Bank Directors Work More Hours For Less Pay
It’s not easy being a bank director these days. Bank Director magazine’s annual compensation survey co-sponsored with Blanchard Consulting Group bears that out.
Board members at smaller banks are, in some cases, working longer hours than last year. Fewer banks are compensating bank directors for attending meetings or offering benefits. And fewer directors think their organization is doing a good job handling compensation issues than last year.
The survey, conducted in July and August, came in the midst of an economic slump and fears of a double dip recession. Boards at many banks are contending with slow growth, low margins and still struggling loan portfolios. Plus, they have a host of new federal government regulations that must be addressed at the board level, including a new rule that boards must review incentive compensation policies for all staff.
The compensation survey was sent to 8,675 U.S. bank CEOs and directors via e-mail on July 21, Aug. 4 and Aug. 18. Surveys were returned by 617 people, for a response rate of 7.1 percent. Because of rounding, not all responses in the survey add up to 100 percent.
Longer hours on the job
The median number of hours board members spend on the job for all asset sizes is the same as last year, 15 hours per month, according to the survey.
However, for some smaller banks, those under $100 million in assets, the median number of hours on the job went from 10 hours per month last year to 15 hours. Banks between $251 million and $500 million in assets are spending 16 hours on the job, three more than last year.
However, larger banks, from $500 million in assets or more, do not report an increase in hours on the job.
Matt Brei, senior vice president and partner at Blanchard Consulting Group, says he sees compensation committees are having much more comprehensive conversations than they used to have, in part because of increased regulatory requirements resulting from the Troubled Asset Relief Program and the Dodd-Frank Act, to name a few.
“(Compensation committees) don’t have to be experts on compensation in all levels of the bank, but they certainly need to know what’s going on and be comfortable with the risk that is being taken,” Brei says.
Fewer board members are getting paid
The difficult financial condition of some banks also may contribute to fewer bank directors getting paid for board meetings. The most common form of compensation for outside directors is board meeting fees, with 51 percent of all banks paying them. That was down from 62 percent of respondents who said their bank paid meeting fees last year.
Twenty-eight percent also get a cash retainer, down from 32 percent last year. However, for the banks that continue to pay fees and retainers, the median amounts stayed the same as last year, $600 for a full board meeting and $10,000 for an annual retainer.
Fifteen percent of respondents to the survey say they get some sort of equity compensation, compared to 16 percent last year.
The bigger the bank, the more likely it will pay equity compensation or retainers. Not surprisingly, few privately owned banks compensate directors with equity, only 6 percent. Twenty-three percent of public banks, on the other hand, pay equity compensation.
Benefits also appear to have eroded. Thirty-nine percent of banks offer no benefits at all to board members, up from 28 percent last year, with the percentage of private banks offering no benefits higher than public, 44 percent to 35 percent.
Nineteen percent of bank boards pay directors’ travel expenses, compared to 20 percent last year. Fifteen percent offered a deferred compensation plan, compared to 13 percent last year. Six percent offer life insurance, compared to nine percent last year.
“Benefits are the first to go,” says Mike Blanchard, CEO of Blanchard Consulting Group. “If net income is down and the company is not performing well, and executives are being asked to be more frugal, to not travel as much and reduce expenses, then boards are going to say, ‘We should do so as well.’”
Brei says this trend of flat or lower compensation for directors has been consistent during the last three or four years.
“What the challenge is, with the increased scrutiny (of board decisions) and the expertise that’s needed, how do you get the right people to serve on the board?” he says. “A community banker can still find a business owner or someone with a strong presence in the community to serve on the board, but now you need someone who has risk expertise and compensation expertise, and that can get more difficult.”
Blanchard worries that some banks may have trouble attracting good directors when they don’t pay anything.
“There is a perception of risk out there, that it is risky to be in the banking industry,” he says. “I believe it’s going to be difficult to attract directors if you’re not competitive with other organizations out there.”
Banks by and large don’t plan to increase director pay next year, either. Nearly three-quarters, or 71 percent, plan to keep director pay the same next year. Twenty-eight percent plan to increase it.
Job satisfaction falls
Satisfaction with the board’s job of handling compensation issues also has gone down. This year, 63 percent of respondents give their board high marks for managing the executive compensation program. That compares to 74 percent last year who said their bank was managing executive compensation well or very well. This year, 56 percent think the board is managing director compensation well or very well, compared to 68 percent last year.
Blanchard says this decline in satisfaction might have to do with the host of new regulations on the table, including compensation regulations coming out of the passage of the Dodd-Frank Act last year.
“With all the scrutiny and the new guidelines, it may be (directors) are unsure if their changes are appropriate with the guidelines,” he says.
Only 34 percent made any changes to their compensation this year. Twenty-nine percent say they have implemented a clawback provision on executive pay. Of those who do have a clawback provision, 65 percent have one for the management team, and 60 percent have one for the CEO.
The lack of changes surprises Blanchard.
He says part of the new regulations require bank boards to review all incentive pay policies, including those for mortgage officers at the bank. New rules strictly prohibit certain kinds of incentive pay for mortgage officers and brokers, which was thought to encourage risk-taking during the financial crisis.
Top problems for compensation committees
Despite all the frustrations about new regulations, the two top challenges for compensation committees are the same as they were last year. Pay-for-performance metrics and the gathering/understanding of peer comparison data were both rated by 26 percent of the respondents as the most challenging issue.
Blanchard and Brei say having a good strategic plan will help align pay with performance.
“You really need to look at what the strategy is,” says Brei. “What’s your long-term strategy and how are you going to get there? I really don’t think setting performance metrics is a one-size-fits-all. You need to make it make sense for your bank, not what the bank is doing across the street. It may be reducing your non-performing (assets). It may be something that’s more discretionary without a hard number on it. Maybe it’s creating a certain culture at the bank.”
Half of all respondents in the survey this year say they link CEO pay to the strategic plan. Sixty-eight percent say they link CEO pay to performance metrics. Of those who link CEO pay to performance, 66 percent use asset quality, 59 percent use return on assets and 62 percent use return on equity. Only 35 percent tie CEO pay to total shareholder return and 37 percent tie it to earnings per share growth.
The industry has shifted over time toward using other kinds of performance metrics rather than just profitability, says Blanchard.
“Three years ago, all these plans were driven by profitability, return on equity, shareholder return, net income, return on assets,” he says. “I see that asset quality has moved up to number one. It’s a good thing for them to say they are focused on asset quality. You need to incorporate more strategic goals. You also have to have good asset quality.”
Brei says he advises clients to look at more than just profit metrics.
“If you’re purely pushing profits, you might be encouraging people just to get loans, but not necessarily good loans,” he says.
Compensation committee practices
Sixty-six percent of respondents say their bank reviewed director compensation within the last six months or a year. Twelve percent say they had done reviews more than a year ago and 19 percent say it has been more than two years since they reviewed compensation practices.
Fifty-two percent say they do not use a compensation consultant. Twelve percent say they used consultants on an ongoing basis and 36 percent used them on a project basis.
Forty-two percent say the compensation committee is responsible for setting director compensation, the same as last year. Nine percent say the CEO sets director pay, about the same as last year. Thirty-eight percent this year say the full board sets director pay.
For most banks, 82 percent, the compensation committee meets quarterly. The median number of compensation committee meetings per year is four, with smaller banks meeting less often than large banks. The median number of full board meetings is 12, which was consistent across all asset sizes.
Elements of director pay
Board meeting fees are the most popular way to compensate directors. The fees vary widely based on the size of the bank and whether it is public or private. For those who say they are paid, banks with less than $100 million in assets paid a median of $375 per meeting, as of fiscal year 2010, according to the survey. Banks with $1 billion to $5 billion in assets who did pay compensated at a median of $700 per meeting.
Publicly traded banks paid a median of $650 per meeting, compared to $500 for private banks.
The median cash retainer was $10,000 as of the last fiscal year. Only 28 percent of respondents say their bank pays a cash retainer.
As far as committees go, 70 percent of banks say they paid fees for serving on a committee. The chairmen of holding bank committees were paid more than the lead bank chairmen. The chairmen of publicly traded bank committees were paid more than for private banks.
The highest paid bank holding committee chairman is the chairman of the audit committee, who was paid a median of $5,000 per year.
Sixteen percent of banks also paid a cash retainer for committee work.
Equity compensation
Sixteen percent of respondents say their bank gave equity compensation for serving on the board.
The median holding company stock option/restricted stock grant for those who were paid in fiscal year 2010 was $11,135. The median lead bank fully equity grant value was $11,500 in fiscal year 2010.
Forty-one percent of respondents say their banks had stock ownership guidelines for directors.
“That’s a good thing,” says Blanchard, “to say: ‘If we give you stock, we want you to hold on to it a certain amount and not sell it, so you can participate in the future success of the company.”
Public banks are more likely to have stock ownership guidelines, at 53 percent, compared to only 31 percent of private banks who have guidelines. Smaller banks are less likely to have ownership guidelines.
Of those that have guidelines, 52 percent require directors to own a minimum or fixed number of shares, down from 67 percent last year. Thirty-one percent have a minimum share value and 13 percent have a multiple of the annual retainer requirement.
Not all banks compensate directors with stock, retainers or even fees. To calculate total compensation, you need to factor in all the directors who don’t get paid in the various categories of compensation. Not counting committee work, the median total compensation during the most recent fiscal year to serve on a bank and holding company board with less than $100 million in assets was $2,925. For banks with more than $1 billion in assets, it was $27,650. The median for all banks was $12,000.
Factors to serve on bank boards
To attract board members, banks ought to consider what directors most want to see in the form of compensation. According to the survey, the most important forms of compensation when considering a board seat are cash fees/retainers and whether the bank pays for board-related expenses, such as travel.
These were the most important considerations for board seats last year as well. However, there was a slight decline in importance in these factors compared to last year. Last year, 67 percent said they rated cash fees/retainers as important or very important considerations. This year, 64 percent do. Last year, 64 percent rated paid expenses as important or very important. This year, 60 percent do. The percentage of respondents that rated bonus or performance pay as important or very important is higher this year, at 40 percent, compared to 31 percent last year. This year, 31 percent rate insurance as an important or very important factor; and 27 percent rate a retirement plan as important.
About the survey respondents
Of the respondents, 55 percent said they were from private companies and the rest were from publicly traded institutions. Eighty-eight percent were from banks older than five years. The majority of respondents, 61 percent, said they were from banks with $500 million in assets or below. Most of the respondents were bank directors. Forty-six percent were outside directors, 22 percent were inside directors, 21 percent were board chairman and 37 percent were CEOs. |BD|
The Board Compensation Survey was co-sponsored by Blanchard Consulting Group.
Matt Brei is a senior vice president and partner with the national compensation consulting company Blanchard Consulting Group. His office is in Minneapolis. He has more than 10 years of experience in compensation consulting, with clients ranging from Fortune 500 companies to community banks throughout the country. Since 2002, Matt has focused exclusively on the banking industry.
Michael Blanchard is the CEO of the national compensation consulting company Blanchard Consulting Group and he works in Atlanta. He has extensive experience in the human resources field and has conducted or supported over 500 compensation planning, market research and organizational development projects during the past 15 years, with more than twelve years specific to the banking industry.
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