In this sampling of bank directors’ opinions on the hot topics of the day, we look at issues related to executive compensation.
For months, the issue of executive compensation has resonated like no other among directors, shareholders, politicians, and the media. At a time when most companies are struggling to survive and many are shuttering, the notion that excessive executive pay is to blame for many companies’ troubles has found widespread populist support, which has translated into a fervent call for regulatory and legislative action among many constituencies.
With this issue gathering steam both inside and outside the boardroom, we felt compensation to be an apt topic to initiate our new department, Top of Mind. In it, we will periodically tap directors for their opinions on relevant governance and banking issues and share this feedback with you. These results will also be featured on www.bankdirector.com, where there will be an additional venue for directors’ comments.
For this issue, we posed a few questions about proposed compensation regulation and about directors’ own compensation programs. The results are as follows and you may also view the results in graphic representations by downloading a PDF of this article.
1. Do you believe all the legislative and regulatory emphasis on controlling executive pay is warranted?
As this issue of Bank Director goes to press, the Obama administration is supporting a movement to ensure that banks receiving TARP funds have taken steps to eliminate incentives that promote excessive risk and, concurrently, the SEC has indicated it is preparing to hold meetings regarding the modifications for the rules on mandatory disclosures of compensation information. More than three-quarters of bank directors polled feel that these measures have overstepped what is necessary at this time.
2. Do you believe some form of shareholder advisory vote (say on pay) is beneficial for controlling executive compensation levels?
An overwhelming majority say “no” to say on pay proposals, which give shareholders the right to vote on remuneration packages for directors and executives. Currently, the Obama administration is calling for legislation that would require “say on pay” votes at all public companies and would force corporate compensation committee members to be independent from management, as part of its plan to bring more oversight to executive compensation.
3. Do you believe there is any part of your executive pay program that encourages inappropriate or imprudent behavior for your bank?
Great news on this front. Directors polled felt their executive comp plans did not motivate excessive risk taking or improper behavior.
4. Has your board taken steps to evaluate your executive compensation plan in the last 12 months?
The vast majority of directors polled are taking the responsibility to stay on top of their executive compensation plan seriously by undergoing a recent evaluation.
5. Does your executive compensation program provide alignment to the following:
82% A mix of long- and short-term performance factors
10% Short-term performance factors
2% Long-term performance factors
6% Our executive compensation program does not include performance alignment
Most experts agree that a prudent compensation program should be weighted heavily toward performance that is long-term in nature and thus has more alignment with the interests of shareholders. These responses show that, according to our panel, the majority of respondents’ banks’ executive pay plans have some component that involves long-term performance alignment.
6. Directors rated their highest concern for the following issues:
Managing operational risk 72%
Maintaining capital adequacy 70%
Systemic financial risk 70%
Regulatory compliance 65%
Technology/data security 64%
Serving the next generation of customers 58%
CEO/management succession 53%
Stock price 51%
Executive compensation 39%
While executive compensation is grabbing the attention of many headlines today, and will doubtless be on the agenda for many board meetings, directors of financial institutions we polled have several concerns that rate much higher. Risk management, both from an operational sense and in the larger scope of the entire financial system, as well as capital management, are the issues weighing most heavily on their shoulders in mid-2009.
Editor’s note: Your opinions matter! Find out information about the benefits of serving on our Bank Director Research Panel.