2002 Bank Director Annual Compensation Review

For its seventh annual director compensation study, Bank Director polled 5,000 board members in a continuing effort to benchmark compensation levels and allow directors to register their opinions on hot topics in today’s boardroom, including liability, performance-based pay, benefits, and ethics.

We received nearly 700 responses from directors at banks ranging from less than $100 million to more than $5 billion in assets. Over the years, we have found that while sometimes size does matteru00e2u20ac”and the bank’s asset size can be a good predictor of how a director will respondu00e2u20ac”other issues transcend dollar value and strike a chord with those at every size bank, from every region of the country. Thus we hope you find this information useful not only for peer group comparisons, but also to get a feel for others who walk in your shoes regardless of their bank’s holdings or geographic locale.

Director profile

Our typical respondent holds the title of outside director (58%) at a community bank (75% under $1 billion in assets) headquartered in the Midwest (43%), has been a director for about 16 years, serves on the holding company and lead bank boards with five to six outside directors and two to three inside directors, and sits on at least one of the following committees: loan, executive, or audit. He or she spends just over 14 hours a month on director duties, attending approximately 12 board meetings and 16 committee meetings annually.

Compensation overview

As in years past, directors have made it clear that compensation is less of a motivating factor than the intangible benefits and prestige that come with serving on their local bank board. Most (83%) are satisfied with the remuneration they receive, though several make the point that cash compensation means less than the opportunity to help maintain or improve shareholder value. As one director put it, “Compensation of directors is irrelevant. What is relevant is how much are they invested in the company and to what extent they are engaged by their investment.” Another echoed those thoughts, writing, “I serve on the board because of equity on stock holdings … compensation [is] not important.”
Others, however, wouldn’t mind being paid more for their efforts, especially considering the risks involved. “I don’t know a fair way to determine compensation for the liability risk. Since my equity interest in this bank is large, I gladly serve on these boards and committees, [though] compensation for doing so probably should be raised,” noted one director. Forty-seven percent of those responding to our survey do not feel adequately compensated for the liability risk they assume and 51% believe their risk has increased in the last year, while another 45% indicate their risk exposure has remained constant.

Upon closer examination, the total compensation figures for income received in 2001 continue to show a positive correlation between asset size and director pay (see Figure 1), with average amounts ranging from $7,652 up to $28,841 and median amounts ranging from $5,250 to $27,075. Average total compensation across all asset sizes was $12,777, up slightly from the previous year’s average of $11,690 (see Figure 2). The median compensation rate also increased $1,000 to $9,000. Geographically, directors in the Mid-Atlantic and New England again reported the highest pay levels, along with directors from the western states, a region that showed a substantial increase over last year’s survey average (see Figure 3).

The individual elements comprising director pay also increased across all asset sizes, with the exception of retainer fees for the largest banks surveyed ($5 billion and up). The average annual retainer in 2001 was $11,846, up more than $3,000; total board meeting fees averaged $7,732 for approximately 12 meetings per year, and annual committee meeting fees averaged $4,852 for approximately 16 meetings per year. (For a breakdown of these components by asset size, see Figure 4.)

Directors who responded to our survey estimate spending a total of anywhere from two to 200 hours a month on board activities, with a strong correlation to asset size: Generally, the larger the bank, the less time spent on director duties.

But as one director commented: “Bank director fees should not be regarded as ‘compensation’ for services rendered. The value of the talents and efforts of directors far exceeds any ‘fees.’ [It’s] more like a door prize than salary.”

Beyond cash compensation, equity benefitsu00e2u20ac”stock options, restricted stock, SARs, phantom stocku00e2u20ac”are more likely to be found at larger asset-size institutions (more than 50% of directors surveyed at banks $1 billion and above receive some form of equity compensation).The vast majority (77%) of those surveyed do not receive any equity pay.

The responsibility for determining director pay also varies across asset size: Community bank boards are more apt to set their own compensation levels, whereas larger institutions ($1 billion and above in assets) generally rely on a compensation committee along with board input. The most popular tool used for setting fees across all asset sizes is peer review; other methods include trade associations, consultant reports, and independent publications. Two-thirds of those surveyed report reviewing director compensation at their bank within the last year.

Then there’s the question of how to calculate director compensation and whether pay based on performance is the new-age measuring stick. Only 13% of our survey respondents indicated that their compensation is tied to bank performance, but that’s up 8% from last year. Of those 13%, 58% report their pay is tied to ROA and 49% to ROE; other measures used include stock value and business development. [Note: Respondents could choose more than one measure.] Nearly 50% of those surveyed said they favor director compensation tied to bank performance, which is also up, albeit slightly, from 2001.

Almost 90%, however, believe that directors can objectively promote the interests of shareholders without performance-based pay. “[Our] outside directors are all major shareholdersu00e2u20ac”therefore performance-based compensation is not a factor for directorsu00e2u20ac”decisions by directors promote the interests of shareholders,” one director explained. Another added: “I am one of the largest shareholders … therefore I have an interest in protecting shareholders [without performance-based compensation as a motivator].”

This leads to the question of whether directors should be required to buy and hold bank stock, an issue on which our survey respondents were almost evenly split: 50.5% said yes, 49.5% no. Furthermore, when asked if they are required to own a minimum number of shares in order to serve, 48% said yes, 52%, no. The comments offered were just as divergent. “As an outside director, I feel it is important to have some stock ownership, even if one feels right in the decision-making process without being a stockholder. It gives you a little different perspective,” one director pointed out, while another advised, “Directors are responsible to shareholders for protecting and improving their investmentu00e2u20ac”but they should avoid conflict by not owning shares.”

Finally, when asked how they would prefer to be paid, as a whole our survey respondents indicated they would choose a 75/25 cash/stock split and would like to receive approximately 20% of their earnings in deferred compensation, with directors from larger banks generally opting for more stock and a higher percentage of deferred compensation than those at smaller-sized institutions.

Benefits breakdown

Directors at a growing number of institutions receive stock, bonuses, and other awards, both in appreciation of their service and in recognition of their bank’s success. In fact, this year’s survey shows that nearly 60% of respondents receive some form of benefits, a better than 20% increase over last year. These perks may include life insurance, medical insurance, travel expense reimbursement, charitable contributions made on a director’s behalf, education/training, and retirement benefits. (For a complete breakdown, see Figure 5.)

As a result of increased public and governmental scrutiny on corporate governance practices, director education and training is an area that is gaining boards’ attention. After numerous comments made by directors in past surveys about the lack of director education, we decided to ask how many directors actually receive this benefit. This year, nearly one in four directors report receiving some form of director training or education, a trend we would expect to increase given recent events. “The sense of responsibility accompanying the director position has become magnified given the events of this past year,” one director wrote. “Even more attention to detail and knowledge of the role is required.” Another director asserted, “Continuing education should be required of directors and paid by the bank on meaningful topics: audit, secrecy, management succession, strategic planning.”

Retirement benefits such as deferred compensation is another area garnering interest, especially as the issue of a mandatory retirement age for directors heats up. This year’s survey indicates that 37% of respondents serve at banks that have a mandatory retirement policy, with an average maximum age of 70 for board service.

(Editor’s note: Bank Director would like to thank Clark/Bardes Consulting for its assistance on preparing the questionnaire for this year’s survey.)