Is Your Compensation Committee Keeping Pace With Your Bank’s Growth?

As banks grow, compensation committee responsibilities expand beyond approving executive pay. These additional responsibilities combined with increased complexity, regulatory oversight and stakeholder scrutiny require more formal processes, stronger governance and risk management practices, and clearer communication with shareholders and other stakeholders. Below are three key areas where bank compensation committees must evolve to strengthen oversight and accountability.

1. Adopting Best Practices of Effective Compensation Committees
At smaller banks, compensation oversight may be relatively informal. The board may play a direct role in individual pay decisions, meetings may occur only when needed and the compensation committee may rely primarily on materials prepared by management. The focus is often on maintaining compliance and addressing immediate compensation decisions. As a bank grows, their compensation committee processes become more structured with well-defined charters, regular meeting schedules, detailed documentation of pay decisions and greater use of outside consultants and legal advisors.

One best practice is to maintain an annual compensation committee calendar to ensure the committee is addressing all its responsibilities at the appropriate time. These responsibilities typically include incentive goal setting, CEO performance evaluation, peer group selection, executive and director compensation reviews, risk assessments, regulatory and market updates and proxy disclosure.

Effective compensation committees use a structured approach to meetings. The compensation committee chair may have multiple meetings with management and outside advisors, including pre-meetings — to review materials and identify key issues —and debrief meetings to summarize key takeaways and determine next steps. Additionally, materials should be distributed at least one week before the actual meeting to give committee members adequate time to review and understand the issues. These tactics improve efficiency at the compensation committee meeting.

Banks should provide multiple meetings for compensation committees to consider significant matters, rather than seeking approval immediately after an initial presentation. This “two bites at the apple” approach gives members time to assess alternatives, request additional information and make more informed decisions. Executive sessions with only independent directors and their outside advisors can further strengthen independent oversight.

The compensation committee charter should be reviewed regularly to ensure that it reflects the compensation committee’s actual responsibilities. In addition to traditional executive compensation matters, the charter may expand to include succession planning and broader human capital matters such as culture, employee engagement and learning and development.

2. Strengthening Risk Management
As banks become larger and more complex, compensation committees must consider not only whether incentive programs motivate performance but also whether they could encourage excessive or inappropriate risk-taking.

An annual incentive compensation risk assessment can help evaluate whether plan metrics, performance ranges, payout opportunities and participant behavior are consistent with the bank’s risk appetite and identify potential concerns. Some banks conduct the risk assessment internally with collaboration from the bank’s risk function and the compensation committee’s outside advisor while others may have the outside advisor conduct the assessment independently.

Clawback policies are another important governance feature. In addition to providing for clawbacks of incentive compensation in the event of financial restatements, banks may consider broader provisions covering misconduct, reputational harm or other significant risk events.

3. Enhancing Disclosure and Stakeholder Engagement
For public company banks, greater scrutiny also places more importance on how compensation decisions are communicated. Proxy disclosure should do more than satisfy technical requirements, it should clearly explain the bank’s compensation philosophy, the relationship between pay and performance and the rationale for pay decisions.

The compensation discussion and analysis (CD&A) provides an opportunity to tell your bank’s compensation story. Effective disclosure can help shareholders and proxy advisors understand why the compensation committee selected particular metrics, how incentive outcomes were determined and how compensation supports the bank’s strategy and risk-management objectives. The Securities and Exchange Commission recently proposed rules that would scale back compensation disclosure requirements for many community banks; however, banks may continue to voluntarily include a CD&A in their proxy as a tool to communicate these important decisions to shareholders.

Banks should also establish a process for regular stakeholder engagement and be prepared for off-cycle discussions when significant issues arise. Relevant stakeholders may include shareholders, proxy advisory firms and regulators. Compensation committee meeting minutes should document key decisions, supporting rationale and discussions to support both internal governance and external disclosure.

As a bank grows, strong compensation committee oversight becomes an essential component of effective governance. More formal processes, thoughtful risk controls and transparent stakeholder communication help ensure that compensation programs remain aligned with performance, strategy and prudent risk management.