Treasury’s profile is elevated through closer ties with the business, and its strategic value-add shows in compensation. The combo of low yields and market volatility hits the pension plan.
Is your team adequately compensated in the corporate treasury talent market? How can treasury add value across the enterprise with its unique skills and perspective? Should you hedge to protect your pension plan? Treasurers in The NeuGroup’s T30 Large-Cap Edition tackled these issues when they convened in late September for their second event, sponsored and hosted by Société Générale in New York City.
1) Compensation Reflects the Heightening Treasury Profile. The increasingly strategic role of treasury is showing up in respectable compensation levels, especially in pharma and biotech.
2) Treasury’s Impact on Key Corporate Initiatives. A member presenter shares how his team drew on a company-wide initiative to show how treasury can contribute. Now the demand is growing.
3) Pension Funds in Low Interest Rate Environments. In the current low-yield scenario, experts posit that an options strategy would reduce risk while keeping the cost of hedging reasonable.
Compensation Reflects the Heightening Treasury Profile
FTE and compensation research, which NeuGroup Peer Research conducted across its treasury peer groups over July and August, reveal a budgetary acknowledgement of treasury’s value-add.
KEY TAKEAWAYS
1) Strategic treasury earns more. The increasingly strategic role of treasury is showing up in respectable compensation levels. Treasury professionals in certain industries and regions do particularly well, like biotech and pharma in the northeast.
2) Cash and operations roles trail with comp. Cash and operations roles in treasury tend to get the lowest average comp levels, even as workload and importance of work rise in response to bank regulation, tax and related compliance matters.
3) Base and cash bonus increases over equity. The results of the survey indicate that base salary and cash bonuses are most likely to see increases, as opposed to increased equity grants, in the current environment.
4) Differentiating treasury comp poses challenges. A key challenge with differentiating between compensation for different treasury roles is that it makes it more difficult to rotate people into different roles to learn them all as part of their career development. A similar challenge is posed when treasury compensation levels differ from those elsewhere in finance or in the company. It is hard to ask someone to take a pay cut in order to rotate into another functional role to further their strategic finance development.
5) Budget increases for personnel. Some treasurers report increased budgets for personnel in the coming fiscal year, often as a consequence of new regulations and related compliance activities.
Capital Structure and Managing the Balance Sheet
Capital structure considerations and management are recurring themes at the treasurer level. One member shared how his treasury is involved in setting objectives for the management of the balance sheet, as well as their roles in ensuring the objectives are met.
- Matching business needs. At the member’s company, M&A and capex drove business funding needs from FY2015 to FY2016. Meanwhile, share repurchases more than doubled from the year before.
- Keeping the rating intact. Activists noted both debt capacity and high cash balances. The member said the goal is to keep long-term unsecured debt aligned with assets like planes and facilities, and avoid hitting the bottom of the BBB rating and stay more in the “mid-BBB” range. The balance sheet composition will always sit squarely on the treasurer’s table, particularly when shareholder activists are eyeing large cash stashes while there is still debt capacity—especially if debt can be increased without moving the ratings needle. In a year like 2016, where M&A saw some record-breaking deal sizes, keeping the powder dry for large transactions needs to be balanced with business needs and external pressures to return capital to shareholders.
OUTLOOK
The strategic value created by treasury and the trend supporting recognition of this value with higher salaries in the wake of the financial crisis continues. A tension is created, however, in that this upward bias in treasury compensation may make it more challenging for companies to push ahead with the even more prominent trend of encouraging high-potential treasury professionals to rotate both across treasury and outside treasury in order to be promoted into more senior finance roles.
Treasury’s Impact on Key Corporate Initiatives
Treasury hasn’t always had a seat at the table to influence and add value to key corporate initiatives. The pace of change has been different at different companies, but the good news is that times are changing. Treasury’s sphere of influence is expanding. The focus of this member session was how to raise treasury’s profile and value-add in the organization, and how to create a framework to voice treasury’s reality checks on substantial corporate decisions.
KEY TAKEAWAYS
1) Get involved with treasury’s unique skills. Company-wide initiatives often have inspiring memes, acronyms and tag lines. Such an initiative at the treasurer’s company prompted him to convene a cross-functional team to see how treasury could contribute. Once other areas of the company get their eyes opened to the unique skills that treasury can bring to help projects succeed, they usually call back when something else comes up.
2) Leverage the culture and treasury’s central location. A centralized treasury is in a position to survey the entire company. From this vantage point, the treasurer noted, he and his team were able to draw many disparate groups together with their can-do attitude to highlight how improvements can impact the bottom line in terms they relate to, like EPS.
3) One thing leads to another. Getting involved with the company’s responsibility and sustainability initiatives can set treasury on the path to issue bonds in the “green” and “sustainability” space, which brings in a whole new class of investors. Look for goals on the investor side and see where there’s room for alignment.
4) But know when to say no—and why. There were several projects that could have gotten treasury’s attention at the member’s company, but they didn’t reach the level where the gains would justify the effort. For example, he decided to forego notional pooling because most of the benefits had already been reaped from other cash management and mobilization efforts, and the incremental gain wasn’t worth it.
The Liquidity Maze—Adapting to Regulations
New corporate rules aim to prevent companies from moving their legal addresses to low-tax countries, while also forcing a harder look at internal financing strategiesand tax planning. At the time of the meeting, members were rightly worried that the pending final Section 385 rule would have a severe impact on liquidity efficiency structures like cross-borderpooling. Thanks to the many comments corporates provided in the comment period the final rule did not include most of the provisions that had threatened to prompt the dismantling of such structures,i.e., offshore related-party financing will not be treated as equity. In addition, the documentation requirement, which had caused much confusion, will only apply to domestic members of a group.
With some of the most cumbersome and hard-to-interpret proposed rules removed in the final Section 385 regulations, it will still behoove treasury to take a careful inventory of intercompany loans and ensure they are in place for legitimate reasons and with terms and conditions updated to live up to the spirit of the OECD’s BEPS initiatives. But the good news is that efficient treasury and liquidity management practices will not be killed off by the regulators (at least not yet).
OUTLOOK
From its perch, treasury can bring a unique set of skills and a keen eye on the company as a whole. Treasurers seeking to add value through involvement where treasury has not tread before can leverage their teams’ understanding of how exposures arise, how funds flow in and out of the company and their penchant for metrics to bring a new perspective to projects that cross many functions in the company.
Pension Funds in Low Interest Rate Environments
What are the impacts of low/negative interest rates on pension plans, and how are liquid alternatives being used as risk management tools? Société Générale’s Eric Viet, Global Head of Sovereign & Financial Institutions, Global Markets, and Mike Clark, Head of Investor Solutions, Americas, led a discussion on increasing transparency, the ability to have a holistic view of risk when combining traditional assets and liquid alternative investments and the ability to isolate one risk factor to hedge a portfolio or to enhance the return on the portfolio.
KEY TAKEAWAYS
1) Should you fund? Low yields and tight credit spreads put pressure on pension funds, and deficits increase, requiring significant corporate contributions to make up for volatile liabilities and unrealistic return assumptions. Mr. Viet warned that many pension schemes are at a “dangerous funding level,” and if you look at your distributions of cash flows, can you see when the scheme runs out of money? “If it’s in five years or less, you’re running out of time.”
2) But should you at least hedge some? Watch your rating. Hedging reduces the volatility of the pension deficit, which in turns reduces the volatility of the corporate leverage ratio.
3) Hedge with options. In the current low-yield scenario, Mr. Viet and Mr. Clark posited that an options strategy (swaptions rather than swaps) would reduce risk while keeping the cost of hedging reasonable and preserve the potential for upside.
Pensions: Try a Risk-Factor Approach
The risk with traditional asset allocation is that it is often faced with high asset correlation when markets are under stress. To counteract this, Société Générale promotes a risk-factor approach to achieve diversification and additional yield. It involves a four-step process:
- Identify a diverse set of risk factors that can be “invested in” via select indices.
- Use multi-model analysis to determine for example how influential each risk factor is on the portfolio or which index brings the most diversification.
- Select the indices that meet the objectives of the portfolio.
- Weight the final allocations using an equal-risk-contribution methodology.
OUTLOOK
The core of the Société Générale pension thesis is that while pension funds can “enjoy the value of time,” corporates cannot. They need to reduce the volatility of deficits to minimize uncertainty to the ratios that matter for ratings and valuations, while letting the pension funds concentrate on building long-term returns at acceptable levels of long-term risk and illiquidity.