Wells Fargo (WFC) may have had to contend with hordes of unruly protestors at its annual meeting held last month, but it continues to get high shareholder marks on pay.

Unlike rival Citigroup Inc., which saw investors reject its executive compensation plan last month, Wells Fargo has earned resounding shareholder approvals in its say-on-pay votes over the last two years. At its annual meeting last month, 96% of shareholders affirmed the San Francisco bank's pay packages for senior executives, in a non-binding vote mandated by the Dodd-Frank Act.

"We feel like we're in alignment with shareholders there," Hope Hardison, a Wells Fargo executive vice president and its director of human resources, told American Banker in an interview on Thursday.

She says that Wells has long determined pay packages by following four principles: paying for performance, promoting a culture of risk management, attracting and retaining top executives and aligning executives' interests with those of shareholders.

"When we think about executive compensation program design, we are always coming back to these four core compensation principles," Hardison says.

Below are more excerpts from American Banker's interview with Hardison.

Wells made some changes to its compensation structure in early 2010, increasing base salaries and reducing annual incentive compensation. What was the thinking behind these modifications?

HOPE HARDISON: We wanted our overarching program to be weighted towards long-term performance. We wanted it to be weighted towards equity compensation, because we believe that aligns executive interests with those of our shareholders, and we wanted to make sure we had the right mix of different types of compensation. So we very consciously created a structure that takes the emphasis off of short-term performance compared to in the past, and puts the emphasis on performance-based pay and in particular, long-term performance.

So what's the pay structure now?

We have three components of pay: base pay, an annual incentive and a long-term incentive. Compared to historical levels, we increased our base pay and lowered our annual incentive opportunity and shifted to a longer-term compensation structure in performance shares.

Why is executive pay so complex? It's not just a single check in the mail — there are a lot of moving pieces.

We're trying to accomplish a couple of different things with our program, and we want to make sure we have a structure that helps us accomplish all those different things. We want to make sure that we are incenting not just short-term performance, but that we are actually aligning with shareholders and incenting longer-term performance. So we feel very comfortable with the structure that's comprised of base pay, short-term incentives and a weight into performance-based pay and a weight into long-term performance-based pay.

When you say long-term performance, what kind of time horizon are we talking about?

Our equity grants are based on performance over three years, and then we also have holding requirements for our executives that last into retirement. So they are holding stock all the way into retirement that relates to their performance-based grants.

Chief Executive John Stumpf's pay increased by about 4.6% in 2011 from a year prior [to a total compensation of $19.8 million], even as Wells' share price dropped about 10% over the same period. Is that a fair way to evaluate his pay?

The idea behind the structure is it's performance-based, and in particular it's long-term, performance-based. So that's the overarching idea behind the compensation structure.

When the committee thought again about performance for 2011, of course then the equity grants are based on longer-term performance. The things they were thinking about are record Wells Fargo net income of $15.9 billion, which was up 28% from 2010. We also returned capital to our shareholders through a higher common stock dividend and resumed common stock repurchases. We identified significant savings through our enterprise-wide expense initiative, and we successfully completed the Wachovia retail bank conversion, and did a really fabulous job on that.

What's your response to concerns that executive pay is just too high? How do you balance that with the need to retain good employees?

I think that obviously executive compensation broadly is a very high-profile topic, and as we think about it, we really try to stay within the context of our compensation principles, and make sure that we're aligned with our shareholders…that it's performance based and that we're paying competitively so that we can attract and retain the best talent for our firm.

Shareholder advisory firm GMI has criticized Wells' performance share awards, saying that executives are awarded even if the bank underperforms all but one of its peers. What's your response?

The way the long-term performance shares are structured is that the executive will receive a target reward if we are at the median of our target group. And that will ratchet down to zero if we're dead last. But it ratchets down pro rata based on performance relative to our peer group.

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