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Variable Pay Funding Finance Accrual Model Update

Variable Pay Funding Finance Accrual Model Update. 6/12/2008 Update. Agenda . Project Summary Current 2008 accrual methodology New HNAH model Model inputs, assumptions & Finance Performance Factor Example Bonus Calculation Finance Factor Employee Data Requirements

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Variable Pay Funding Finance Accrual Model Update

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  1. Variable Pay Funding Finance Accrual Model Update 6/12/2008 Update

  2. Agenda • Project Summary • Current 2008 accrual methodology • New HNAH model • Model inputs, assumptions & Finance Performance Factor • Example Bonus Calculation • Finance Factor • Employee Data Requirements • Pro Forma results - What Does It Mean • Next Steps

  3. Project Summary • PROBLEM STATEMENT: Business Entities use different bonus accrual methodology and adjust accruals different times based on unique perspectives. • OBJECTIVES:Develop a Financial Model for the Discretionary Bonus Plan (DBP) plan at a HNAH level and/or by business entity to determine: • How to create the DBP pool • How to adjust the DBP based on financial performance • What process should be used to allocate the HNAH PBT pool • by business entity • by department level based • KEY STAKEHOLDERS: • Executive Champion: • Key Stakeholders: • SCI Manager: • Team Members: • KEY PROJECT DATES: • START DATE: IMPLEMENTATION DATE: CLOSE DATE: 3

  4. Accrual Methodology for 2008 • HBUS - Controlled centrally based on historical data. includes GCB 0s & 1s and an estimate for payroll taxes and TRIP ($60mm) • HBIO – Decentralized in business units based on 120% of target X salary (historical) and ($110mm) • HBCA – Controlled centrally based on historical and includes GCB 0 & 1 ($55mm) • HTSU – TSI based on historical data ($33mm) • Total HNAH accrual $258mm • Estimate based on HR model $259mm* *Excludes 0’s, 1’s and Secondee's 4

  5. Proposed HNAH Model • (Market Data Point) x (1 + Bonus Target %) = Total Cash Available • (Total Cash Available) – (Actual Salary) = Available Bonus • (Available Bonus) x (Finance Performance Factor) = Adjusted Bonus • Inputs • Market Data Point, Bonus Target and Actual Salary by individual and Legal Entity, this information to be provided by HR • Finance Performance Factor based on HNAH PBT against AOP

  6. Example • Midpoint $100,000 x 1.15 (15% target) = $115,000 • $115,000 - $102,000 (actual salary) = $13,000 (available bonus) • $13,000 x 1.0 (finance performance factor) = $13,000 (adjusted bonus) • * Assumptions: • Midpoint - 20/70/10 weighted average performance management rating scale, ~55th percentile • Finance performance factor - percentage variance from pre-tax AOP (1.0 = on AOP) • Computed at the HNAH level and then pushed down • Finance Performance Factor based on HNAH PBT against AOP 6

  7. Finance Performance Factor • Achieving HNAH PBT equal to AOP ($5,000) equates to a Finance Performance Factor (FF) of 100% • Expressed as a percentage (200% - 50%) and based on HNAH PBT • Sliding scale where “slope of the line” determines PBT required to payout 200% (cap) and floor (50%) 7

  8. Finance Factor • 5% of Pre-Tax variance from AOP • Upside Capped at 200% payout • Downside Floored at 50% payout • Example 1: • Pre-Tax AOP = ($2.0) Billion • Bonus Pool = $0.3 Billion • Actual Pre-Tax = ($1.5) Billion • Increased Bonus Pool = $0.5 Billion x 5% = $25 Million • Finance Factor = 1.083 x $13,000 = $14,080 • Example 2: • Pre-Tax AOP = ($2.0) Billion • Bonus Pool = $0.3 Billion • Actual Pre-Tax = ($2.5) Billion • Decreased Bonus Pool = ($0.5) Billion x 5% = ($25) Million • Finance Factor = 0.917 x $13,000 = $11,920 8

  9. Employee Data • Current Market Data Point, Target and Actual Salary by individual and Legal Entity • Separate list of all secondees and GCB 0’s & 1’s • Processed Controlled Centrally By HNAH HR/CFO Office • Exclusions From PBT: • FVO • Global Banking and Markets • Private Banking 9

  10. Proforma results and what they mean • Sample HR data (from 12/07 CMS), run through the model and using a FF of 100% for illustrative purposes • Units (legal entities) where actual salaries are below MDP will require larger amounts of variable compensation where as units with a salary structure above MDP will require lower accrual amounts 10

  11. Next Steps • Obtain Refreshed Data Including MDP and Current Employee Compensation and Targets • Finalize Secondees and GCB 0’s & 1’s • Agree Bonus Computation For 2008 • Agree to the Finance Factor methodology: • slope of the pay line • versus YTD performance (ROP?) • applied by legal entity or to HNAH in total. • Develop Communication Plan to Push Out Bonus Accrual Methodology 11

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