Given increasing risk and responsibilities of bank board members, is outside director pay expected to increase?
Yes. Going forward, we expect more focus on board compensation and recognition that effective governance in the banking industry requires significant time and expertise. We suggest board compensation be approached in a strategic and holistic manner. Banks should define their desired pay philosophy and develop programs that support objectives. Questions to answer include:
- What is the desired mix of pay, such as cash versus equity, or retainers versus meeting fees?
- What is the appropriate pay for board service to all members to fulfill their responsibilities?
- How should different roles, contributions and time commitments be recognized?
A well thought-out board compensation philosophy and program will help ensure a fair and equitable program while also enabling the bank to attract the best board talent.
How are banks recognizing additional leadership responsibilities of chairmen and lead directors?
Board chairmen/chairwomen and lead directors are typically recognized through additional cash retainers. The amount should reflect the specific responsibilities and time commitments of the members in these roles. Market data can provide a reference but we see much variation in dollar value due to the significant variation in responsibilities often required of these roles. One way to look at these roles is as a multiple or premium on the board member retainer. Board chairmen retainers tend to range from 1.5 to 2.5 times the member retainer, while lead directors are in the 1.25 to 2 times range. Committee chairmen should also be recognized with an additional retainer. While some banks pay a premium on committee meeting fees, it is more common and appropriate to provide additional pay through retainers. All of these roles carry significant time commitment and responsibilities outside the meetings. As discussed earlier, it is important to define an approach that fits with your board’s philosophy and structure.
Are bank boards eliminating meeting fees in preference for larger retainers?
The trend towards simplified director pay programs has been occurring for several years across industries, with many companies now providing board retainers in lieu of meeting fees. However, the trend has been most prevalent among the larger companies. While fewer than 30 percent of the Fortune 250 companies provide meeting fees, a recent Meridian study of banks with $1 billion to $5 billion in assets indicated that 75 percent still pay meeting fees. Recently, however, many banks have been exploring the advantages of retainer versus meeting-fee pay.
Simplified programs are viewed as having several advantages: They are easier to administer and communicate, recognize that directors are often making significant contributions outside of meetings and avoid the issue of determining what constitutes a meeting. Eliminating retainers is easiest for board service since most banks have a consistent number of meetings each year. However, many banks prefer to continue providing meeting fees for committee service since that involvement can vary from year to year. One approach is to pay a retainer but allow for additional meeting fees if the number of meetings exceeds an expected level. Additionally, boards should not eliminate meeting fees if there are concerns that it will impact participation levels.
Should board pay be aligned with bank performance?
Director compensation should be aligned with bank performance, but not in the same manner as executives. The structure of board pay should reflect the director’s role of providing oversight to management and working in the best interest of shareholders. Including the board in traditional executive incentive plans creates a conflict of interest, as directors are responsible for approving the design, performance expectations and payouts of incentive plans. However, providing a meaningful portion of director pay through equity, particularly full value shares, ensures that compensation will vary based on the value delivered to shareholders. We expect to see more compensation in the form of equity.