Bank Director asked speakers at its upcoming Bank Executive & Board Compensation Conference November 5-6 in Chicago to answer a question lots of bank directors want to know: Is it time for a raise? Even if the industry’s financial performance is still lackluster, do bank directors deserve a raise?
Yes, if performance is good.
Bank Directors deserve a raise if the bank performs benchmarked against industry peers. Performance should be an obvious consideration. The regulatory burden and expectations of serving as a director has exponentially increased. Regulators expect directors to be capable, competent, knowledgeable, engaged and responsible and they are increasingly held to those standards. Our performance is directly related to the economy which is a complex challenge for our industry. This demands more of our directors. Finally, regulation has diminished our revenue and increased our costs. All these things require directors who need to be compensated appropriately so banks can acquire and retain capable talent to represent shareholder interests and provide advice and counsel to management.
- Ed Balderston, former executive vice president and chief administrative officer, Susquehanna Bancshares, Inc., Lititz, PA
Director work load and risk has increased significantly as has the need for continuing education.
- James C. Bean, Principal, McLagan, An Aon Hewitt Company
I think the answer could be yes or no, depending on how current director compensation is positioned in the marketplace. If a bank has a median market compensation (not too high or too low), I would recommend that the board should increase pay as the common philosophy is “pay for time” rather than pay for performance and many directors are working harder than ever in these tough times. Of note, if the bank has frozen salaries for all employees or executive officers, I wouldn’t recommend the pay raise for the board, as it wouldn’t look good for the organization.
- Mike Blanchard, CEO, Blanchard Consulting Group
Each compensation situation for bank directors is unique. In general the expectations, involvement and liability of being a bank director has increased substantially over the last several years. In order to attract high quality directors, the overall compensation package for a bank director needs to be commensurate with those responsibilities and expectations. Bank directors need to be held accountable for a high level of engagement and should be compensated for that engagement.
- Daniel E. Bockhorst, executive vice president and chief risk officer, CenterState Banks
This question does not have a simple yes or no answer. I certainly believe directors have seen their workload and responsibility increase in recent years and this may very well warrant a raise. Market data trends in recent years have not shown an increase in director compensation, but I do believe we will see that change in the near future. So, if the bank is performing at an adequate level and the directors have been working harder than in the past, I think it certainly might be time to give the directors a raise.
- Matt Brei, senior vice president and partner, Blanchard Consulting Group
While all corporate directors are facing increased responsibilities, the demands on bank directors have particularly escalated. In light of the expanding requirements, the need for more diverse skills and expertise on boards has never been greater. Meanwhile, surveys show director compensation at banks continues to lag other industries. While financial performance and affordability are both important for banks to consider when evaluating director compensation, the following factors should also be assessed:
- competitive positioning of director compensation against industry peers;
- changes in board structure, such as the creation of a lead director position;
- historical frequency of changes in director compensation at the company (many companies consider changes to director compensation every 2-3 years); and
- consistency with employee pay decisions (e.g., have employee salaries been frozen?)
- Michael W. Brittian, partner and senior consultant and Daniel Rodda, senior consultant, Meridian Compensation Partners LLC
I hate to look at shareholders who have entrusted their ownership stakes to me and tell them I should be paid more as they see the value of their bank diminish. Directors should feel the pain as shareholders. Perhaps rather than cash, perks or restricted stock (which is real economic value today), the best way to compensate directors for the added time is through option grants. At least through this, directors will make more only if the shareholders make more. It's called alignment.
- Frank Farnesi, compensation committee chairman, Beneficial Mutual Bancorp Inc., Malvern, PA
Bank directors’ fees like everyone else’s compensation are driven by a number of factors. The first is performance of the director. If the director performs in a manner that enhances the operation of the bank and its profitability, then an increase may be in order. The second is performance of the bank. If the bank is performing favorably against its peers in meaningful ways, an increase is not unreasonable. However, if stock prices are at disappointing levels, it is not always effective to point to the bank’s or director’s above average performance. Stockholders in most cases will have the ability to vote against directors at least every three years.
- Douglas P. Faucette, partner, Locke Lorde LLP
The answer is not an easy one. Responsibilities for directors dealing with compliance requirements, time commitments and personal liability have significantly increased. Recent studies suggest non-executive directors are not compensated adequately relative for their role. What is also clear is the expectations of directors have increased significantly and include a greater time commitment, exposure to legal liability and scrutiny by the public. Director pay is not simply an honorarium; it’s one the most difficult issues to assess. For a director to deserve a raise, they should be able to answer “yes” to these questions:
- Has the board performed a self-assessment as recommended by regulatory agencies?
- Are all directors performing at a satisfactory level?
- Is shareholder value increasing?
- Have peer evaluations been conducted?
Finally, pay should be commensurate with the time and expertise required. Shareholders should recognize that without qualified individuals, it is the company and eventually the other shareholders who will suffer.
- Flynt Gallagher, president, Meyer-Chatfield Compensation Advisors
Yes, with conditions.
There is certainly no question that bank directors are spending increasing amounts of time in the performance of their duties. Most bank directors have a “day job” from which they take time to perform bank business, which creates an additional expense relative to lost time. In addition to the time requirement is the potential risk of personal assets. The short answer to the question is “yes,” but the reality is “not really.” The current environment makes it difficult to justify raises when the full-time employees are asked to sacrifice raises or additional benefits. The bottom line is to improve performance, which will result in better financial footings, improved stockholder relations and conceivably more satisfied employees.
- W. Scott Gallaway, compensation committee chairman, Millington Savings Bank, Millington, NJ
Directors’ compensation at any bank can only be evaluated against the specific performance of that bank. The compensation committee needs to weigh both the performance of the bank for all of its stakeholders (shareholders, customers, employees and communities) and compensation for directors against market. In difficult times like these, banks need to seek out the best talent when searching for a new director and can’t afford to be less competitive than other industries when searching for talented and experienced directors. While raises are probably not on the table this year, each committee needs to thoughtfully evaluate its package for directors each year.
- Barbara Jeremiah, compensation committee chairman, First Niagara Financial Group, Inc., Allison Park, PA
Yes, more challenges should mean more pay.
The overall financial performance of the industry is not the only determining factor when considering whether bank directors deserve raises. Directors must work harder than ever to fulfill their duties in these times of shrinking margins, deteriorating asset quality, lackluster growth and increased government regulations. Because of these challenges, assessing risks and creating policies responsive to those risks is increasingly difficult and now requires extra diligence and continual education. Our shareholders deserve directors who commit the additional time, energy and effort to fulfill their fiduciary obligations. Likewise, bank directors fully engaged to these tasks deserve to be fairly and adequately compensation for their effort and experience.
- Dallas Kayser, compensation committee chairman, City Holding Company, Point Pleasant, WV
Industry performance good or bad should not be a major factor in setting director pay. Far more relevant is the performance of the director's bank. The current climate for pay raises is negative because of generally lackluster industry performance. In a back drop of significantly increased regulatory burdens, director workload and responsibility, there is some justification for adjusting director pay to compensate for these factors. In the current industry situation however, it is my opinion that director pay increases should be undertaken with great reluctance and only after careful study. The optics of increased director pay in the current environment can be negative from an investor's point of view.
- Vincent Manahan, compensation committee chairman, Investors Bancorp, Inc., Millburn, NJ
Yes – but don’t reward everyone equally.
Obviously, an involved director of any board will spend more time, energy and will be subject to more stress during times of adversity. However it is rare that all members share equally in the process of problem resolution. Therefore it is difficult to recommend blanket increases for all board members. How to financially recognize the ones heavily involved and critical to success would be a good topic of discussion.
- E. Lyle Miller, compensation committee chairman, Ouachita Independent Bank, Monroe, LA
That would depend on the circumstances of the individual bank. First, if the bank's performance exceeded peers and met or exceeded expectations for return on equity, return on assets, adequate capital ratios, etc., a raise for directors might be in order if the directors' compensation remained within its peer group. Secondly, if the bank was having difficulty attracting qualified directors, a raise would most likely be in order unless the compensation was deemed unreasonable by best practices of the industry. Thirdly, for individual directors who had certain expertise (i.e. financial experts) who carried additional responsibilities, an increase in compensation would be justified and prudent. To base directors’ compensation solely on the industry's overall performance would be counterproductive.
- John Mitchell, compensation committee chairman, NBT Bancorp Inc., Ithaca, NY
Since the financial crisis, the role of a bank director has become increasingly demanding as the industry faces economic uncertainty and an expanded regulatory environment. Bank directors must practice a delicate balance of executing their duties, while allowing bank management the latitude to do their jobs as experts in a complex, heavily regulated industry. The progress an institution makes against its strategic objectives, combined with a strong link to long-term incentives, should also be factored into the decision.
- Cathy Nash, president and CEO, Citizens Republic Bancorp, Troy, MI
Whether compensation should be “raised” depends on each bank’s current pay levels, program structure and unique requirements. While the financial crisis brought several years of flat /modest increases, many banks recognized additional [board responsibilities] through increased retainers for board and committee chairs as well as meeting fees for key committees. Public banks tended to make increases in the form of equity, to reinforce shareholder alignment. With further regulations and a spotlight on the banking industry governance, we expect board pay will continue to evolve and increase to meet demands.
- Susan O’Donnell, managing partner, Pearl Meyer & Partners
There is no one answer to the question of whether or not bank directors as a group deserve a raise in the present environment. Treating all directors as a class would be manifestly unfair; each bank has faced different challenges and boards have reacted to these challenges in significantly different ways.
Pay raises need to be reviewed for boards while concentrating on the individual circumstances of each bank. Pay raises need to be reviewed on a case-by-case situation to determine if the appropriate strategies and tactics were put into place.
- Dave Payne, senior vice president, Meyer Chatfield
I think bank directors are deserving of consideration for raises, even despite lackluster industry performance, based upon the increased workload and accountability board members are facing. Whether members of any particular bank board are deserving [of a raise] depends on the each bank’s unique circumstances, such as the bank’s long term shareholder return performance relative to peers, the bank’s status with regard to regulatory compliance issues and, of course, the current board member compensation relative to peers. So, the direct answer to your question is “maybe.”
- Kent L. Roberts, executive vice president and human resources director, Columbia Bank, Tacoma, WA
According to a recent survey performed by a well known executive search firm which used National Association of Corporate Directors data, bank directors in smaller publicly traded banks (market capitalization under $1 billion) are currently paid less on average than directors in other similarly sized public companies. Given the greater responsibilities and regulatory requirements imposed on banks and bank directors, if we are to continue to attract the quality of directors we need, I do believe bank directors should be paid competitively with those in other public companies. Do we "deserve" it? That's more subject to personal opinion and a good topic for cocktail discussion!
- Charles Schalliol, compensation committee chairman, First Merchants Corporation, Indianapolis, IN
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