Ever since the financial crisis, bank boards have been operating under a tremendous amount of scrutiny, and that is leading to substantial changes in pay packages. Changes that at first only impacted the largest, global banks are cascading down to smaller community and regional banks.
People such as John Corbett, the CEO of the $3.9-billion CenterState Bank of Florida, headquartered in Davenport, Florida, say their banks are paying executives more of their total compensation in long-term equity. If the bank’s shareholders do well, so do the executives, so the thinking goes. Half of the stock is time vested, meaning it takes a few years before executives have access to it. The other half is tied to performance goals. Also, the bank’s annual bonus plan for top executives is a mix of cash and stock, and the bonuses are deferred for three years in case the credit quality of the bank’s loan portfolio deteriorates.
Corbett spoke at Bank Director’s Bank Executive and Board Compensation Conference last month in Chicago.
Kevin O’Connor, president and CEO of Bridge Bancorp, Inc. in Bridgehampton, New York, also spoke at the conference and said his more than $2-billion asset banking company has made substantial changes, adding long-term incentives in the form of equity, tying those to individual and corporate performance, and requiring vesting periods for the stock.
O’Connor said not all banks provide employees with as much transparency into exactly how the bonus plan works as Bridge Bancorp does now. But his bank’s plan has generated more discussion about how to reach corporate and individual goals, and he feels good about that result.
“[Employees] want to know what the corporate goals are,’’ O’Connor said. “They want to know how they can affect it. What I like is there is actually a dialogue now with the manager as to what they should be focused on.”
Other changes that are happening in bank pay plans include:
More publicly traded banks are using restricted stock. The stock typically vests over a three-to-five year period, to provide a retention tool, or vests based on achievement of specific performance measures. Common performance measures include the company’s shareholder return relative to a peer group, return on assets, or earnings per share. Goals for the highest executives tend to be focused on corporate performance, while lower level employees have more weight given to individual and department goals. Private companies can offer incentives in the form of “synthetic stock” or “phantom stock” that increases in value with the company’s value, and is ultimately paid in cash.
Long-term incentives are an increasingly important part of the average executive’s pay, but the percentage varies greatly by size of bank. For example, CEOs at banks above $1 billion in assets on average receive 26 percent of compensation in long-term incentives, typically stock, according to a review of about 150 publicly traded companies by Blanchard Consulting Group. For banks between $500 million and $1 billion in assets, the percentage of total compensation that is long-term is 12 percent.
Stock options are going away. Regulators have a “stated disdain” for stock options, according to compensation consultant Todd Leone of McLagan. “They have been slowly dying on the vine,’’ he said. Powerful shareholder advisory groups, such as Institutional Shareholder Services and Glass Lewis & Co., don’t consider stock options tied to performance.
Gone are the days of executives getting change-in-control payouts when a sale occurred even when they didn’t lose their jobs. The payouts also are smaller, in the range of two to three times base pay, rather than four or five times base pay as was common five or six years ago, said Barack Ferrazzano attorney Andy Strimaitis.
Figuring out how to pay top executives has always been a huge challenge for the board. You don’t want to lose top talent to competitors, but you also don’t want to give overly lavish pay packages, either. There is no one way to do this. There are plenty of ways to get your bank in trouble with regulators or ensure a negative say-on-pay vote at the annual shareholders’ meeting, but each board has to come to its own decision about what makes an optimal pay package.