With the close of 2012 fast approaching, directors and compensation committees continue discussions on how to produce acceptable growth under the weight of banking reform legislation.  Understandably, banks are nervous. In the face of regulatory actions, weak performance, or cuts in compensation, valuable bank officers may opt to move elsewhere. 

In spring of this year, Meyer-Chatfield Compensation Advisors and Bank Director conducted a comprehensive survey to understand industry viewpoints on executive and directors pay.  Download Full Report.  To further validate our findings, we identified six questions from the original spring survey, and re-surveyed the audience of bank directors and executives in attendance at the Bank Executive & Board Compensation conference in Chicago in November this year.  William MacDonald, advisory board member for Meyer-Chatfield Corp., the parent company of Meyer-Chatfield Compensation Advisors, talks about the survey results and trends in compensation, including the increasing use of stock in director compensation and the movement away from Supplemental Executive Retirement Plans (SERPs). 

1. How well do you believe your bank’s board is managing its executive and director compensation? 

Board members at the November conference felt they were doing a better job handling compensation than board members felt in the spring survey. In my opinion, the improvement in numbers is due to compensation committees and board members getting their arms around the changes, and developing a process to deal with the issues. 

2. What is your top compensation challenge for 2013? 

The top challenges in both the spring 2012 survey and November Chicago conference were “tying compensation to performance” and “retaining key people.” Historically, bank incentive plans have been tied to financial performance using matrixes such as return on assets and earnings per share. 

3. Do you have stock ownership guidelines for your directors? 

More than half (58 percent) of the Chicago survey group have directors’ guidelines in place, compared to 47 percent of the spring survey. Many banks use deferred compensation plans to offer restricted stock compensation for directors, and pay directors a larger portion of compensation in stock than they have historically.

4. If you have stock ownership guidelines for directors, what are the ownership requirements? 

In the annual spring study, most respondents who had stock ownership guidelines had guidelines requiring a minimum or fixed number of shares, while the Chicago group more often had a multiple of retainer or annual compensation.  I think a multiple is a better idea.  Not all directors are financially able to meet a fixed amount of shares. 

5. Who is primarily responsible for setting directors compensation levels at your bank? 

To follow high standards in corporate governance, a board should work with an outside consultant with access to meaningful data and best practices.  All parties need to weigh in on this subject; the chairman, full board, the compensation committee, as well as the bank CEO.

Source: Bank Director and Meyer-Chatfield Compensation Advisors spring 2012 survey on director compensation.

6. Does your bank offer a nonqualified retirement benefit to your management team? 

Both survey groups weigh in at 60 percent roughly offering a nonqualified retirement benefit.  Nonqualified plans are effective tools for banks to attract, retain and reward key people. 

Many community banks structure supplemental executive retirement plans (SERPs) for senior management. SERPs became prevalent at community banks as a way to compete with major banks. Now, SERPs are on the chopping block. Institutional investors, shareholders and many boards are focused on inherent plan costs. Most SERPs are fixed defined benefits, and expensive from a profit and loss standpoint. During the conference and in a break-out session with Flynt Gallagher, president of Meyer-Chatfield Compensation Advisors, we discussed ways banks are maintaining these plans with much lower costs. In some cases, the bank can maintain the benefit at a 50 percent reduction in the expense that must be recorded for employee pensions (FAS 87). 

Going Forward

Compensation for executives and directors will remain a hot topic in 2013. Look for incentive compensation to gain momentum as banks align interests of executive teams with shareholders. What’s more, I envision the sprouting of new measurements to better balance shareholder and regulatory interests.  I would also watch for shareholders to require executive and director benefit plans do more heavy-lifting in the war for talent, because flexibility trumps tradition hands-down.