Proxy season has recently ended, and the beginning of the third quarter marks the start of a new compensation planning season. The summer meeting of a bank’s compensation committee is an ideal opportunity to reflect on the previous compensation cycle and to consider the next—often by focusing on topics like proxy season trends, pending regulatory/legislative and other emerging compensation issues. However, the summer committee meeting can also be used to focus on issues of more strategic importance to the bank. Consider adding one or more of the following topics to your summer discussions to increase your committee’s effectiveness over the upcoming year.
Our experience in working with community banks is that many board members do not view succession planning as a high priority issue. They either don’t view retention of their CEO as a risk, and/or their CEO is still several years away from retirement. As a consequence, many directors cannot articulate what would occur if a CEO’s departure, death or disability left the bank suddenly leaderless.
Considering that it takes several years to develop and cultivate a CEO successor in the best circumstances, boards should identify potential candidates to succeed the CEO long before he or she retires. High-potential executives are always in demand, and developing your bench will strengthen the team and mitigate the risks associated with unexpected and unwanted executive turnover.
And even if long-term cultivation of candidates is less of a priority right now, an emergency CEO succession plan should be a requirement for all organizations, to mitigate the business continuity risk should tragedy strike. An emergency CEO succession plan will minimize board deliberations and discussions of interim CEO candidates in crisis situations by articulating a structured process (the timing of internal and external communications and board decisions), as well identifying one or more interim CEO candidates (who could come from the senior leadership ranks or the board).
The most common pay-for-performance analysis retrospectively evaluates historical financial performance and total shareholder return relative to actual compensation received by the CEO (and potentially other proxy executives), compared against the performance and pay of peer companies. Simply put: did the incentive programs deliver appropriate pay for the performance results achieved?
Summer is an effective time to discuss these pay-for-performance results with the committee, since pay data for peers is publicly available following the end of proxy season. The results may encourage further discussions about the organization’s compensation philosophy, and especially the effectiveness of incentive plans in supporting your business strategy and results.
Compensation Philosophy and Peer Group
Wholesale changes in compensation philosophy from one year to the next are rare, but as your bank’s business strategy evolves, your compensation philosophy ideally will evolve as well. For example, as a business strategy evolves from growth to profitability (or vice versa), the corresponding compensation philosophy should consider re-weighting incentive plan metrics to more effectively support such a change in priorities.
Peer group changes are less frequent in banking than in other industries, but your peer group may require re-evaluation if the bank has grown significantly, or changed business focus (for example, geographic footprint, or retail vs. commercial lending). Likewise, continued industry shifts (mergers, business shifts, etc.) require an annual review to ensure that peers are still a good “fit” with the bank.
Committee Meeting Calendar and Agenda
A compensation committee’s summer meeting tends to include fewer time-sensitive items than most other meetings. It is an ideal time to review your annual committee meeting calendar and standing agenda items relative to the committee charter. Work collaboratively with your executive team and outside advisors to ensure that no key issues are overlooked, and that items are spaced throughout the year to allow enough time for consideration of relevant information and thoughtful deliberation prior to key decisions.
Remember that the purpose of your executive pay programs is to support and reinforce your bank’s business strategy. Proactive planning of your meeting calendar and agenda will ensure your committee is addressing all its compliance-related requirements, while allowing sufficient time to thoughtfully consider strategic implications of compensation design decisions.
To find a full year’s Compensation Committee agenda items for community banks in our recently published document, Managing an Effective Compensation Committee Calendar for Community Banks, go here.