Accounting and consulting firm Crowe Horwath LLP has conducted an annual review of bank compensation every year for 30 years. This year’s results from 280 banks show a modest increase in bank employee salaries, while CEO pay has rebounded after declining the year before. Crowe Senior Consultant Timothy Reimink, who is in charge of the survey, talks about the results.
What surprised you about the findings this year?
We were somewhat surprised to see how quickly financial institutions have shifted priorities from containing costs to developing employees. It seems to be a good sign of the health of the financial industry. Respondents to our survey cite “containing costs” at a lower level of priority in 2011 than in 2009 or 2010.
What general trends are you seeing in terms of compensation?
Pay increases continue to be modest. Since the onset of the recession, banks have slowed salary increases for employees. The average salary increase for officers in 2011 was 2.4 percent, the same as in 2010. For non-officers, salary increases in 2011 were also comparable to 2010. Increases planned for 2012 are only 2.5 percent.
This change in salary practices appears to be part of a fundamental shift in strategy, to have compensation more in line with competitors. Only 12 percent of banks have a strategy of paying above market compensation, compared to 17 percent in years prior to the recession.
What about CEO and executive level pay?
We saw CEO compensation rebound in 2011, with total compensation increasing 6.5 percent from 2010, after declining in 2010 from 2009. The increase was in base salary. Bonuses as a percentage of base salary were 9.8 percent in 2011, similar to 2010 levels. Growth in total compensation for CEOs had been slowing during the prior three years, reflecting the decline in financial institution performance during the last three years. As the economy and financial condition of banks have both stabilized, CEO compensation appears to be on the upswing.
Do you have an opinion on how banks might change their compensation practices to better attract and retain good employees?
Financial institutions should reward above-average performers by increasing their salaries at a significantly faster pace than for average performers. While 87.7 percent of financial institutions say they have a pay-for-performance program, their actual practices in granting merit pay increases don’t appear to support their expressed objective. There appears to be little difference between salary increases for average performers and above-average performers. Banks rated 26.9 percent of their employees as “exceeded expectations” in 2011, and on average gave a 3.2 percent salary increase. This level of salary increase is not much more than the average 2.6 percent increase given to those employees meeting expectations.
Pay-for-performance may be primarily a downside phenomenon, with average increases of only 0.5 percent given to the 5.9 percent of employees rated as “below expectations.”
How have regulatory changes influenced pay trends?
Executive compensation has certainly been a focus of attention for the regulators and the media in recent years. The most controversial pay practices have been at large banks and investment firms. In contrast, for the majority of financial institutions, 55 percent, these regulatory changes have required no change in compensation practices. Of our survey participants, 42 percent have reviewed their compensation practices, but only 21 percent have made changes because of regulatory concerns. Our review of the trends indicates that there has been a shift away from cash bonuses and toward restricted stock as a form of incentives for executives.