Five year proforma financial statement

Managerial Finance

Executive Compensation at Bank of America

Tying compensation packages for executives at Bank of America and J.P. Morgan Chase to the banks' performance is a common strategy, and with good reason, but can be quite difficult to achieve in an appropriate manner. Measuring performance as well as adjusting compensation to meaningfully track performance are both far from straightforward tasks, and adjusting the current compensation packages based on observed trends in the companies complicates matters still further. In order to develop fair and accurate compensation packages the make executives truly responsive to shareholders, examinations of past company performance and its relation (if any) to compensation will need to be considered alongside projections of future performance and metrics that accurately reflect this performance. This is the approach used herein to develop a rough outline of an executive compensation package that will more fairly and responsibly utilize the company's resources.

Bank of America's performance has suffered as of late, with interest income dropping steadily for the past five years and non-interest income also showing a downward trend -- despite a major spike in 2009 representing the income from the major acquisitions the company made during the period, income has now dropped back almost to the downward-trending pre-acquisition levels of 2007 and 2008. Interest expenses have been dropping, as well, and net interest income actually trended somewhat upwards until the past year as a result, but this expense reduction appears to have reached its limit and actual performance in terms of interest income remains poor, as does non-interest income. At the same time, personnel expenses have almost doubled while other expenses remain essentially flat, suggesting an unwarranted bubble in compensation that is not tied to performance. With executive compensation likely making up a significant portion of the total compensation expenses listed on the income statements, it would appear that their compensation has been rising despite drops in income performance and to a much greater degree than improvements (i.e. reductions) in expenses have been made. The pro forma documents that have been completed suggest that this trend will continue, with rising expenses in many areas and with especially significant rises in compensation rates while performance continues to be far less than optimal. Attention to this and other metrics will be used in determining performance and thus compensation.

J.P. Morgan Chase's accounting statements tell a similar though less extreme story. Non-interest revenue climbed substantially in 2009 after a significant drop in 2008, but have remained essentially flat over the past two years and over the five-year period. Interest income has shown a fairly steady decline, and though interest expenses are now a fraction of what they were four years ago the net revenue gains this has contributed to appear to be at an end, with interest expense unlikely to drop lower and with income and revenue both decreasing or at least flat lining. Compensation expenses have not showed the strong upward trend observable in Bank of America, but they have been subtly and steadily climbing despite poor performance. Though compensation does not appear to be as out-of-tune with performance at J.P. Morgan Chase as it is in Bank of America, it is still an issue that needs to be addressed.