Tying compensation to performance is the top compensation challenge for bank boards, according to a survey of more than 300 bank directors and executives conducted by Bank Director in March. Some banks are approaching this challenge in unique ways. Bank Director asked upcoming speakers at its Bank Executive & Board Compensation Conference in Chicago Nov. 4-5 to share the most innovative compensation package they have seen.
What’s the most innovative CEO or employee compensation package you have seen?
A privately-held bank was seeking to reduce its use of equity awards while maintaining a program that motivated executives and aligned their compensation with shareholder returns. The company replaced some equity grants with a new long-term cash plan tied to three-year return-on-equity goals, which reduced the equity grant rate while retaining alignment with the return provided to shareholders. The company continued to grant stock options, including some with a premium exercise price, to reinforce the link to value creation for shareholders. The long-term program also includes potential reductions in payouts if performance on credit and risk measures fails to meet expectations during the vesting period. While this program may not be appropriate for many banks, for this bank it aligned with their business objectives while maintaining a balance between risk and reward.
—Daniel Rodda, lead consultant, Meridian Compensation Partners, LLC
It’s not a bank, but the most interesting one I have seen is for the chairman and CEO of GAMCO Investors. He does not receive salary, bonuses, or stock options, but is paid a management fee of $69 million.
—Dennis Gustafson, senior vice president and financial institutions practice leader, AHT Insurance
A large financial institution wanted solutions to unintended consequences surrounding officer compensation plans. The bank annually awarded significant equity grants to all officers in the form of options or restricted shares. A deferred compensation plan also allowed officers to defer a portion of salary, annual incentive and/or equity grants in various funds, with disbursements made in company stock upon retirement. The bank officers were concerned regarding the concentration of compensation in the form of bank stock and the lack of diversification upon distribution from the deferred plan. We swapped existing equity grants in a value-for-value exchange for cash-settled restricted stock units, which were then deferred into a new fund using our patent-pending LINQS+TM design. The end result was a significantly reduced shareholder dilution, diversification for the officers, and a lifetime retirement benefit.
—W. Flynt Gallagher, president, Meyer Chatfield Compensation Advisors, LLC
A bank I know focused its CEO pay on the success of its business strategy (driving profitable, risk- appropriate growth through acquisition). Base salary and annual cash incentives were minimized with stock based compensation representing the majority of his compensation. A modest portion of the grant consisted of restricted stock that would cliff vest after three years to provide retention and ownership perspective. The majority of shares would vest only if a balanced scorecard of measures were achieved (profitability, shareholder return, efficiency and asset quality). This encouraged the CEO to focus on long rather than short-term results. Ownership and holding policies, along with the CEO purchasing shares outside the program illustrated his “skin in the game” and alignment with shareholders. The business plan was exceeded, share value increased and the CEO was rewarded accordingly.
—Susan O’Donnell, lead consultant, Meridian Compensation Partners LLC
Pearl Meyer & Partners worked with a compensation committee that, on the heels of the financial crisis, needed a more rigorous set of annual incentive goals. The committee members elected to remove some of the usual guess work in establishing annual incentive plan goals by taking a new approach to the concept of plan funding triggers. Rather than the common approach of using a single earnings-based trigger to determine whether the entire plan gets funded, they revised their plan to include “gatekeepers” based on performance relative to a peer group for each of the plan's four corporate financial goals. Meeting the gatekeeper for a specific metric would then trigger a potential incentive payout if the bank also meets its budgeted goal for that metric. This approach promotes a more balanced assessment of performance relative to peers as well as to the bank’s budget. The result: a higher level of confidence by directors and investors that pay will be directly aligned with performance.
—Greg Swanson, vice president, Pearl Meyer & Partners