How Director Comp Stacks Up

Ask a handful of bank directors why they serve on the board and at least one of them is likely to confess: It’s fun.

But when things cease to be fun because of dissention among board members, regulatory scrutiny, or the growing mound of work, directors begin to ask themselves why they’re still serving. And looking at their compensation usually doesn’t provide any clues. For most, their payu00e2u20ac”as director Edward B. Cornell puts itu00e2u20ac””isn’t the difference between beans and steak.”

According to Rich Chapman, president of the banking division of Clark/Bardes Consulting in Minneapolis, most banks still lag behind other companies when it comes to compensating directors. But these days, he says, few directors are likely to get upset about that.

“Company directors aren’t right now saying ‘Hey we’re doing great. What’s in it for me?” Chapman says. “The time to be bullish about your own paycheck and benefits compensation is when you’re knocking it out of the park and thinking, ‘I have had something to do with this.’” Now, Chapman says, “No one’s in the mood.”

The mood is similar, he says, to that experienced during the troubled days of banking in the late 1980s and early 1990s. “The same kind of mood has settled in. It’s, ‘Yes we’re doing fine. Returns to shareholders are good. But I’m not ready to talk about this stuff right now.’”

Take, for example, the $96.5 million Finance and Thrift Company of Porterville, California. Edward Cornell has worked as a director there for 33 years and says he doesn’t think much about compensation. He earns $500 a board meeting and $75 a committee meeting. Directors get a bonus at the end of the year when the bank has performed well: usually between $2,000 and $3,000. The board has talked, he says, about offering stock options. But the discussion hasn’t gotten very far. “We’re in the process of forming a holding company,” Cornell says, “We’ve got more important things cooking.

Other directors, while interested in making compensation packages fit the changing workload, don’t seem to expect those changes to literally cover the value of their service. But they have batted about ideas like performance pay in the form of stock options or bonuses. Directors, Chapman says, have not shied away from stock as a valuable piece of the compensation package, despite the sagging economy. “Directors are more patient with the value of the options or stock,” Chapman says. “Their stock ownership is not their primary capital accumulation plan.”

Increasingly, banks are giving directors opportunities to defer cash retainers. Five years ago, Chapman says, about 20% of small banks offered deferred payment whereas about 40% do now. While most banks pay a set fee per meeting, the increased workload has some boards casting about for other means of payment.

Laconia Savings Bank in Laconia, New Hampshire recently revised its compensation package from a per-meeting fee to an annual retainer. Director John F. Weeks Jr. says it seemed like the meetings were multiplying and some directors were putting in considerably more time and making considerably more money than others. The $640 million institution hired a consultant to help redistribute the work and pay. The board’s loan committee, for example, met weekly. Now it is a function of management and meets biweekly. As a result of the restructuring, all directorsu00e2u20ac”except committee chairs who are paid moreu00e2u20ac”get about $24,000 a year plus a retirement benefit of about $6,000 annually after age 70.

“We’ve had significant growth in the past two or three years,” says Weeks. “These revisions were made in an effort to have the directors concentrate on setting policy, on the oversight role and to get away from being involved with the minutiae.”

Still, Weeks says, the compensation compared to the work that is done is nominal. But for most of the directorsu00e2u20ac”the retirees and those with large companiesu00e2u20ac”that’s no problem. They are there, he says, because they enjoy it.

Bill Eddy, a director of $200 million Metcalf Bank in Kansas City says he gets paid $300 a meeting. He would possibly be interested in stock options if they were offered. But his primary reasons for sitting on the board are the business and the peopleu00e2u20ac”many of the directors on Metcalf Bank have been friends of his for years. “I serve on a lot more boards than I want,” Eddy says. “I like to serve on boards of businesses that I am excited about, interested in, and those for which I feel I can make a significant contribution.” Employee-owned Metcalf Bank fits that description.

Jeanne B. Granstoff tells a similar story. Her husband’s family helped found $47 million Perryton National Bank in Perryton, Texas. She is content with her $500 a month director’s pay and her long-term relationship with the bank.

Not so Raymond Folwell.

State National Bank in Garfield, Washington pays Folwell $100 a meeting. He didn’t mind that so much at first, when the then-$10 million bank sought his experience as a professor of agricultural economics to help with its mostly agricultural loan portfolio. He was the only director; his expertise was valued; and it gave him a lot of fodder for his classes.

Then the bank changed. It opened offices in Spokane and moved meetings there, meaning a 75-mile drive each way for Folwell. It quadrupled in size in three years. Part of that growth was through added directors whose heavy investments dwarf Folwell’s small number of shares and make him feel his vote counts for less. “These are major developers and contractors,” he says. “They could buy and sell me with one swipe of their pens.”

Part of the growth was through loans to insiders which brought the Office of the Controller of Currency swooping down. “It was a fun thing to do until this latest run-in with the OCC,” he says.

Only two of the loans remain outstanding and neither borrower has missed a payment. Still he says, “It makes you feel a little uneasy for the amount of personal investment to be liable for those two loans.” Now, Folwell says, even if they paid him $1,000 a meeting, it wouldn’t compensate for the dread of having responsibility for those loans.

Had State National wanted to hire Folwell as a consultant, he says, they never could have paid the outrageous fees he receives. And that, according to another director, Clayton Sparrow Jr., is the problem.

Sparrow is an attorney in Atlanta and a founding director of $350 million Summit National Bank and Summit Bancorp. He receives $600 per board meeting and gets stock options, but he’s still losing money compared to the $300- to $400-per-hour he could be making as an attorney. He would like to see the bank add an annual payment to directors for all the work that isn’t covered at meetings, such as reviewing loan packages, discussions among directors about strategic issues, and management review opportunities.

Sparrow is also in favor of paying directors based upon their performance, and his board has considered insurance-based programs with deferred compensation. “We’ve talked about it, but we decided not all board members are created equal,” Sparrow says. Some of the directors, he says, aren’t really that involved, while others spend a lot of time working for the bank.

Generally, Sparrow says, banks haven’t offered compensation packages that would make it attractive for the very best people to serve on their boards. Neither is it easy to innovate when it comes to compensating directors. “It comes up once a year, and there’s always the tension between paying fairly and the appearance of self-dealing, the concern for what shareholders are going to think about it. It’s very important to use surveys and reports of what other banks are doing.” He remains committed to Summit, which specializes in serving small businesses, especially those that are internationally oriented or ethnically owned. Still, he says, “You shouldn’t have to take a loss to be a director.”

Laconia Saving’s Weeks says what he most worries about is future recruitment. Attorneys, like Sparrow, and CPAs and other self-employed people who get paid in billable hours may not find it worthwhile to serve on bank boards as older members retire. Already the pool of potential director candidates is evaporating for small banks as local businesses are replaced with national chains. Local managers of these chains, he says, are too busy to serve. “We feel like the biggest difficulty for us is to find younger people still active in business in the communities we serve,” Weeks says. “It’s not so much the liability factor. They just don’t have time. They don’t have the freedom that a business owner has.”

Increased compensation can help with the independent operator, he says, but not with someone whose out-of-town obligations won’t permit him the time to serve. Interestingly though, smaller banks have a draw that larger banks with better-paid boards may lack. The fun factor.

Steven Dillinger, director of Metro Bank in Noblesville, Indiana, acknowledges that he’s hoping his bank-offered stock options pay off. Moreover, the board just got a raise and he now receives $550 for meetings and $150 for committee meetings. But, he says, the compensation is secondary. He’s there because the executives and the board are close.

They are working together as a team to build the bank. “You really don’t do this for the compensation,” he says.

That feeling gets harder to achieve as banks grow. When Weeks started at Laconia in 1973, his role as a director was a personal matter. He knew most of the employees and immersed himself in every aspect of the business. Now he says he never lays eyes on most of the 200 employees, and nearly all his information comes from formal sessions with management.
John Sterling, director of First Midwest Bancorp in a suburb of Chicago, relates a similar experience. Sterling was director for a small community bank where directors met monthly, and he had input into much of the day-to-day operations. Then his company was acquired. He was pleased to be chosen to serve on the board of the acquiring company, a $6 billion bank whose directors meet quarterly. The pay is satisfactory. But he says there’s little opportunity to develop the camaraderieu00e2u20ac”the sense of being on a team.

Of course, there are other things besides fun and profit. Michael Talley, a broker in New York, can’t recall what his board service pays him. Maybe it’s $200 a meeting. And there are stock options. A loyal son of Michigan, Talley works on the board of University Bancorp, a $60 million bank holding company in Ann Arbor and believes he has a divine mandate to serve.

“God told me to,” Talley explains. “I always do what God tells me to do, and sometimes I make money and sometimes I don’t.” |BD|

In its sixth annual director compensation study, Bank Director polled 4,000 financial institution board members in our ongoing effort to provide a useful framework to help boards set their compensation levels. Each year we also attempt to hone in on compensation-related issues that all boards grapple with at one time or another: insider fees, performance-based compensation, amount of pay versus liability, and the need for additional benefits, to name a few.

Directors we surveyed proved there is no shortage of opinions about how much one is worth or whether one’s compensation is fairu00e2u20ac”the subject strikes a natural chord. Overwhelmingly, though, directors offered positive comments, describing their role as “interesting,” “exceeding expectations,” and even “a thrill.” Clearly, the honor and experience they receive on the job are what drives many board members to accept their positions, rather than remuneration.

Nevertheless, banks continually compete for a slice of their directors’ time, and from time to time, they must recruit new members. The dearth of qualified directors means institutions must stay on top of compensation trends and maintain equitable comparisons with their peer groups. The following research has been compiled to assist community and mid-sized bank boards with these challenges.

Survey profile

The majority of directors responding to the 2001 survey listed their title as outside director (67%). Other categories of respondents were inside director (18%), CEO (17%), and chairman (14%). The average length of time that respondents have served on the board is 14 years. Most reported that their boards have two to three insiders, and an average of seven outside board members. Again this year, the majority of responding directors serve on banks headquartered in the Midwest (38%). Responses to questions based on asset size were broken down into five categories: less than $100 million (40%); $100 million to $250 million (29%); $251 million to $1 billion (26%); $1.1 billion to $5 billion (4%); and those greater than $5 billion (2%).

Compensation comparisons

As the comments from the accompanying article make clear, for directors at smaller community banks, the amount of compensation they receive is less of a motivating factor to serve on the board than the intangible benefits of the position. In nearly all asset categories, approximately 80% of directors believed they are fairly compensated for the duties they perform as directors and the time required on the job, which, on average, was just upward of 11 hours per month.

Total compensation figures for the 2001 survey support a positive correlation between asset size and director compensation (see Figure 1). Directors serving on bank boards of institutions under $100 million in assets reported average annual total compensation of $7,282; those from banks between $101 million and $250 million average $11,133; those from $251 million to $1 billion average $15,705; those from $1.1 billion to $5 billion reported receiving $18,912; and those from institutions with more than $5 billion average $34,186. Average total compensation across all asset sizes is $11,690, somewhat down from last year’s survey average of $13,816 (see Figure 2).

Geographically, directors in the Mid-Atlantic and New England report receiving significantly greater compensation that those in other regions (see Figure 3).

The individual elements comprising director pay are slightly lower this year across all asset sizes. Annual retainers average $8,284; annual board meeting fees average $6,000 annually for approximately 14 meetings per year, and annual committee meeting fees average $2,887 for approximately 16 meetings per year. A breakdown of these components by asset size is shown in Figure 4. Discrepancies by asset sizes are more sharply evident in the area of annual retainer; meeting fees show less of a disparity by asset size.

The parties responsible for setting director pay also vary across asset size: Smaller community bank boards are more likely to have the board set its own compensation levels. Larger institutions ($1 billion or more in assets) are more likely to employ a compensation committee along with the board’s input.

Bank Director asked respondents to describe how they would divide the calcuation of their annual compensation among five categories: annual retainer, earnings performance, peer group performance, stock price, and other. Overall, directors would prefer to receive 48% of their pay in the form of an annual retainer, with another 21% based on earnings performance, 11% based on peer group performance, 8% on stock price and another 11% on some other factor.

Benefits picture

Directors at many institutions receive stock awards and some garner other benefits, including life insurance, medical insurance, travel expense reimbursement, and charitable contributions made on their behalf, as well as retirement benefits (see Figure 5). Numerous survey comments touched upon directors’ desire to have their institutions provide additional benefits. “Directors should be given the opportunity to participate in stock options, insurance, and retirement plans,” noted one directoru00e2u20ac”a sentiment echoed by several others.

Twenty-two percent of directors we surveyed reported receiving stock options, 5% receive stock grants and 2% receive stock appreciation rights.

Figure 6 represents compensation and benefits for large financial institutions survey by William M. Mercer.

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