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Shaun Bisman
Principal
Mike Bonner
Principal
Kelly Malafis
Founding Partner
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About the authors
Written by
Shaun Bisman Principal

Shaun Bisman is a partner at Compensation Advisory Partners in New York.  He has over 15 years of experience consulting management and compensation committees.  Mr. Bisman provides compensation consulting services to both public and privately-held companies, assisting with incentive plan design, performance measurement, pay-for-performance validation, regulatory/compliance and director compensation.

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About the authors
Written by
Mike Bonner Principal

Mike Bonner is a principal at Compensation Advisory Partners in New York.  Since joining CAP in 2013, he has worked with compensation committees and senior management teams to address a wide array of executive and non-employee director compensation issues.  His typical projects include incentive plan design, executive and non-employee director compensation benchmarking, and performance measurement.  Mr. Bonner has experience working with both public and private company clients across industries, including financial services, pharmaceuticals, consumer products, and retail.  He also has experience working with companies on executive compensation matters in special situations, including mergers and acquisitions and IPOs.

Close
About the authors
Written by
Kelly Malafis Founding Partner

Kelly Malafis is a founding partner at Compensation Advisory Partners LLC (CAP) in New York.  She has 20 years of executive compensation consulting experience working with compensation committees and senior management teams.  Ms. Malafis’ areas of focus include compensation strategy development, evaluating the pay and performance relationship for senior executives, annual and long-term incentive plan design, compensation program governance and board of director compensation.

 

Ms. Malafis has advised large and small publicly traded companies in a variety of industries, including financial services, insurance, pharmaceutical, manufacturing, and retail.  She has also provided advice on compensation issues for privately held companies and companies with special circumstances such as IPOs and spin-offs.  Ms. Malafis has also advised the U.S. Department of the Treasury on executive compensation matters.  She writes and speaks frequently on executive compensation.

Uncertainty has become the new norm in the banking sector. Interest rates, inflation, stock price volatility, regulation, competition from fintech companies and the upcoming presidential election all have an impact on bank financial results and valuations. In compensation plans, this volatility can impact the value of incentives and create retention risks.

Banks can consider a variety of strategies to make their compensation programs more durable in this uncertain environment. These strategies generally fall into two categories: improving flexibility of core programs and awarding retention awards.

Improving Flexibility of Core Programs
In-flight annual and long-term performance plans may not adequately account for rapidly changing market conditions, as goals are often set at the beginning of the year and macroeconomic conditions beyond management’s control may impact actual company results. This may lead to incentive payouts that are well-below the target level. The chart below incudes several strategies banks can employ to improve the flexibility of their go-forward performance plans:

    Applies to
Strategy Description Annual Incentive Plan Long-Term Performance Plans
Semi-Annual Performance Periods or Annual Milestone Approach
  • For annual incentives, instead of setting annual goals, banks can use two, six-month performance periods.
  • For long-term performance plans, banks can replace a three-year performance period with three, one-year periods.
 X X
Discretionary or Qualitative Components
  • Incorporating discretionary or qualitative components into an otherwise formulaic performance plan balances flexibility and objectivity by measuring quantitative and qualitative criteria to determine a payout.
  • Banks can incorporate discretion through either a weighted component of 20% to 30%, or a modifier that can adjust results positively or negatively by 20% to 30%.
 X
Wider Leverage Curves or Lower Thresholds
  • Set threshold and maximum performance goals in a wider range around target.
  • Establishing wider performance ranges or lowering thresholds provides a greater opportunity to achieve a payout in an uncertain environment.
 X X
Set Target Goals as a Range
  • Setting target goals as a range rather than a fixed number offers flexibility and acknowledges uncertainty while maintaining the integrity of the performance plan.
 X
Relative Performance Metrics
  • Measure performance relative to a peer group of banks or an index.
  • Avoid having to set an absolute performance goal.
 X X
Time-based Restricted Stock Units (RSUs)
  • Introduce or increase the emphasis on time-based RSUs, as it provides more stable value than long-term performance awards or stock options.
 X

 

Retention Awards
To improve the retention hook of outstanding equity awards, companies may consider granting special retention awards outside of the core compensation program. While these types of awards may receive pushback from shareholders, they can be designed to support retention and drive performance. Important considerations when structuring these awards include:

Design Feature Considerations
Size of the Award
  • Assess the current value of outstanding equity against the intended target value.
  • Benchmark the value of similar awards in the market relative to core long-term incentives and core total compensation.
  • Consider the realizable value of the award at different stock prices in conjunction with the realizable value of other outstanding equity awards.
  • Consider affordability and potential dilution.
Cash vs. Equity
  • Equity is common for public banks.
  • Private banks should consider if equity is feasible — does the bank have a history of providing equity and will the bank provide liquidity?
  • Consider award objectives. Cash can provide a stable value while equity enhances link between employees and shareholders.
Performance vs. Time-Based Vesting
  • Time-vesting conditions support retention.
  • Performance-vesting conditions link outcomes to bank performance and may make awards more palatable to shareholders.
Vesting Schedule / Performance Period
  • Given that the awards are supplemental to the core long-term incentive, it may be appropriate to make the vesting schedule longer than typical awards.
Eligibility
  • Rather than applying retention awards universally, it is more effective to target awards to positions critical to the bank’s success and to roles that are essential for navigating economic uncertainty.

Ensuring Pay and Performance Alignment
Adopting flexible strategies in performance plans and implementing thoughtful one-time awards can support retention of key employees and help banks effectively navigate economic uncertainty. Banks should continue to ensure that their compensation programs support the pay and performance relationship, take a balanced approach to risk management and reflect principles of good governance. Additionally, public banks should provide robust disclosure describing to shareholders the rationale for any compensation actions and demonstrating the continued alignment between the compensation program and shareholder outcomes.

WRITTEN BY

Shaun Bisman

Principal

Shaun Bisman is a partner at Compensation Advisory Partners in New York.  He has over 15 years of experience consulting management and compensation committees.  Mr. Bisman provides compensation consulting services to both public and privately-held companies, assisting with incentive plan design, performance measurement, pay-for-performance validation, regulatory/compliance and director compensation.

WRITTEN BY

Mike Bonner

Principal

Mike Bonner is a principal at Compensation Advisory Partners in New York.  Since joining CAP in 2013, he has worked with compensation committees and senior management teams to address a wide array of executive and non-employee director compensation issues.  His typical projects include incentive plan design, executive and non-employee director compensation benchmarking, and performance measurement.  Mr. Bonner has experience working with both public and private company clients across industries, including financial services, pharmaceuticals, consumer products, and retail.  He also has experience working with companies on executive compensation matters in special situations, including mergers and acquisitions and IPOs.

WRITTEN BY

Kelly Malafis

Founding Partner

Kelly Malafis is a founding partner at Compensation Advisory Partners LLC (CAP) in New York.  She has 20 years of executive compensation consulting experience working with compensation committees and senior management teams.  Ms. Malafis’ areas of focus include compensation strategy development, evaluating the pay and performance relationship for senior executives, annual and long-term incentive plan design, compensation program governance and board of director compensation.

 

Ms. Malafis has advised large and small publicly traded companies in a variety of industries, including financial services, insurance, pharmaceutical, manufacturing, and retail.  She has also provided advice on compensation issues for privately held companies and companies with special circumstances such as IPOs and spin-offs.  Ms. Malafis has also advised the U.S. Department of the Treasury on executive compensation matters.  She writes and speaks frequently on executive compensation.