Conference Report

A new day in compensation: Banks boards across the country are totally revamping their compensation plans to accommodate new regulations, reduce risk and appease shareholders.

“It’s been a perfect storm,” said Todd Leone, a principal in the Minneapolis office of compensation consultant McLagan, speaking at Bank Director’s Bank Executive & Board Compensation conference on Nov. 8-9 in Chicago. Nearly 300 bank officers and directors gathered to learn how their peers were handling compensation, what regulators wanted and how to deal with the increased power of shareholder groups such as Institutional Shareholder Services (ISS).

Here are some highlights from the conference:

New pay plans: Banks are adapting to new regulations and fundamentally shifting their pay packages for executives. They are instituting clawback policies to take pay from executives for malfeasance or misstatement of earnings. More bank compensation plans are including long-term equity in the form of restricted stock instead of cash bonuses. Few use stock options anymore, as low bank values have left them underwater.

Shareholder power: The say-on-pay provision for publicly traded companies in the Dodd-Frank Act is forcing companies to better explain in proxy statements how they pay their executives. The reports and recommendations from shareholder rights’ groups such as ISS can’t be ignored-a no vote can mean bad press and shareholder lawsuits, said Susan O’Donnell, a managing director in Pearl Meyer & Partners’ Boston office.

Regulation: Part of the trouble for banks is that there are so many different regulatory categories, each with their own compensation rules.

Regulators who spoke at the conference, however, focused on the big picture. They aren’t worried about the dollar amounts as much as the risk created by the pay packages.

It won’t work to defer pay alone without factoring in the risk profile of each person’s job, said Jim Nelson, senior vice president of supervision and regulation with the Federal Reserve Bank of Chicago. For example, loan officers who get incentives based on volume without quality won’t care about quality, he said. Getting the bank’s chief risk officer involved early in the compensation strategy is critical, he said.

No one at the conference disputed the notion that compensation has become a complicated topic, and navigating the waters between shareholder and regulatory needs, while recruiting and retaining top talent, has become a difficult task indeed.

ANNA BARNITZ
Board Member, Ohio Valley Banc Corp.

“We are spending more and more time working for the bank. It’s wonderful. It’s a challenge, but we’re doing it for the same amount of money or in some cases, less.”

BEN PLOTKIN
Executive Vice President, Stifel Nicolaus Weisel

“In the past, banks could rely on operating leverage to solve those problems. You had expenses, but you saw growth. Right now, because of the economy, it’s difficult to see that operating leverage.”

CHARLES THAYER
Board Member, Mainsoure Financial Group

“What I fear is that in response to the regulation we are checking the boxes and we aren’t thinking why are we doing this. Each of your institutions have shareholders. What do your owners want? They want to grow and create value for themselves.”

JIM NELSON
Senior Vice President, Chicago Fed

“Deferral [of pay] by itself really doesn’t help. You need it balanced with risk and how risk manifests itself over a period of time.”