2010 Director Compensation Review

Since our last compensation survey in 2008, the financial landscape-indeed the entire economic environment-has changed dramatically. As a result, directors can add disclosure requirements and for some, profitability woes, to their ever-expanding list of ongoing board concerns: risk management, liability, recruitment, and regulatory oversight. With the additional workload, directors are expecting to increase the time they spend performing their duties and will do so under closer scrutiny in the wake of investor and activist calls for transparency.

But how are these environmental changes and internal challenges affecting board compensation? In June we polled 777 bank directors and insiders to find out. Our goal was to arrive at a fair determination of compensation for 2009 and to look for trends and gather opinions about the outlook for 2010 and beyond.

Study overview

The study began by addressing the oversight of executive and director compensation programs. When asked how well their board is handling director compensation, approximately two-thirds indicated their board is managing the program well (36%) or very well (32%). That leaves a third of respondents who are either neutral (22%) or unhappy (10%) with regard to board management of director compensation. A slightly higher percentage, 74%, believe their board is managing its executive compensation program well (40%) or very well (34%).

Delving deeper, we found that compensation committees are most often responsible for setting director compensation levels, according to 42% of those surveyed. We also discovered that the higher the asset size of the bank, the more likely it is to use a compensation committee for this task. Approximately one-third of our respondents indicated the full board has this responsibility and another 11% say the CEO handles this task. Furthermore, nearly two-thirds say director compensation has been reviewed at their bank in the last six months (34%) or 12 months (30%). Sixteen percent say it’s been more than a year, and a surprising 17% say it’s been more than two years since their compensation was reviewed. More de novo banks (49%) than nonu2013de novo banks (31%) have reviewed director compensation within the last six months.

Given the strident demands for transparency and disclosure in the wake of the financial meltdown, it’s not surprising that nearly two-thirds (64%) of respondents predict that say-on-pay proposals at publicly traded companies will increase. Another quarter (26%) believe there will be no change in the number of say-on-pay proposals, with only 10% anticipating a decrease. While these proposals are still more likely to affect executive remuneration, director pay practices often follow suit. And although executive compensation decisions have historically been the board’s bailiwick, some shareholders and activists seem intent on making it a more public discussion. “We try to keep director [pay] at or below the median of our peer groups to avoid questions about fees,” one board member noted.

Similarly, 29% of respondents chose performance pay metrics as the most challenging issue facing the bank’s compensation committee, although 72% indicated that performance metrics do not currently play a role in their bank’s director compensation plan. However, the larger the asset size of the bank, the more likely it is to use performance metrics to guide director compensation. The second most-challenging issue chosen by 24% of respondents was gathering and understanding peer/comparison data for compensation analysis. Regulatory compliance was selected by 17% of respondents as difficult for the compensation committee to handle, with another 12% selecting long-term incentive plans (Figure 1).

In an effort to assist your board in tackling these issues and others, we’ve collected data on cash compensation as well as equity pay, breaking those numbers down as necessary by bank type, asset size, and region.

The elements of director pay

To gain a more in-depth look at director pay, we’ve categorized our survey data into four basic compensation components: board fees, including meeting fees and retainer; committee fees, which also include meeting fees and retainer; equity income; and benefits. In doing so, we found that nearly two-thirds of outside directors (62%) receive full-board meeting fees, just under a third (32%) earn an annual cash retainer for board service, and 16% receive equity compensation. Forty-two percent receive both board meeting fees and an annual retainer.

Board meeting fees are more common at nonu2013de novo banks (88%) than start-ups (71%) but are offered fairly consistently across asset ranges. Meanwhile, as the asset size of the bank increases, so does the likelihood that it includes an annual retainer as part of its compensation package, which is also the case for equity compensation. Furthermore, significantly more public bank representatives (63%) indicated their board offers an annual retainer than those from private banks (31%); likewise 38% of respondents from public institutions said their board offers equity compensation to outside directors compared to 12% from private banks.

Nearly 30% of respondents indicated the board chairman receives board chair meeting fees, and 21% said their chairman earns an annual chair cash retainer. Only 7% indicated their board chairman receives equity compensation, though that number rises to 33% for banks with more than $5 billion in assets. Seven percent also indicated their board chairman receives other cash compensation for his or her leadership.

Committee meeting fees were selected as part of outside director compensation by about half of the respondents (48%). Again, as the asset size of the bank increases, so does the likelihood that it includes committee meeting fees in its compensation package, and public banks appear to do so at a considerably higher rate than private banks.

Board fees and retainers-After analyzing this year’s data, it appears that cash compensation figures have decreased slightly overall for both holding companies and lead bank boards since our last survey two years ago. Director retainer medians have remained fairly steady, though retainers for chairmen have decreased somewhat. Board meeting fees have dropped across the board, though the number of meetings per year is unchanged (Figure 2).

The overall median annual cash retainer for directors we surveyed is $10,000, up slightly from the 2008 figure of $9,600. The median remains at $10,000 when viewed for holding company boards and sits at $8,000 for lead bank boards (both figures are constant from 2008). The median annual cash retainer for directors of de novo banks is $7,500, a slight drop from 2008’s $8,000.

The overall median board meeting fee is $600, down $100 from 2008, with a $600 median board meeting fee at holding companies and a $572 median board meeting fee at lead banks. Again, the median fee for de novo banks is a little lower, at $500.

When analyzed by asset size (Figure 3), annual retainers and board fees show a parallel relationship to asset size, with most fees increasing as the size of the bank increases. In terms of range, the median annual retainer for directors at banks greater than $1 billion in assets is nearly three times that of the annual retainer for directors at banks $250 million and less. Similarly the median board meeting fee for directors at the largest banks is more than twice the amount received by directors at the smallest banks.

In a sign of the times, several directors said their banks have ceased paying fees due to poor performance; others sit on the boards of start-ups that have not yet begun compensating directors. “We reluctantly suspended fees until the bank reaches sustained profitability,” explains one director, while another notes: “We are a de novo bank and are currently not paying compensation to directors. We have been looking into this and are preparing to do so once we make a profit.”

Committee fees and retainers-A considerable amount of the board’s business is conducted via committee. For a clearer understanding of how much directors are paid for these duties, we’ve isolated fees for the major committees at both holding companies and lead banks (Figure 4) by director fees per meeting and by annual retainer, as well as chairman fees.

According to our survey, audit committee members are the highest paid on a per-meeting basis ($500 median at holding companies, $318 median at lead banks). Audit committee members at holding companies are the most likely to receive annual retainers for committee work; the same is true for audit committee members as well as loan committee members at lead banks. With regard to chairmen, annual compensation for committee work is up significantly across the board, with the exception of a slight decrease in fees for governance/nominating chairs at lead banks. Executive committee chairmen at both holding companies and lead banks receive the highest annual fees. This is a reversal from two years ago when exec committee chairs at holding companies received the least highest annual fee.

With regard to time spent on committee duties, our survey found that loan committee members meet most often, an average of nine times per year at holding companies and 21 times annually at lead banks, followed by executive committee members, who meet an average of seven times per year at holding companies and nine times annually at lead banks.

Equity pay-The median amount of full equity granted is $12,000. According to survey results, nearly 40% of respondents sit on boards that issue stock ownership guidelines for directors. Such guidelines are more likely to be found at public banks (54%) than private banks (28%). There is a general relationship between asset size and the institution of such guidelines, with larger banks more likely to encourage stock ownership than smaller institutions. When asked to identify the requirements, 67% of those serving boards with guidelines must own a minimum or fixed number of shares.

Sixteen percent have to maintain a minimum share value and 12% are required to have a multiple of their annual retainer in stock. This requirement is more frequently found among those serving banks over $1.1 billion in assets. Only 7% of respondents serving boards with stock ownership guidelines have holding periods.

Benefits-Seventy-two percent of those surveyed indicated their bank offers benefits to outside directors. Of those boards that offer benefits, 28% cover travel expenses, 18% provide a deferred compensation plan, and 9% offer life insurance.

One director commented that “in today’s volatile environment, group health insurance for directors would be a very valuable benefit,” and another suggested that LTC insurance would be beneficial.

Time spent on the job-Compensation may be down overall, but the median time spent on director duties is up from 12 to 15 hours per month and varies widely when broken out by asset size (Figure 5). Looking ahead, 70% of those surveyed anticipate keeping director compensation the same in 2011, despite the increase in workload. Another 28% expect their board will increase director compensation-only 2% foresee a decrease in compensation for the coming year. More de novo banks (39%) than nonu2013de novo banks (26%) anticipate an increase in compensation in 2011.

Risk vs. reward

With a pay profile in hand, we wanted to find out which incentives matter most. When a candidate considers joining a board, what are the compensatory tipping points? Sixty-seven percent of our respondents say the level of cash fees/retainers is important (39%) or very important (28%). Paid expenses for board service also rated highly, with 64% labeling this perk as important (33%) or very important (31%). Similarly, equity compensation is deemed worthwhile, with 60% rating it as either important (37%) or very important (23%). Deferred compensation and the potential for bonus/performance pay were each chosen by approximately one-third of those responding.

As one survey participant noted, a lack of incentives can have a direct effect on board recruitment: “The bank is not profitable and therefore is not entertaining compensating directors, which is making the search for new directors quite difficult.” Several others agreed that finding and retaining qualified directors has become much more difficult and that an increase in compensation is necessary to attract more desirable outside directors.

In exchange for the rewards, directors must deal with the inherent risks involved in board service. Enterprise risk management has become a priority in the industry, particularly in the wake of the financial crisis. Perhaps not surprisingly then, 84% of study respondents indicated that the risk of liability has increased for outside directors over the last 12 months, a level that reflects a 75% jump in the concern over liability since 2007. Fifteen percent of 2010 respondents believe the risk of liability for directors has remained steady, and less than 1% believe there has been a decrease in the threat of liability. These figures are consistent across demographics.

A few directors felt the need to sound off on this issue. One noted the lack of balance in director liability versus compensation compared to that of bank officers: “Directors’ risk has increased substantially as regulators threaten directors. CEO/COO-led banks seem to favor the bank officers’ compensation more than the directors and ignore the real risks that the poorly compensated directors assume.” A second agreed, saying, “The regulatory environment has polarized shareholders and management (and the board) while simultaneously increasing director workload, responsibility, and liability. Yet the polarization has made it difficult for directors to be compensated appropriately.” And a third summed it up by saying, “Serving on a bank board today is quite the conundrum. Risk is up, time is up, regulation is up, [but] satisfaction is down, and sense of helping the community is down, which is the real reason I serve.”

A duty of care

Despite their concerns and the challenges that lie ahead, most directors still feel it is an honor to sit on a bank board. And though compensation for their efforts is important, it’s obviously not the only reason they serve; in fact, over the years, many directors have told us that it would be difficult, if not impossible, to compensate them fully for the time spent and liability incurred on a bank’s behalf.

“We have a great bank, and I am proud to be on it” is a theme we’ve heard throughout the years this survey has been conducted, though less often than we used to, given the growing complexities of the job and the current state of the industry. But considering that more than 50,000 directors serve on public and private bank boards today, the benefits, both tangible and intangible, still appear to make directorship worthwhile.

Bank Director would like to thank Blanchard Chase for its contributions to the 2010 Bank Director Compensation Survey.

Respondent Profile

Of the 777 surveys returned, 40% were from respondents representing banks under $250 million in assets; approximately one-quarter (24%) were from those in the $251 million to $500 million range; 19% were from banks more than $1.1 billion in assets; and 17% were from banks in the $501 million to $1 billion range. The typical survey respondent is a CEO or outside director at a private, mid-sized bank in the Midwest.

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