Financial institution boards are casting a wider net today to try and recruit younger blood with more breadth of experience. Are banks` compensation programs keeping pace? This and a host of compensation-related issues are revealed in the results of the 2000 Bank Director Compensation Survey.Financial modernization. E-commerce. Consolidation. Rapid technological growth. Expanding geographic boundaries. The banking industry is rapidly changing, causing the makeup of boards to evolve as well. In fact, the composite that emerges of the successful, progressive bank board appears remarkably different from what it was even a decade ago. These factors and others are reshaping the structure and dynamics of the board, prompting new trends in how millennium-era directors will be compensated.For its fifth annual survey of director compensation and board practices, Bank Director set out to determine how much directors are being paid, by what means they are being paid, and for what responsibilities. We also polled board members on their opinions regarding the need for changes to the composition of their boards. Earlier this year, we mailed surveys to 5,000 directors representing a full range of bank asset sizes, and received responses from 941 board membersu00e2u20ac”nearly 20% of the survey population. Each director was asked to provide factual data and share anonymously (or not) his or her opinions on a host of issues, including performance-based compensation, liability, and board responsibilities. The statistical results of this year`s survey are provided as benchmarks, both regionally and by asset size, to help board members gauge their compensation and benefits plans against those of their peers. In making a judgment as to whether a particular bank`s pay levels stack up, however, it is important to note that the numbers alone don`t tell the whole story; nonpecuniary factors, such as liability, prestige, and a sense of personal reward, also come into play with a director`s overall job satisfaction.Foremost in the minds of directors this year is the need to deal with a rapidly changing financial environment. Many boards are faced with an aging membership as well as the reality that both employees and directors are increasingly mobileu00e2u20ac”able to easily change jobs or board seats without a loss of status or pay. Moreover, recent regulations mandating specific expertise on the audit committee and the increasing need for board-level business development means that many boards are looking to increase the number of directors. To address this demand, directors we polled said they are planning to draw on younger business and community leaders, including women and minorities. In doing so, boards will seek out individuals who can bring experience in specific areasu00e2u20ac”technology, marketing, and financial expertise, for example. To lure these dynamic, well-educated, and motivated individuals, banks may need to reconsider current compensation programs and give particular attention to factors that raise the level of retention. The comments of one director who took part in the survey sums up the challenges: “The board has to be able to change at a faster pace. There are more players in the game every day. We need to be as responsive as possible to keep the edge.”
Survey profile and methodology
A snapshot of our survey group looks something like this: Forty-six percent of directors responding served on banks headquartered in the Midwest; 17% hailed from the South; about a third were split between southwestern (13%), Mid-Atlantic (10%), and western states (9%); and just over 5% were located in New England. On average, these bank boards had 2.7 inside directors and 6.7 outside directors; 53% had an inside board chairman. Most had considerable experience in their positionsu00e2u20ac”the average time spent as a director was 16 years. Seventy percent were outside directors; 20% were chairman; and 12% who answered our survey were CEOs (some categories crossed over). The majority serve on the lead bank board or the bank holding company board. Because the results of this survey are used as a tool for boards that are looking for peer comparisons by which to gauge their own compensation programs, the data has been broken out both regionally and by asset size. Responses to questions were broken down into five asset categories: less than $100 million; $100 million-$250 million; $251 million-$1 billion; $1.1 billion-$5 billion; and greater than $5 billion. Another key measurement is the amount time a director spends doing bank business: The results of our survey show an average of 12 hours per month spent on board-related activities. (Bank boards that are spending significantly more time than that should take that factor into consideration when comparing average compensations.) According to Richard C. Chapman, president and CEO of Bank Compensation Strategies Group, a compensation and benefits consulting firm in Minneapolis, another important means of comparison is bank performance. While our survey did not cross-tabulate compensation totals by profitability ratios, Chapman notes that on the whole, “higher-performing banks tend to offer better compensation packages and benefits.”
In looking at this year`s total compensation figures, it`s no surprise to find that directors pay increases proportionately to asset size; the larger the bank, the higher the director`s board income. Interestingly, a three-year historical view shows little change in the smallest asset size and only moderate growth among the mid-tier community banks. Yet, our survey reported significant increases in the two largest asset-size categories, perhaps indicating a recognition among the larger banks of the need to attract and retain new members with broadened expertise who, consequently, have higher compensation demands. The total average compensation for all asset sizes is $13,816, up slightly from last year`s $13,047.Geographically, directors in the West and Northeast report receiving greater compensation that those in the South and Midwest. These levels are similar to those reported in our 1998 and 1999 surveys.In breaking down the components of director pay across all asset sizes, annual retainers average $9,442; total annual board meeting fees average $6,276 for approximately 13 meetings per year, and total annual committee meeting fees average $3,646 for approximately 17 meetings per year. Again, the $1.1 billion-$5 billion asset size showed the largest jump in average annual retainer. Other asset sizes showed moderate growth in this area. Board and committee meeting fees, however, presented a slight decline, both in overall averages and in several asset sizes (see Figure 4). The survey reveals that, directors at larger institutions are significantly more likely to receive an annual retainer as part of their compensation package (in excess of 60% for banks with more than $1 billion in assets, but less than 23% for those below $100 million in assets), as well as committee meeting fees, chairman`s fees, and stock options.To gain an understanding of how directors would prefer to receive their compensation, we asked respondents to demonstrate how they would divide their pay, given the opportunity. They were asked to break down their yearly earnings among five categories: annual retainer, earnings performance, peer group performance, stock price, and other. Annual retainer received a clear majority of the vote (46%), followed by earnings performance, 24%; peer group performance, 11%; stock price, 8.5%, and other, 10%. As was the case last year, it appears directors still feel most comfortable receiving about half of their yearly compensation as a guaranteed, fixed amount.
Benefits: adding up the perks
While cash is the primary form of remuneration for board members, some directors also receive stock awards and other tangible incentives, including life insurance, medical insurance, travel expense reimbursement, and charitable contributions made on their behalf, in addition to retirement benefits (see Figure 5). Forward-thinking institutions understand that such benefits are a meaningful way to both attract and retain directors in an increasingly competitive market, says Chapman. For others, there is apparantly a dearth of such benefits. As one director commented: “There is a need for nonmonetary benefits, such as deferred compensation and insurance.” Another echoed: “A retirement plan is needed.”More than one-third of those we surveyed receive stock benefits, with stock options receiving the lion`s share of the vote (72%) and stock grants and phantom stock rounding out the totals. Of those who receive stock benefits, a full 50% reported a decrease in their underlying stock price for 1999. Thirty-seven percent indicated their stock price increased, and 13% said it remained unchanged. Not surprisingly, looking at the figures on an asset-size basis shows that the larger the bank, the greater the likelihood that directors receive stock options, although this figure may be tempered somewhat by the fact that larger banks are significantly more likely to be public companies.Ironically, even those few banks that do offer retirement plans are now finding that qualified plans are rarely the sole incentive to remain on a board long term. “We`re dealing with an increasingly mobile workforce,” explains Chapman. “And these qualified plans are fully portable. It`s hardly enough to make someone stay on the board.” Therefore, he says, banks need to look closely at the full scope of compensation and benefits available to meet the needs of the market.
Comparisons of size
Beyond some basic similarities in fiduciary duties and board structure, there is not much common ground between a director at a rural $50 million institution and one leading a $5 billion metropolitan behemoth. Not only do compensation and benefits rise with asset size, cultural differences also widen. The chairman, for instance, is significantly more likely to be an insider at larger institutions: 93% of those surveyed at banks $5 billion and larger indicated their chairman is an inside director versus about 50% for those banks under a billion in assets. As for the rest of the board, the number of inside directors increases proportionately as the asset-size grows, as does the total number of board members.Surveywide, about 38% of respondents report a mandatory retirement age for board members, but broken out by asset size, the numbers are more revealing. Only 18% of boards at banks with less than $100 million in assets employ a mandatory age, yet the percentage increases steadily as the asset-size grows, peaking at 73% for those boards at banks $5 billion and up. For a more detailed look at compensation and benefits practices at the nation`s largest banks, Figure 6 offers a breakdown of totals based on the most recent research conducted by William M. Mercer Inc.
An honest day`s work
All things considered, do directors believe they are paid fairly? Of those surveyed, 83% say they are fairly compensated for the time required and the duties they perform; however, only slightly more than half feel fairly compensated when considering the liability risk they assume as board members. “The liability hasn`t gone away, and people`s perception is, there`s not much pay and a lot of liability,” Chapman notes. As one director put it: “Because of liability, I don`t know why a person would accept a director`s job.”Directors who said their institutions were offering expanded services, such investment and insurance, had an even greater level of dissatisfaction with compensation, with 60% of those responding saying they were not fairly compensated. Chapman says the time necessary to run these businesses is sometimes frustrating: “Directors often look at these businesses, insurance in particular, and say, `This looks easy.` But it`s not easy.” Overall, the workload has increased greatly at banks, partly due to regulatory pressure, and partly due to new areas of business that banks must learn about and manage, he says.And what about performance-based payu00e2u20ac”do directors favor it? Philosophically, it would appear that about half of our respondents favor director compensation that is tied to bank performance, though only 8% of our survey group actually participate in one. Chapman notes that in his experience, higher-performing banks tend make it a factor in their compensation packageu00e2u20ac”for those directors, it`s understandable why pay would be linked to performance. But there`s risk with this approach as well, and for underperforming institutions, or during years when economic conditions would make it difficult to reach their goals, some boards may be reluctant to tie their comp levels to outside factors. This year`s percentage of directors favoring performance-related pay is down slightly from 1999, a more optimistic time when bank profits were on the upswing and the stock market hadn`t yet hit its 2000 downturn. Our survey revealed that larger banks are only slightly more in favor of performance-based pay than those at smaller institutions, although those at banks $5 billion and greater are more likely to participate in such a program. For those who did respond affirmatively to receiving pay linked to performance, banks use the following factors most often to determine pay levels: ROE, 49%; ROA, 40%; stock appreciation, 27%; and efficiency ratio and business development tied at 12%. [Note: Respondents could choose more than one answer to this question.] Who is making compensation decisions for the board? According to two-thirds of those surveyed, board members are responsible for setting their own compensation levels, followed by the compensation committee, 26%; CEO, 20%; and chairman, 16% (again, respondents could choose more than one answer). These percentages hold true across the community bank asset sizes (where by far the majority are closely held, or widely held but thinly traded), but the compensation committee is far more likely to prevail at banks $1.1 billion and larger.
The bottom line
The vast majority of directors who responded to the survey say they continue to serve on the board because they find it to be a worthwhile endeavor. “This is a small town, and I have always admired the bank directors. I have managed my own business for 30 years and I thought I could contribute to the bank. It has been a rewarding experience,” wrote one board member. Others say they want to support their community and to protect their investment in the bank. Money, clearly, is not the leading factor. Yet, when it comes to the changing face of the board, the subject of compensation rises to the forefront. In a world where time constraints force directors to be increasingly selective about outside commitments, compensation and related benefits become the only way to attractu00e2u20ac”or more importantly, retainu00e2u20ac”good members. “In many cases, it`s not so much the liability issue anymore,” says Bob Miller, president and CEO of Bank Compensation Consulting in Minneapolis, “it`s the time factor today.” Many who commented on the survey revealed that the time spent in meetingsu00e2u20ac”and the preparation for themu00e2u20ac”adds up to an overwhelming obligation for a minimal amount of pay. One director`s comment speaks volumes: “I am not a banker by profession; however, if I billed at my professional hourly rate for time spent only, my compensation would exceed $150,000, rather than $19,500.” Though most directors agree that the fees should not be the sole reason for serving, their level and method of pay remains an ongoing, if somewhat thorny, issue. The best approach is to open lines of communication, gather information on current pay practices and peer group comparisons, and in some cases, seek out professional guidance, so that ideas and discussion about compensation can be properly vented in a fair and objective manner. (Note: Bank Director would like to thank Rich Chapman and Tim Klein at Bank Compensation Strategies Group and the directors who participated in this year`s survey who made the research for this article possible.) BD