Expect CEO Pay to Rise in 2013

6-21-13_Moss_Adams.pngWestern bank CEOs and their direct-report executives should expect average salary increases in the 3 to 5 percent range during 2013, according to a survey by assurance, consulting and tax firm Moss Adams LLP. Also, the industry should expect a nearly 50 percent reduction compared to 2012 in the number of institutions that continue to subject their executive officers to a salary freeze.

According to the 2012 Community Bank Compensation Survey conducted with Western Independent Bankers, the executive compensation banks are providing continues to show a strong correlation with the institution’s operating performance. The survey found compensation strategies continue to favor incentive-based compensation over salaries in order to place a greater emphasis on variable costs for the retention of key executive officers. However, as the economic recession gives way to recovery and many more banks return to profitability, we’re beginning to see more focus and attention given to executive compensation programs, particularly with respect to incentive pay components.

We also found that operating performance objectives, return measures and top-line growth continue to be primary considerations in establishing annual incentive compensation levels, while executive retention strategies are becoming more of a factor. While these compensation-related measures remain consistent from previous years and from bank to bank, nearly 50 percent expect to raise performance hurdles for measuring overall incentive compensation available in 2013. Long-term incentive award levels are also trending up modestly in 2013, with the award packages still relying heavily on time-vested restricted stock but increasingly including performance-vested stock awards.

In addition to these salary and incentive-based compensation expectations, the survey identified a number of emerging trends.

Increased Incentive Pay
Executive compensation is increasingly being delivered through incentive pay. It’s evident that there is a greater alignment of pay and performance, and incentive pay programs have a greater focus on long-term performance and risk outcomes. Equity-based incentives that defer compensation through multiyear vesting and mitigate compensation risk appear to be gaining favor.

More Performance Factors
Boards of directors and their compensation committees are taking a broader view of relevant performance factors in setting incentive-based compensation. An entirely discretionary approach to incentive compensation payouts is giving way to a formulaic approach dependent, in many cases, on multiple measures. Earnings measures remain the prominent factor, although returns on equity, capital levels, credit quality, and asset growth represent alternative metrics that are also considered.

Increased Documentation
When discretionary measures are used as the primary determinant for executive incentive compensation payouts, increased rigor and documentation is expected. We expect regulators to be more probing about the structure surrounding discretionary payouts to ensure decisions are justified and consistent. We expect compensation committees to refine their approach to discretionary payouts through the use of scorecards that will reflect absolute goals moderated by some subjective judgment tied indirectly to specific metrics or goals. Clawback provisions for incentive-compensation payments continue to be limited in application and complicated to enforce.

More Long-Term Incentive Strategies
Multiple long-term incentive strategies are expected to emerge with an increased use of performance-based vesting and increased responsiveness to shareholder interests and market trends. While performance-based incentive programs increase in application, time-based awards are expected to remain, balancing the mix if poor risk outcomes materialize prior to vesting.

More Transparency
More transparency in compensation reporting will become the norm, as say-on-pay provisions and public company advisory votes on executive compensation have raised reporting expectations. Proxy disclosures related to how compensation decisions are made, how performance criteria were established and how performance results led to incentive payments are expected to improve reporting clarity.

As boards of directors and their compensation committees continue to explore business planning strategies, risk tolerance measures, executive goal setting and the use of defined metrics in performance measurement, they will be better equipped to make even more meaningful connections between expected business performance and executive compensation in the future.

The Moss Adams annual survey was conducted in 2012 with Western Independent Bankers. The compensation report includes responses from 123 institutions that range in size from less than $50 million in total assets to over $2 billion across the western United States.