This past week, Bank Director and The NASDAQ OMX Group hosted our sixth annual Bank Executive & Board Compensation Event in an unseasonably warm Chicago. After an early registration and light breakfast, over 270 bankers and advisors from across the country gathered in the large ornate grand ballroom of the Intercontinental Hotel to kick off our two-day event with an opening session on the Future of Performance Compensation Plans.
Moderated by Todd Leone of Amalfi Consulting, a panel consisting of a compensation committee chair, senior human resources executive and a board chairman shared their insights on how to design compensation programs that deliver a competitive edge, while still rewarding the CEO and balancing the needs of the company and shareholders.
To jump start the session, Todd presented the attendees with an overview on the four regulatory factors that have changed the responsibilities of compensation committees, and therefore making their position the most challenging of the board. These regulations consistencies include:
- Compensation committees are now being held accountable for performance-driven compensation plans across the entire organization, including the lowest paid employees.
- Clawbacks are predicated upon reinstatement of earnings, and performance bonuses will need to be re-paid if a loan goes bad.
- Committee members will be instrumental in reviewing the risk of compensation plans and should have an audit process in place.
- Members will need to look beyond the fiscal year to ensure that the team is focused on long-term goals as well as short-term ones.
Many observations and recommendations were presented by the three panel members but the following topics were considered the highlights of the discussion.
Managing Regulations & Risk Review
- Greg Ostergren, the compensation committee chairmen for Guaranty Federal Bancshares, a $732-million institution out of Missouri, described the effectiveness of hiring a chief risk officer to help manage regulations, review compensation plans and to help the bank stay ahead of curve.
- For smaller community banks where resources may be limited, panelists recommended that the compensation committee take on the duties of risk oversight. In some cases, the human resources or internal auditing team can take on this role of giving a more objective viewpoint.
- While TARP banks are ahead of the curve with regard to risk review, panelists were in agreement that non-TARP banks should follow suit just to be prepared for the regulators.
Incentive Based Pay Structures
- When it comes to executive compensation plans, one approach is to develop a mixed ratio plan that accounts for performance metrics, company culture, and business development. Paul Barber, SVP & HR manager for Graystone Tower Bank, a $1.6 Billion non-TARP bank, shared that 50% of their executives’ incentive compensation is based on credit quality.
- A panel member also suggested that 30-35% of the Relationship Manager’s reviews be based on a clean portfolio.
- Bonus incentives for the commercial lenders can be changed from cash to stock options, so that employees are compensated on the performance of the bank over long periods of time rather than the ability for someone to make a quick buck.
Recruiting & Retention Challenges
- With all the regulations coming down the pike, attracting top talent to a troubled bank can be a challenge. One creative solution is to bring new recruits on as consultants before submitting them to the FDIC for approval as management.
- Sam Borek, chairman and acting CEO of OptimumBank in Florida, reminded the group that while the FDIC doesn’t approve of signing bonuses, it does approve of staying bonuses which can aid in the recruiting of top management talent.
- In terms of future compensation planning, clawbacks can actually work as a retention tool by requiring that the executive team receives a bonus after meeting their three-year goals during their employment term.
While several points were discussed among the panel, the overall recommendation was to consider what works best for your bank based on your region, business goals and staff needs. And as Sam Borek so thoughtful shared, his company’s number one stakeholder group is the employees, as happy employees create happy customers who make for happy shareholders who ultimately make for happy communities. Everything else falls in line behind that key mission.