A Thorny Issue

Hal Smithson has been CEO of the $1.1 billion City Trust Bank for four years and, though his bank performs near the top in all significant performance categories, Smithson`s compensation ranks at the bottom of the bank`s peer group executive pay scale. Unfortunately, his predecessor frowned on any creative compensation alternatives, and the board still accepts this philosophy as gospel. Year after year, his requests for review have fallen on deaf ears. While Smithson enjoys his position at the bank and within the community, this issue has become a thorn in his side. One bright note is that the compensation committee chairman will retire at the upcoming annual meeting. Finally Smithson may get a chance to persuade the board to consider some creative alternatives to his situation. Hal appears to be negotiating from a position of strength. The bank has performed well under his leadership and the shareholders have benefited. Good CEOs are hard to find and he should subtly remind the board of these facts. As his predecessor went to great lengths to persuade the board about compensation, Hal must go one step further in order to reverse its thinking. Hal should immediately compose a written summary of the bank`s performance during his tenure and include examples of what bank performance and his personal pay would have been if a more creative compensation package were in effect. This summary should also include peer information. Hal can point to other areas of the bank that have changed over time and argue that compensation is no different. Certainly there are other positive changes Hal has made since the departure of his predecessor, and compensation can be made analogous to these. He should not wait for the chair of the compensation committee to retire as the position could be filled with another board member equally opposed to change. Even more important than this single incident is the long-term issue of keeping the board up-to-date on compensation trends in the industry and the packages that will most motivate management to achieve the goals of the board. Hal should make an effort to keep compensation on the radar screen and be quick to make the correlation to performance. As with any goals, those that go unmeasured, go unmet.

Thomas H. Kenning

President

First National Bank

Telluride, ColoradoI would begin by focusing my attention on the CEO, Hal Smithson. As CEO, he runs the company and is the best person to make things happen.I would tell Hal that regardless of who is elected as the new compensation committee chairperson, he needs to approach the board from a different angle. Even if the compensation committee chairperson agrees with his point of view, Hal will still face an uphill battle against remaining board members and potentially distance himself even further from the board on this issue. I would recommend engaging an outside compensation specialist to perform a competitive assessment of City Trust Bank`s executive compensation. If Hal`s pay is below market rates, there is a good chance that he is not alone in this position. The assessment will offer an objective point of view on the level of executive compensation, a comparison of City Trust Bank to peers in the industry. Also, if other senior management pay is below market rates the results of the assessment will garner their active support for compensation restructuring. Additionally, I would recommend Hal have a pay-for-performance analysis completed, where the total return to shareholders, or return on equity, is calculated for City Trust Bank and selected peer companies against CEO compensation levels over a specific time period. With the results of this analysis, Hal may be able to say that not only is executive compensation at City Trust Bank below competitive levels, but even at these low levels, the bank is performing equal to or above competitive levels, further strengthening the case for compensation realignment. Additionally, the data might be able to demonstrate performance dispersion for companies that pay executives below, at, and above competitive levels.

Michael A. Herman

Human Capital Advisory Services Practice

Deloitte & Touche LLP

New York, New YorkHal Smithson should first appeal to the board for a specific meeting to discuss his performance. Hal should go into the meeting with a spirit of one who is a learner and a loyal employee of the bank. Hal should attempt to explain his personal convictions without a spirit of condemnation, establishing with the board that his performance and the performance of his staff is of service to the company and of high value. A respectful rapport with the board is essential. Hal can now present his creative alternative to the present CEO compensation package to the board. By creative, I mean that he must show how the shareholders of the bank will benefit, how his fellow employees will benefit, and how the board will be responsible for a good decision. He should explain how the new package will ultimately reach the long-term goals of the company. Hal should also provide comparative data to substantiate the high performance of City Trust compared to peer banks, and add the fact that the CEO package is at the bottom of the peer group. Hal should make his presentation as if it was being made for his predecessor and the good of the bank, not for his personal benefit. If the compensation package is lower than industry standards, a case could be made that earnings will suffer when the day of reckoning comes and a fair compensation is installed. The final decision must be up to the board, but he should respectfully set a schedule for the decision. Hal has now done his best. He must either reap the benefit of a increase or suffer the process of finding a new job. Hopefully, he will not stay if he is growing bitter toward the board. Staying and working with bitterness is bad for Hal, the board, and the bank.

William G. Barron

Director

Indiana United Bancorp

Greensburg, Indiana First, I suggest the CEO work with the nominating committee to choose the next compensation chairman, which should be an individual with compensation experience. While the individual does not have to be a compensation, expert, he or she should have experience dealing with officer compensation in his or her own business. This person should know that an officer who excels in making a company profitable in today`s labor market needs to be rewarded. Second, the CEO is in a difficult position by raising the issue of his or her own compensation, as it may appear self-serving. The ideal situation would have the new compensation chairperson leading a project to evaluate officer compensation. This will allow the board to take ownership of the study rather than the CEO giving the board an analysis, which may be perceived as biased. Third, this study should include more than just the CEO. Typically, the study would include the top officer group. While this group varies, in a bank with $1.1 billion in assets, this would include the top six to 12 officers. If the study includes more than just the CEO, the focus will not be on the CEO, therefore it won`t appear as a personal issue. And last, the study should evaluate total compensation based upon industry and peer group information, which shows how the bank`s compensation package compares to its peers, with the bank`s strong performance as a factor. The study should incorporate base salary, annual and long-term cash incentives, equity (stock options), benefits, and perquisites. If done correctly, the study would show the bank ranked at the top in financial performance and the bottom in total pay. In my experience, most boards would recognize the pay disparity and begin to address the issue from that point.

Todd A. Leone

Senior Vice President, Compensation Consulting

Clark/Bardes Consulting – Banking Practice

Minneapolis, MinnesotaReading this scenario about City Trust Bank conjures up some bad memories about how shortsighted some directors and boards can be. In my past life, I was a bank CEO; now in my after-banking life, I serve on several boards. Bank directors often get in the mindset that banking is still the nice little community business that it was 30 years ago when all employees got lower wages, but everyone had a job for life. As we all know, those days are gone. If a bank or company has a good CEO with the skills to keep the bank competitive and growing its bottom line without risking the bank, it is definitely an advantage worth keeping. If Hal Smithson is a good CEO, then he should be able to effectively present his case to the compensation committee or to some other directors on the board who understand his current contribution. I would suggest to Hal that he tell the board (and I remember a similar speech) things are currently structured unfairly, and that he has done his partu00e2u20ac”now its time for the board to do its part. If the board still won`t listen to reason, then inform it that you are going to institute your voluntary resignation clause in your employment agreement, and find a board and bank that appreciates your effort and skill. You do have an employment agreement, don`t you?

Name withheld upon requestInitially, Hal Smithson should seek to influence the selection of the new chairman of the compensation committee. Hopefully, there is a board member who has a working familiarity with executive compensation practices, preferably in the public company arena. If he hasn`t already done so already, on an annual basis Smithson should collect the proxy statements of the public companies that are in his peer group. From that information, he could prepare an informal survey of the compensation packages of the chief executive officers of these companies for the new chairman to read. The compensation committee reports included in the proxy statements might also prove to be useful. In the long-term, Smithson should strive to have a third-party consultant engaged to conduct an executive compensation review of the bank`s pay practices for presentation to and discussion with the committee. From what we are told, Smithson should feel confident that favorable recommendations will result from any study conducted by a compensation expert. In the meantime, he should continue managing the bank to maximize performance, which will therefore maximize his value to the bank and his opportunities for alternative employment.

John J. Gorman

Partner

Luse Lehman Gorman Pomerenk & Schick, P.C.

Washington, D.C.