You’ve Selected a Good Compensation Peer Group…But Are You Getting the Most Out of It?

Many community and regional banks have invested the time and energy to establish a peer group of comparable banks to benchmark their executive compensation practices. The selection of the peer group is important work, but its full potential benefits often are not realized. Here are four key uses of peer group information to advance your business and leadership strategies.

1. Test your bank’s relative pay-performance alignment. How does your bank pay relative to your peers, and how does it perform relative to your peers? Such an assessment of relative pay-performance alignment requires definitions of “pay” and “performance,” as well as a determination of the appropriate time period over which to measure pay and performance against peers.

   In general, the closer the bank’s percentile ranking of pay to the percentile ranking of performance, the better the relative pay-performance alignment over the selected time period. A significant difference in those percentile rankings may indicate a need for adjustments to the pay opportunity structure, especially if the difference persists over multiple periods. The peer group is very useful when conducting this type of analysis for the bank’s executive pay program.

2. Challenge your bank’s short-term incentive (STI) design practices. The proxy disclosures of your peer group will provide varying levels of clarity about their STI arrangements. However, design elements such as threshold, target and maximum payout opportunities, performance measures and their respective weights, as well as how discretion is exercised in determining actual payouts are often discussed in proxy disclosures. Understanding how your peer group approaches these key design elements can bring greater clarity to your bank’s decisions.
3. Inform future decisions regarding long-term incentive (LTI) strategy. Bank boards are increasingly shifting business strategy discussions from the near-term to a longer-term time horizon, particularly as they return to financial stability and cleaner balance sheets. The shift has created new energy in boardroom conversations about the best way to support the long-term business strategy with LTI compensation arrangements, particularly equity-based pay. There are no silver bullets on this front, but good ideas are being tested in the marketplace on a regular basis. Your leadership and advisors can study the LTI design practices disclosed by the peer group to add valuable context to the bank’s deliberations in this area.
4. Understand the total compensation picture. Executive compensation consists of more than just salary, bonus and equity awards, as the banking industry continues to make significant use of supplemental retirement arrangements for senior executives. For this reason, it is critical for compensation committees to understand the value of compensation delivered in the marketplace by such arrangements. The best source of information related to retirement and perquisite compensation is the proxy disclosures of your peer group. Interpreting this data and incorporating it into a holistic competitive pay analysis takes some work, but is worth the extra effort. Take advantage of this available information so your board and senior management team make pay decisions based on full, not partial, information.

Your bank’s peer group provides useful information to help determine competitive pay levels for your senior executives. It is extra work, but there is significant additional information to be gained which will elevate the exercise to a more strategic level and support the creation of long-term value for all stakeholders.