From the July-August 2009 issue of Treasury & Risk magazine

SEC Wants More Disclosure As Say-on-Pay Measure Looms

Amid the ongoing furor about executive pay, the Securities and Exchange Commission (SEC) recently proposed changes to what companies must disclose about top officers' pay. The changes, expected to take effect in 2010 proxies, include a consideration of risks involved in pay plans.

In the proxy report's compensation discussion and analysis, the SEC wants companies to look at whether compensation policies create incentives for employees that could add to risks. "Certainly the principle of doing a compensation risk assessment makes a lot of sense," says Don Nemerov, an executive director in Grant Thornton's compensation and benefits consulting practice. But he questions how far the requirement extends. "We need some more definition and boundaries," Nemerov says, suggesting that otherwise, "all the sudden, we'll have every compensation plan for the company in the proxy."

The SEC is also asking companies whose compensation consultants provide advice on other benefits to disclose their payments to the consultants. And the agency wants to revise the way companies report the stock and options they grant to executives so the full value is disclosed in the year the grant is awarded.

Currently, companies report the FAS 123R expense they accrued that year related to top executives' grants in the proxy's summary compensation table. But Nemerov notes that the full fair value of that year's grants is also already reported in the proxy, in a separate table. And the fair-value total will be inconsistent with other numbers in the summary compensation table, like salaries and perquisites, that are primarily accrual-based, he says, adding that the change "might create more confusion than it resolves."

Rick Smith, senior vice president and executive compensation practice leader at Sibson Consulting, a division of Segal, says companies are struggling to ensure the wording in the proxy makes it clear that the current year's grants vest over a period of time.

Smith suggests compensation will remain a hot topic. As banks see business improve, "they are paying some big bonuses," he says. "It's making Washington nuts." Congress will likely vote later this year to require all public companies to give shareholders a non-binding vote on executive compensation, the so-called say on pay. Smith says that in anticipation of such a vote, companies are working to educate shareholders on what they pay top executives and why.

Polishing Up that Crystal Ball For Better Cash Flow Forecasts

At a time when every penny counts, companies are having a hard time keeping track of their coin. Only about a fifth of companies can predict cash flows over a two- to three-month span within 5% accuracy, according to a study the Hackett Group conducted recently with the National Association of Corporate Treasurers.

Of course, as customers pay more slowly amid the recession, it becomes harder to predict cash flow. The study shows almost half of the more than 100 companies surveyed have between 11% and 30% of their receivables past due. But slowing payments coupled with companies' scanty access to credit means having a firm grip on what cash will be coming in is more important than ever.

The information needed to forecast cash flow comes from not just the finance department, though, but such far-flung empires as sales and procurement. "Treasury and finance quite often know what the issues are, but to achieve the results, they need to bring along other parts of the company that they don't necessarily manage," says Stephen McCardell, a principal at Hackett subsidiary REL. For example, the outlook on payments due the company involves not just collecting receivables, but the terms the sales force quoted to clients in the first place, he says. .

Finance's effort to exercise leadership will go more smoothly if top executives adopt a focus on cash. And getting the entire company to focus on cash will increasingly involve making it part of pay plans, says Michel Janssen, Hackett's director of research. The survey shows that 15% of companies currently link incentive compensation to forecasting accuracy, but Janssen predicts that percentage will be higher by year-end. "The cash culture is starting to take much more of a foothold in organizations," he says.

Technology is another hurdle. The survey shows a heavy reliance on spreadsheets to put together forecasts. "There is no technology silver bullet," McCardell says, noting that the information involved in cash flow forecasts resides in a lot of different systems.

401(k)s Shifting To Stocks

As U.S. stock markets rallied during the second quarter, employees who participate in 401(k) plans moved almost $800 million of their assets out of fixed-income investments and into equities, according to the 401(k) Index maintained by benefits consultancy Hewitt Associates.

Amid the enthusiasm for stocks, stable value funds were the biggest loser, with almost $790 million of outflows during the quarter. Pam Hess, Hewitt's director of retirement research, says the movement of money out of stable value reverses the sizable flight to quality into that type of fund that occurred amid last year's market turmoil. "Over the past year, the most money went into stable value," she says.

Pre-mixed funds, like balanced funds and target-date funds, saw the biggest inflows during the second quarter, at $208 million, followed by large-cap funds at $205 million.

The average equity allocation among 401(k) participants jumped to 53.6% at the end of June, up from 49% at the end of March, according to Hewitt.

First Data Gets Citi's Lockbox

Citi is outsourcing its lockbox operations in the United States to First Data, the big payments processing company, the bank says. Citi's move echoes J.P. Morgan Treasury Services' announcement in April that it was outsourcing lockbox operations to 3i Infotech.

As consumers write fewer checks, retail lockbox volumes are shrinking, says Bob Meara, a senior analyst at financial services consultancy Celent. That's making the business increasingly competitive, which is leading to consolidation.

"I don't think this will be the last bank we see doing this, particularly on the retail side," Meara says. "This work will be in the hands of fewer and fewer processors."

Meara notes that wholesale lockbox volumes have held up better than retail since checks still dominate business-to-business payments.

While J.P. Morgan outsourced only its retail lockbox business, Citi's deal with First Data covers the processing for its wholesale, retail and "wholetail" lockbox businesses. First Data will sublease Citi's facilities and offer jobs to its lockbox workers. Citi will remain the point of contact for customers.

"I suspect that Citi concluded this is a lower-cost, long-term play than if they had maintained their own operations," says Meara, adding that Citi's customers also get access to First Data's broader geographic footprint.


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