC delivered as Deferred Award - At least 60% of IC delivered as Deferred Award for members of the SSGA GmbH s Board of Managing Directors and for the Risk Takers directly reporting to them Deferral Period and Vesting Schedule - DSAs vest on annual pro-rata basis over four years following the award date - SSGA LTIP vest on quarterly pro-rata basis over four years following the award date - 100% of DSAs and SSGA LTIP awards are subject to the below ex-post performance adjustments 1 It should be noted that Risk Takers receiving variable remuneration below the threshold of EUR 50,000 are exempted from this regulatory deferral requirement (which for the time being, is deemed appropriate for the Banking industry by BaFin). Instead, these Risk Takers receive their variable remuneration per State Street s corporate variable pay design (see below for employees who are not subject to Section 20 InstitutsVergV). 7

8 Cash/ Equity Split - At least 50% of Immediate Award delivered as Immediate Equity - At least 50% of Deferred Award delivered as DSAs (balance as SSGA LTIP) Retention Periods - All equity subject to 6-month retention period post-vest (i.e. Immediate Equity and DSAs) The variable pay structure described above relates to Risk Takers. For individuals whose variable remuneration is not subject to the requirements of Section 20 InstitutsVergV, State Street s corporate variable pay design applies and the awards are delivered as follows: For employees at the Senior Managing Director level and above: - 10% as immediate cash - 90% deferred over 4 years with vesting on quarterly pro-rata basis For employees from Vice President level and below Senior Managing Director level, the higher the total amount of variable remuneration, the higher the percentage of the variable remuneration which will be deferred. This could ultimately result in up to 90% of variable remuneration being deferred over 4 years with vesting on quarterly pro-rata basis For employees below the Vice President level, awards are delivered 100% in immediate cash. Beginning with the 2014 compensation year, incentive compensation plan awards are restricted to 2x fixed compensation to ensure compliance with the maximum ratio permitted under CRD IV and Section 6 InstitutsVergV. SSGA GmbH has obtained the relevant shareholder approval to extend the default maximum ratio from 1x fixed compensation to 2x fixed compensation for all employees and members of the Management Board and such has been notified to the BaFin and Deutsche Bundesbank. State Street (incl. SSGA GmbH) does not generally award guaranteed variable remuneration to current or new employees. Where a strong business case can be made to justify such an award, this rationale will be reviewed along with the individual facts and circumstances of the award. Any such awards that are proposed must meet the following three criteria: Awards must be only made to new hires Awards must not last longer than 12 months Awards may only be made in exceptional circumstances. 8

9 The Performance Measures State Street applies both ex-ante and ex-post adjustments to its award process for Risk Takers: 1. Ex-Ante Performance Adjustment Ex-ante adjustments are guided by the corporate multi-factor risk scorecard which is used to guide the assessment of risk performance and serve as an input into the incentive compensation pool size and allocation processes. This scorecard framework utilizes several different risk inputs and perspectives to assess State Street s top risks. Risk factors are evaluated using a five-point rating scale that ranges from significantly above expectations to significantly below expectations for each of the following five categories: Actual performance vs. expectations for key risk areas such as operational losses, fiduciary losses, liquidity risk, investment portfolio change, Stress loss based on scenarios specified by the US Federal Reserve Board, Capital/ dividend strength, Economic capital, and Regulatory and agency ratings. Performance against the scorecard metrics is completed using data sourced from various systems in State Street s control functions, including Enterprise Risk Management, Finance and Treasury, among others. To the extent any performance is significantly below expectations (i.e., a red flag is indicated on any scorecard), judgment-based ex-ante adjustments to the responsible individual material Risk Taker s incentive compensation may be triggered upon review by Head of State Street EMEA in conjunction with the regional heads of the control functions. 2. Ex-Post Performance Adjustment State Street includes a malus-based forfeiture provision in the deferred award agreements of all Risk Takers. In addition, State Street has for several years included in its deferred award agreements for all employees, a contractual provision requiring any unvested deferred awards to be forfeited in the case of termination on account of gross misconduct. Gross misconduct is determined in State Street s discretion and includes conduct which places State Street at legal or financial risk. The malus-based forfeiture provision includes a statement of intention to comply with and meet the requirements of applicable banking regulations and guidance on incentive compensation and provides specifically that the ECC may reduce or cancel any deferred award to the extent required to do so under any such applicable rules. In this way, the forfeiture provision permits consideration of any criteria, to the extent required by applicable law to be considered in an investigation and forfeiture decision. Malus-based forfeiture review will be triggered by the occurrence of a material loss, the establishment of a reserve for a material loss, or the investigation of facts or circumstances, which, if determined adversely to State Street or a material business unit of State Street, could reasonably be expected to result in a material loss or reserve. The individuals reviewing a potential malus-based forfeiture must be independent for the purpose of the review and should be sufficiently knowledgeable about the area of business in which the loss event occurred or the business whose employees are under investigation to be able to understand and analyze the consequences of the employee s risk-taking conduct. 9

10 Quantitative information The following table discloses the quantitative remuneration details according to Section 16 (2), No 3 InstitutsVergV for the financial year Aggregated remuneration information are also available in the institution s Annual Financial Statement which is published separately in the German Federal Gazette. Remuneration break down according to Section 16 (2), No 3 InstitutsVergV Remuneration in keur 2014 Total Total remuneration of which fixed remuneration of which variable remuneration 839 Number of Beneficiaries of Variable Pay 16 10

11 Glossary BaFin CEC CEO CRD IV DSA ECC ETF EU GmbH GTR IC InstitutsVergV ISIP KWG LTIP NIBTIC PPR RC SSC SSGA SSGA GmbH SSGA LTIP TRDT Bundesanstalt für Finanzdienstleistungsaufsicht (German Federal Financial Supervisory Authority) Compliance and Ethics Committee Chief Executive Officer of the State Street Board of Directors Capital Requirements Directive IV Deferred Stock Award Executive Compensation Committee of the State Street Board of Directors Exchange Traded Fund European Union Gesellschaft mit beschränkter Haftung Global Total Rewards Incentive Compensation Institutsvergütungsverordnung (German Remuneration Ordinance) Institutional Sales Incentive Plan Kreditwesengesetz (German Banking Act) Long-Term Incentive Plan award Net Income Before Tax and Incentive Compensation Performance Plan and Review process Risk Committee of the SSC Board of Directors State Street Corporation State Street Global Advisors State Street Global Advisors GmbH SSGA Long-Term Incentive Plan award Talent and Reward Differentiation Tool 11