07/30/2015

Are Bank Directors an Undervalued Asset?


One could easily argue that the job of a board member has never been tougher, or more time consuming. Bank Director’s 2015 Compensation Survey bears this out. Whether logging hours in meetings, drumming up business in the community or reviewing bank-related materials at home, the time spent by directors on board activities rose five hours within the past year, to a median of 20 hours a month, up from 15 hours as consistently reported by the survey’s respondents since 2010.

More time spent on board matters has come with an uptick in board pay. But is it enough? Do banks, as an industry, fairly compensate their directors? Bank Director first posed this question to bank directors two years ago, and roughly one-quarter of respondents consistently responded that it does not. In that same time period, around 61 percent have said they believe pay is fair. The remaining respondents are unsure.

Many banks rely on peer studies to determine how they pay the board and executives, which provide a basis of comparison against other banks of similar size and geographic area, or even similar performance metrics. But what if compensation for bank boards compares less favorably to that of other industries? Consulting firm Frederic W. Cook & Co. analyzed the board compensation packages of 300 small-, mid- and large-cap public companies, based on proxy statements filed from June 2014 through May 2014, and found that directors in the financial services industry receive the lowest total compensation, at a median of $149,000. The technology industry paid the most, at $212,000-42 percent more.

More than half of respondents to Bank Director’s survey report that their board last raised pay in 2013 or 2014, with an additional 28 percent planning to increase pay in 2015. But 28 percent of respondents haven’t seen a raise in pay since at least 2010.

What does this all add up to? Bank directors are paid less than other industries, with, typically, more liability, and a significant percentage of the industry hasn’t raised pay in at least five years. For an industry that often struggles to find qualified directors to fill boardroom seats, paying less than other industries that are drawing from the same talent pool doesn’t make sense. This is particularly true in the case of younger business professionals, whom many banks would like to recruit as directors, but are often busy trying to build a career. For them, time is at a premium, says Flynt Gallagher, president of Compensation Advisors, the survey’s sponsor. “It’s a challenge for boards today, finding qualified people,” says Gallagher. “I think long term, banks are going to have to pay more to get qualified directors.”

With a need for more diverse skills, as well as replacements for retiring directors, banks aren’t competing in a vacuum for board talent. Jim Dent, a board member at Old Line Bancshares, a $1.3 billion asset holding company based in Bowie, Maryland, says its location in the Washington, D.C. area means increased competition for directors from the many corporations and nonprofit organizations based nearby. “Everybody’s out there scrambling for the best they can find, so it’s necessary that we try to keep up the pace and stay with what the area is doing,” says Dent. “I’m sure there are some boards around town that pay a lot more than banks do.”

The board of Northwest Bancorp. Inc., the holding company for Spokane, Washington-based Inland Northwest Bank, with $446 million in assets, last evaluated its board’s compensation with a consulting firm around five years ago. They discovered that the board’s pay was well below that of its peers, so pay was increased. The compensation committee hasn’t reviewed director pay since, which is similar to other banks of its size-41 percent of banks between $250 million and $500 million in assets have not increased board compensation since 2011. But Randall Fewel, Northwest’s chief executive officer, recognizes the need to pay directors appropriately. “We want to be comparable to our peers,” he says. “There’s a lot more responsibility to be a bank director today than there used to be, and you want to get top notch people.”

It’s been a few years since Northwest recruited a new board member, but Fewel keeps in touch with potential directors. “The issue of liability…is much more prevalent than ever before,” he says, adding that the concern can often be countered by promoting the bank’s financial performance, and the availability of liability insurance to protect the board. But the fact that prospective directors are asking these questions reflects the increased responsibilities of board members. “Twenty years ago, 15 years ago, I didn’t get hardly any questions about the liability. They were honored to be asked,” says Fewel.

With the increased time commitment, lower pay and higher liability, has the prestige of serving on a community bank board lost its luster? Cydly Langer Smith, chairman of the board at Olympic Bancorp Inc., the Port Orchard, Washington-based holding company for Kitsap Bank, with $994 million in assets, doesn’t believe so. People who serve as community bank directors are doing so not just for the money, she says. “I think there’s a certain amount of prestige attached to that as well as the opportunity to…be on top of what’s going on in the local economy.” Despite the honor, she recognizes that the board should be compensated well, and the bank pays a combination of monthly meeting fees, committee fees and synthetic equity.

Compensation doesn’t boil down to just fees and retainers. Smith says the bank also provides directors & officers (D&O) insurance as well as education and training for the board.

The survey finds the decision-making authority for board compensation still largely lies in the hands of the bank’s compensation committee, for 48 percent of respondents. Almost one-quarter report the full board sets director pay, a practice more common at banks under $1 billion in assets. Five percent say the governance committee is responsible for director pay. Gallagher says this could be an emerging trend. When the compensation committee is responsible for both executive and board pay, the two are often discussed at the same time, says Gallagher. Placing board compensation within the governance committee may serve to segregate those responsibilities.

The Office of the Comptroller of the Currency (OCC) still recommends that the responsibility for board compensation and benefits lies with the compensation committee, while the governance/nominating committee is responsible for succession planning and board nominations. Compensation committees are a more common ingredient in board structure: Sixty-nine percent of respondents report their board has a governance and/or nominating committee. The committee is more commonly found at larger banks with more than $1 billion in assets. Eighty-nine percent have a compensation committee.

Dent says that the Old Line board established a governance committee just three or four years ago, and that committee makes decisions about board membership. Board pay remains in the hands of the compensation committee, and the governance committee chairman is a member of both committees. Dent believes this additional viewpoint has been beneficial, particularly when looking at board compensation. “This is the committee that decides whether you are or are not going to be put up for another term,” he says.

The establishment of a governance committee could lead to the abolishment of age limits for Old Line’s board, says Dent. The use of a mandatory retirement age for directors remains a split issue, according to the survey, with the median age at 72 years. At Old Line, the governance committee actively evaluates board membership, based on skills and expertise instead of age, which Dent thinks is a better approach.

How do directors say they want to be paid? The vast majority, at 91 percent, prefer cash fees and/or retainers. Seventy-seven percent indicate that their boards pay meeting fees to independent directors, and 61 percent award an annual cash retainer. The median fee paid to independent directors per board meeting rose by one-third in FY 2014, to $1,000. Banks with more than $5 billion in assets paid a median of $1,500, while the smallest banks, under $250 million in assets, paid $550. The median annual retainer remained steady, at $20,000. Banks larger than $5 billion in assets paid a median of $35,000, while those under $250 million paid a median of $7,900.

Fifty-five percent report that outside directors receive benefits as well. The percentage indicating that the board is offered a deferred compensation plan rose from 18 percent in 2010 to 34 percent today. Twenty-one percent of responding directors indicate they highly value deferred compensation as part of their pay package.

Just four percent of respondents-all from banks with more than $500 million in assets-indicate that directors have a retirement plan. It’s a benefit James Keukan, a director at UFS Bancorp, a $1.5 billion mutual holding company headquartered in Whitinsville, Massachusetts, says is offered to directors when they reach the age of 65. The benefit is paid out over a 10 year period, and is a three-year average of the highest value of cash fees received by that director. The survey indicates that 15 percent of respondents from mutual entities offer a retirement plan for directors.

“We don’t have the ability to issue stock, so [a retirement benefit] is our way to provide a long-term incentive to the directors,” says Keukan.

Plano, Texas-based LegacyTexas Financial Group Inc. converted from a mutual to a full stock organization in 2010. LegacyTexas, known as Viewpoint Financial Group Inc. until it acquired LegacyTexas Group Inc. in January 2015, awarded a $20,000 annual cash retainer and fees totaling $1,000 per board meeting and $750 per committee meeting in 2014, an amount that has remained constant since at least 2006, when Tony LeVecchio, now the company’s chairman, joined the board. Non-employee directors were awarded 5,250 shares of restricted stock in 2012. While the board has not increased its own cash compensation, the price of the company’s stock has climbed by approximately 60 percent, which LeVecchio says makes up for the the board’s steady cash award.

Forty-two percent of survey respondents indicate that their directors receive some type of equity compensation. Fifty-eight percent of directors and chairmen from publicly traded banks, and half from boards of privately held banks, indicate equity is of high value. Banks awarded a median of $34,045 in equity compensation to independent directors in FY 2014, up 19 percent from 2013.

Following the LegacyTexas acquisition, the former Viewpoint Financial has grown significantly in size, to $6.5 billion in assets. The board plans to review its compensation arrangements-with a new peer group provided by the bank’s compensation consultant-to determine if a raise in cash pay is necessary.

Another question LeVecchio plans to consider is the size of the LegacyTexas board. The size of a board can be a delicate balancing act: Too big and it’s hard to get the work done; too small, and directors are stretched too thinly. LegacyTexas currently has seven outside directors, and LeVecchio wonders if the board needs additional board members to staff the bank’s audit, compensation, governance, risk and loan committees. “Seven puts a pretty good demand on everybody,” he says. The survey indicates that holding company boards have a median of 10 directors, and 4 or 5 directors serve on each committee.

Time spent on board matters may have increased, but the median number of board and committee meetings reported by respondents and within proxy statements remains steady. One committee whose workload has shifted in the past few years may be the loan committee. In 2010, respondents reported that the loan committee met nine times at the holding company, and the bank-level board loan committee met 21 times. In the 2013 survey, respondents reported a median of 12 board-level loan committee meetings. This increased to 16 in 2014, but respondents and proxy statements currently reflect a median of 12 board-level loan committee meetings. Loan committee responsibilities are time-consuming, says Gallagher, and some boards may feel they lack the expertise to have a say in loan approvals.

Fewel says that the role of Northwest’s board in the lending process has changed little in recent years. However, as the bank grows, the board has raised the limits on what needs to be approved by that committee. And Fewel thinks the committee’s members offer a unique perspective due to their knowledge of sound business operations and their involvement in the community. The bank has backed away from some deals that didn’t smell right to the board: A loan for an apartment complex that was supported by bank management wasn’t approved because directors with expertise in real estate and construction felt that the cost per unit wasn’t right. “When you’ve got guys that are actually doing it, that brings a whole different level of expertise to the analysis,” he says.

While the board’s role in lending may be in a state of flux at some institutions, the value of loan officers has perhaps never been greater: Lending was indicated by survey respondents to be the top area for executive hires and promotions, at 53 percent. Forty percent of respondents report losing executive-level loan officers. If banks appear to be playing musical chairs with lenders, it may be because training programs dried up years ago as big national banks lost the loan officers they invested in to community banks, says Gallagher. Younger talent isn’t flocking to banking, leading to an aging and limited talent pool.

“As an industry, we’re not really creating new lenders…and you can’t really go outside the banking industry to find that talent,” says Gallagher. “Most of your really good commercial lenders are well over 40.” Since commercial lenders tend to do more than bring in loans-they typically bring in deposits and can deepen other areas of the relationship-the lack of younger talent in lending promises to be a worsening problem for the industry.

Smaller banks appear to be more stable when it comes to new and departing executives: Twenty-six percent of respondents from banks less than $500 million in assets report they lost at least one key executive in 2014, compared to 39 percent at larger banks. Gallagher says many executives of smaller, more rural institutions are likely committed to staying in their hometowns and communities. But when does stability evolve into stagnation? “If it’s a bank that’s really not growing and the executive team’s not motivated for growth, or the ownership’s not motivated for growth, then there’s not really a lot of opportunity for the individual,” says Gallagher.

Sixty-one percent of respondents report that they hired new executives as the result of a retiring predecessor. Fewel anticipates that five of Northwest’s top executives will retire within three years. He’s prepared for that eventuality, but recognizes the challenge ahead. “The pool to draw from is not like it used to be,” he says. Northwest Bancorp has significantly increased its budget on training, and Fewel believes that it’s a good investment. “For the right people, you’ve got to do what it takes,” he says. While there’s always the risk that a well-trained officer could take his or her skills elsewhere, “you’ve got to invest in education, because none of the banks have those management trainee programs anymore.”

Thirty-one percent report hiring a compliance executive in 2014. UFS Bancorp has been actively seeking a chief compliance officer, and Keukan says they’re hard to come by-and expensive. “It’s requiring more effort, and time, and money to find the people to staff those positions, and they bring nothing to the bottom line,” he says.

Technology and risk management are also top areas for executive movement, with risk executives in particularly high demand at banks with more than $5 billion in assets.

After a cash bonus, retirement benefits are highly desired by executives responding to the survey, at 72 percent. With the industry seeing so many executive retirements, this lines up. “Senior executives are aging, [so] retirement is more important to them now than it’s ever been, because they’re near the end of their career,” says Gallagher. Also, “executives are looking for some sort of security, especially [due to bank] M&A activity.”

Forty-three percent of directors responding to the survey do not indicate that retirement benefits are highly valued by executives. “Find out what your people value before you put a plan in place,” says Gallagher.

Half of executives say they highly value equity as part of their compensation package.

In addition to executives, many banks will likely be looking to fill board positions in the coming years as baby boomers retire. They’ll be looking for board members that can bring something to the business, maybe a little youth, perhaps a little diversity, and all the time looking for particular expertise, like technology or risk management. These are busy men and women, for whom time is just as valuable as money. The increased liability has fundamentally changed what it means to serve on a bank board, dramatically raising the stakes for current board members as well as those seeking to find the next generation of talent in the boardroom. “With regulations such as they are right now, everything is amplified,” says Dent. Still, he says Old Line has had success in attracting qualified board members who are also a good cultural fit, and he thinks they’ll stick around. “They like the work, they like the meetings, and I guess the pay must be sufficient, too.”

About the Survey
In March and April, Bank Director surveyed online 281 senior executives and independent directors of U.S. banks about director and executive compensation trends. Additionally, pay data for the CEO and boards of publicly traded banks, including board meeting fees, annual retainers and committee compensation, was collected from the proxy statements of 90 financial institutions, comprising 24 percent of the data. Forty-eight percent of the respondent and proxy data represent institutions with more than $1 billion in assets. The complete results of the survey are available in the research section at BankDirector.com.

WRITTEN BY

Emily McCormick

Vice President of Editorial & Research

Emily McCormick is Vice President of Editorial & Research for Bank Director. Emily oversees research projects, from in-depth reports to Bank Director’s annual surveys on M&A, risk, compensation, governance and technology. She also manages content for the Bank Services Program. In addition to regularly speaking and moderating discussions at Bank Director’s in-person and virtual events, Emily regularly writes and edits for Bank Director magazine and BankDirector.com. She started her career in the circulation department at the Knoxville News-Sentinel, and graduated summa cum laude from The University of Tennessee with a bachelor’s degree in Spanish and International Business.

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