Key Compensation Issues in a Turbulent Market

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As compensation committee chair, Susan knew 2020 was going to be an important year for the bank.

The compensation and governance committee had taken on the topic of environmental, social and governance (ESG) for the coming year. They had conducted an audit and knew where their gaps were; Susan knew it was going take time to address all the shortfalls. Fortunately, the bank was performing well, the stock was moving in the right direction and they had just approved the 2020 incentive plans. All in all, she was looking forward to the year as she put her finished notes on the February committee meeting.

Two months later, Susan had longed for the “good old days” of February. With the speed and forcefulness that Covid-19 impacted the country, states and areas the bank served, February seemed like a lifetime ago. The bank had implemented the credit loss standard at the end of March — due to the impact of the unemployment assumptions, the CECL provision effectively wiped out the 2020 profitability. This was on top of the non-branch employees working from home, and the bank doing whatever it could to serve its customers through the Paycheck Protection Program.

Does this sound familiar to your bank? The whirlwind of 2020 has brought a focus on a number of issues, not the least of which is executive compensation. Specifically, how are your bank’s plans fairing in light of such monumental volatility? We will briefly review annual and long-term performance plans as well as a construct for how to evaluate these programs.

The degree to which a bank’s annual and long-term incentive (LTI) plans have been impacted by Covid-19 hinge primarily on two factors. First, how much are the plans based upon GAAP bottom-line profitability? Second, and primarily for LTI plans, how much are the performance-based goals based upon absolute versus relative performance?

In reviewing annual incentive plans, approximately 90% of banks use bottom-line earnings in their annual scorecards. For approximately 50% of firms, the bottom-line metrics represent a majority of their goals for their annual incentive plans. These banks’ 2020 scorecards are at risk; they are evaluating how to address their annual plan for 2020. Do they change their goals? Do they utilize a discretionary overlay? And what are the disclosure implications if they are public?

There is a similar story playing out for long-term incentive plans — with a twist. The question for LTI plans is how much are performance-based goals based upon absolute versus peer relative profitability metrics? Two banks can have the same size with the same performance, and one bank’s LTI plan can be fine and the other may have three years of LTI grants at risk of not vesting, due to their performance goals all being based on an absolute basis. In the banking industry, slightly more than 60% of firms use absolute goals in their LTI plans and therefore have a very real issue on their hands, given the overall impact of Covid-19.

Firms that are impacted by absolute goals for their LTI plans have to navigate a myriad level of accounting and SEC disclosure issues. At the same time, they have to address disclosure to ensure that institutional investors both understand and hopefully support any contemplated changes. Everyone needs to be “eyes wide open” with respect to any potential changes being contemplated.

As firms evaluate any potential changes to their executive performance plans, they need to focus on principles, process and patience. How do any potential changes reconcile to changes for the entire staff on compensation? How are the executives setting the tone with their compensation changes that will be disclosed, at least for public companies? How are they utilizing a “two touch” process with the compensation committee to ensure time for proper review and discourse? Are there any ESG concerns or implications, given its growing importance?

Firms will need patience to see the “big picture” with respect to any changes that are done for 2020 and what that may mean for 2021 compensation.

Fueling Future Growth

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2017-Compensation-White-Paper.pngOver the past year and a half, there’s been a lot of good news for the banking industry. New regulators have been appointed who are more industry-friendly. Congress managed to not only pass tax reform, but also long-awaited regulatory relief for the nation’s banks. And the economy appears to remain on track, exceeding 4 percent gross domestic product (GDP) growth in the second quarter of 2018, according to the Bureau of Economic Analysis.

Bank Director’s 2018 Compensation Survey, sponsored by Compensation Advisors, a member of Meyer-Chatfield Group, finds that the challenges faced by the nation’s banks may have diminished, but they haven’t disappeared, either.

Small business owners are more optimistic than they’ve been in a decade, according to the second quarter 2018 Wells Fargo/Gallup Small Business Index survey. This should fuel loan demand as business owners seek to invest in and grow their enterprises. In turn, this creates even more competition for commercial lenders—already a hot commodity given their unique skill set, knowledge base and connections in the community. Technological innovation means that bank staff—and boards—need new skills to face the digital era. These innovations bring risk, in the form of cybercrime, that keep bankers—and bank regulators—up at night.

For key positions in areas like commercial lending and technology, “banks have to spend more,” says Flynt Gallagher, president of Compensation Advisors. “You have to pay top dollar.”

But a solid economy with a low unemployment rate—dropping to 3.8 percent in May, the lowest rate the U.S. has seen in more than 18 years—means that banks are facing a more competitive environment for the talent they need to sustain future strategic growth.

And regulatory relief doesn’t mean regulatory-free: With the legacy of the financial crisis, along with the challenges of facing economic, strategic and competitive threats, all of which are keeping boards busy, there’s more resting on the collective shoulders of bank directors than ever before, and boards will need new skill sets and perspectives to shepherd their organizations forward.

For more on these considerations, read the white paper.

To view the full results to the survey, click here.

Compensation Planning In Today’s Talent Market

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How do banks attract young employees and retain key executives? David Fritz Jr. and Patrick Marget of Executive Benefits Network explain that bank compensation plans should appeal to multiple generations and outline how Bank-Owned Life Insurance (BOLI) can offset compensation costs.

  • Challenges in Attracting & Retaining Employees
  • Focusing on Long-Term Incentives
  • BOLI’s Role in Compensation Planning

Three Questions Bank Directors Should Ask About Incentive Compensation

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The recent events surrounding the Wells Fargo cross-selling scandal has stimulated a lot of conversation at Bank Director’s 2016 Bank Executive & Board Compensation Conference on Amelia Island, Florida. Editor in Chief Jack Milligan offers three questions bank directors should ask regarding their financial institutions’ compensation programs.


Key Trends in the BOLI Market in 2016

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BOLI-market-6-22-16.pngIn 2015, the percentage of banks with bank-owned life insurance (BOLI) increased, the majority selected a General Account (GA) product and the cash surrender value of policies rose.

These are some of the conclusions drawn from the latest research from the Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report. Of the 6,182 banks in the U.S. operating at the end of last year, 60.5 percent now report holding BOLI assets. This percentage has consistently grown year after year. Further, the percentage of banks in each size category holding BOLI assets increased from the end of 2014 to the end of 2015 with banks in the $1 billion to $10 billion asset category having the highest percentage of BOLI at 82.5 percent.

BOLI assets reached $156.2 billion at the end of 2015, reflecting a 4.4 percent increase from $149.6 billion as of December 31, 2014. The growth in BOLI holdings is attributable to a variety of factors including an increase in the value of those holdings, first-time purchases of BOLI by banks, and additional purchases by banks already having BOLI on the books.

Holdings by Product Type
The highest dollar amount of BOLI assets continues to be held in Variable Separate Accounts (VSAs), where the investment risk is held by the policyholders and investment gains flow directly to them rather than the insurance carrier. VSA assets totaled $71.95 billion representing 46.1 percent of all BOLI assets as of December 31, 2015, down slightly from 47.6 percent at the end of 2014. At the same time, only 480 or 12.8 percent of all banks with BOLI reported holding VSA assets, down from 14.2 percent a year ago. Typically, only larger banks hold VSA assets because of the investment risk noted previously. The average amount of VSA assets held by these 480 banks is substantially larger than the average amount of General Account (GA) or Hybrid Separate Account (HSA) assets held by community banks due to the size differential between the banks.

The type of BOLI assets most widely held by banks in 2015 was GA. A GA’s cash surrender values are supported by the assets of the insurance company. Nearly 96 percent of banks with BOLI reported GA BOLI assets. In comparison to GA products, HSAs have not been available for purchase nearly as long. Since 2011, the number of banks using HSA products increased by 47 percent to 1,280. The above BOLI holding percentages exceed 100 percent since some banks have more than one type of BOLI product.

New Purchases of BOLI in 2015
According to a report from IBIS Associates, Inc., an independent market research firm, BOLI sales last year increased to $4.048 billion which were attributable to purchases by approximately 500 banks. This was 26 percent higher than the $3.214 billion reported in 2014 and was primarily due to a major increase in VSA premium which rose from $35.6 million in 2014 to $504.0 million in 2015. This was due, in part, to a few very large VSA purchases that may not be duplicated in future years.

Why BOLI Remains Popular
Feedback we have received from our clients suggests that the reasons BOLI remains appealing as an investment for banks has not changed in recent years:

  • It provides tax advantaged investment income not available with traditional bank investments, as well as attractive yields compared to alternative investments of a similar risk and duration
  • The growth in the cash value of the BOLI policies generates income for the bank and its shareholders
  • The bank receives the life insurance proceeds tax-free upon the death of an insured employee who elected to participate in the plan; and
  • The bank can use the income to pay for one or more non-qualified benefit plans to help attract and retain key executives, or use the income to help offset and recover employee benefit costs such as health care and retirement expenses.

Since BOLI currently offers a net yield ranging from approximately 2.25 percent to 3.75 percent, depending upon the carrier and product, BOLI remains a popular investment option for many financial institutions. For a bank in the 38 percent tax bracket, this translates into a tax equivalent yield of 3.62 percent to 6.05 percent.

Finally, based on our experience, banks owning BOLI policies remain very satisfied with their previous purchases and would consider making additional purchases in the future.

2016 Compensation Survey: Where Are The Lenders?

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compensation-survey-5-10-16.pngThe demise of training programs at the nation’s biggest banks, coupled with an aging Baby Boomer population, is resulting in what could be a mini-crisis for the banking industry. There aren’t enough commercial lenders, according to the bank executives and directors responding to Bank Director’s 2016 Compensation Survey. Without skilled lenders, financial institutions will be hard-pressed to grow their revenue, since lending is still how many banks make most of their money.

Forty percent of survey respondents say that recruiting commercial lenders is a top challenge for 2016. When asked to describe their bank’s efforts to attract and retain commercial lenders, 43 percent say there aren’t enough talented commercial lenders. The same number say they’re willing to pay highly to fill these valuable roles within their organization.

Bank Director’s 2016 Compensation Survey is sponsored by Compensation Advisors, a Gulf Breeze, Florida-based member of Meyer-Chatfield Group. In March, Bank Director surveyed online 262 bank directors, chief executive officers, human resources officers and other senior executives. Fiscal year 2015 compensation data for CEOs and directors was also collected from the proxy statements of 105 publicly traded banks.

Twenty-three percent of respondents say that recruiting younger talent is a key challenge this year. Thirty-four percent say they’re actively seeking talented millennial employees, between the ages of 18 and 34 years, but have trouble attracting them. Of these, 60 percent say that millennials aren’t interested in working for a bank. Fifty-four percent consider their bank’s culture to be too traditional.

One-third have a satisfactory plan in place to attract millennials. The majority of these, at 71 percent, credit a culture that millennials feel comfortable in as the reason for their bank’s success, as well as a clear path for advancement (59 percent) and reputation (55 percent).

The remaining third say hiring millennials is not currently a focus for their institution.

Other key findings:

  • Tying compensation to performance remains the top challenge identified by respondents, at 46 percent.
  • Sixty percent expect the bank’s CEO and/or other senior executives to retire within the next five years. Forty-five percent have both a long-term and emergency succession plan in place for the CEO and all senior executives.
  • Respondent opinions are mixed on the value of equity. More than half of executives, at fifty-four percent, indicate that equity is highly valued as part of their own compensation package, but just 36 percent of all respondents say equity on its own, in the form of stock options or grants, is an effective tool to tie executive interests to that of shareholders. Fifty-three percent of CEOs received equity grants in 2015.
  • Forty-five percent of respondents indicate that their board most recently raised director pay in 2015 or 2016.
  • Almost half of respondents indicate that three or more board members will retire from their position in the next five years.
  • Sixty-seven percent indicate their bank has a plan in place to identify prospective new directors.
  • Sixty-three percent say their bank will actively seek to create a more diverse board in the next two years.

To view the full results to the survey, click here.

Mega-Acquirers: Compensation Practices That Make a Difference

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As football coach Lou Holtz famously stated, “In this world you’re either growing or you’re dying, so get in motion…” In the past two years, 545 banks have been acquired—the highest level of activity since 2006 to 2007. During this busy cycle, the regional public banks between $5 billion and $50 billion have enjoyed greater profitability than either their smaller or larger counterparts.

With improving financial markets, increasing regulatory requirements, and decreasing margins, some of these regional banks have been executing an acquisition growth strategy for several years. Pearl Meyer identified 22 “mega-acquirers,” banks in the top quartile of regional banks ranked by three-year asset growth. These mega-acquirers have averaged a three-year asset growth rate of over 30 percent, compared to just over 7 percent for other regionals. Not only do they outperform in asset growth, but also on a number of other key financial metrics.

Median Financial Performance of Mega-Acquirers Versus Other Regionals (as of 12/31/2015)

  3-yr Asset CAGR (%) Price/Tangible Book (%) TSR CAGR (%) Diluted EPS after Extraordinary Items CAGR (%)
1-Yr 3-Yr 5-Yr 1-Yr 3-Yr 5-Yr
Mega Acquirers (n=22) 31.58 171.48 21.63 21.56 16.55 25.56 20.12 9.82
Other Regionals (n=89) 7.30 158.87 7.62 15.19 9.97 3.39 6.85 5.29

CAGR: Compound Annual Growth Rate
TSR: Total shareholder return defined as stock price appreciation plus dividends Source: S&P Global Market Intelligence

Pay Differences
While there are many factors that can influence financial success, we looked specifically at whether or not mega-acquirers structure executive compensation differently. The answer is yes and no. The median pay of CEOs for the mega-acquirers and other regionals aren’t markedly different. The mix between base salary, annual incentives, and long-term incentives for CEOs also were generally consistent for all regionals. There were, however, three key differences.

  • Mega-acquirers manage to results. Fewer mega-acquirers have an annual incentive plan with a discretionary component (33 percent versus 46 percent for other regionals), potentially inferring that mega-acquirer executives are accountable for achieving financial goals regardless of the external environment.
  • Mega-acquirers focus on both revenues and cost. While all regionals use net income as a metric equally, mega-acquirers are more likely to include an efficiency ratio in their annual plans (27 percent versus 17 percent for other regionals).
  • Mega-acquirers tend to use more time-vested restricted stock and fewer performance shares. Curiously, mega-acquirers are getting good financial results without the use of performance-based equity. Eighty-two percent (82 percent) of mega-acquirers provide time-based equity awards to their CEOs versus 73 percent for other regionals. Prevalence of performance-based shares is 36 percent for mega-acquirers versus 51 percent for other regionals.

While we can only speculate why there is a greater preference for restricted stock rather than performance shares, there are a couple possibilities. First, performance shares often vest based on achieving operational metrics. The argument may be that future operational performance is a function of what is acquired and this can be hard to pin down even if it is measured on a relative basis. Second, while median stock ownership for mega-acquirer CEOs is similar to other regionals, it is more than twice that of regional CEOs at the 75th percentile. There may be a strong desire by some of the mega-acquirers to ensure that the CEO has meaningful share ownership and is willing to achieve this through time-based vesting. In our experience, actual share ownership is what drives behavioral shifts and creates shareholder alignment.

Considerations
These pay differences are subtle. However, when you combine strategy, financial results, and pay practices together, the implications provide for compelling discussion in the boardroom.

Has the use of discretion in incentive plans gone too far? Discretionary components are inappropriately used if they are a way of explaining away poor performance on the defined metrics. Discretion is best used when it is a qualitative assessment of non-financial results or where it is difficult to determine financial outcomes due to acquisition or other factors. Establishing what will be evaluated qualitatively at the beginning of the year, rather than at year-end also fosters discipline in using appropriate discretion.

If there aren’t meaningful differences in CEO compensation values, are you getting what you are paying for? Holding CEOs and their executive teams accountable for strategy deployment and financial results is a primary board responsibility. Open and honest feedback coupled with active oversight can ensure the bank is getting value from its compensation dollars.

Are you evaluating the CEO on the right things? Simply focusing the CEO’s evaluation on whether the bank made its numbers that year is insufficient. A more holistic view of the role using seven characteristics should be considered:

  1. Strategy and Vision
  2. Leadership
  3. Innovation/Technology
  4. Operating Metrics
  5. Risk Management
  6. People Management
  7. External Relationships

Conclusion
Compared to both smaller and larger banking organizations, regional banks have enjoyed relatively strong performance despite a challenging operating environment—and mega-acquirer performance has been even stronger. Has executive pay design played a role in the success of mega-acquirers? The differences in design are small, but potentially impactful—a tighter link to performance, a stronger focus on operational effectiveness, and for some, a higher level of long-term equity ownership.

What Behavior Does Your Incentive Plan Reward?

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Nearly all banks, regardless of size, view growth as a key driver of success. What differentiates Bank A from Bank B are the unique strategies they have formulated to achieve that growth. However, when it comes to compensation, regardless of business strategy, there’s often just a single question asked: “How do my peers pay?”

While it is important to understand market norms regarding pay levels and practices, this information is most impactful when followed by additional questions including “What implications do those practices have for us?” and “How can we use compensation in a way that draws the right talent and ensures success?”

Assessing whether or not an executive compensation program is working requires going beyond market data and compliance to determine the program’s degree of alignment with the bank’s business and talent strategies. The following steps can help compensation committees think through this alignment with their program design.

Step 1: Define Path to Success
The ultimate goal of all banks is to create value for stakeholders over the long term. But in the interim, “success” can be defined as the effective execution of the bank’s chosen strategy. For example, an acquisition strategy often seeks to create higher returns and shareholder value through market share and economies of scale. Examples of strategies include:

Strategy Measure of Success
 Acquisition  Higher returns through market share and economies of scale
 Exit/Liquidity (e.g., Sale, IPO)  Maximize growth through capital infusion
 Organic Growth  Stable and growing returns
 Niche  Profitability through higher margin business

Step 2: Consider Compensation Implications
Compensation committees should consider whether the compensation structure is helping execute the strategy and deliver results. Let’s stay with the example of an acquiring bank. When an acquisition is made, there can be significant noise in the financial statements along with one-time merger costs. If the annual incentive program is formulaic and heavily based on income-related metrics, it could very well discourage management from seeking acquisitions. Further, the plan may not be designed to reward key elements that can determine whether or not the benefits of the strategy are realized. For example, in the near term, it may be entirely appropriate to reward executives for bringing quality deals to the board for consideration. Later, executives should be rewarded for ensuring merger integration is timely and efficient.

The following outlines common compensation design challenges and considerations:

Strategy Challenges Considerations
Acquisition Financial results during the acquisition stage are highly variable Does the annual plan include qualitative measurement to account for variability?

Are there adjustments or exclusions for incentive calculations?

Is there greater weight on equity compensation to reward long-term results?
Exit/Liquidity (e.g., Sale, IPO) Short-term profitability and results related to franchise value are important Does the annual plan focus on profitability and results related to franchise value (e.g., deposit and loan growth)?

Is there greater weight on equity compensation to align interests?

Are implications of the change-in-control agreement terms clear?
Organic Growth Results are driven through increases in market share and cost reduction Is the annual plan focused on profitability and moderate growth in key areas?

Is wealth accumulation through equity, retirement benefits or both?
Niche Achieving profitability through higher margin business Is the annual plan appropriately customized for business lines?

Is differentiation in compensation required to hire and retain specialized talent?

Step 3: Tailor the Program
Using our acquisition strategy example, a compensation program might be redesigned so equity encompasses a larger portion of incentive pay, taking pressure off immediate financial results and incenting deals that are accretive over time.  The annual incentives could play a lesser role and continue to use profitability of the legacy lines of business, but would be complemented with measures that focus on deal flow and integration.

Step 4: Revisit and Refine
Compensation committees should test the outcomes of the compensation program annually and refine as necessary:

  • Did the program attract talent and retain our best people?
  • Were pay and performance aligned?
  • Did our results move us toward our strategic goal? If not, did the compensation program play an unintended role in not achieving objectives?
  • Have milestones and objectives changed in a way that the program should be refined?

Moving beyond market practices to align compensation programs to a specific strategy can provide a competitive advantage when it comes to attracting and retaining your best people and driving business results.  Being mindful of the alignment of strategy and the compensation programs that support those efforts ensures that the bank has the best probability for success.

Trends in Private Bank Compensation

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8-14-14-DC-comp.pngThough the executives and directors from privately held institutions in Bank Director’s 2014 Compensation Survey say that they face the same challenges as the board members and senior executives of publicly traded banks, the data on compensation and benefits show they are paid less and receive fewer benefits.

Privately held banks tend to be smaller, and this also impacts how well these boards can compensate their CEO. Still, there are pay issues particular to private banks, including how to compensate executives without publicly traded stock, that private banks must address.

Private Banks Offer Equity, Too
Naturally, public banks are more likely to offer equity grants. Not only is a public company’s stock more liquid, but the company tends to have more shares outstanding. Just 31 percent of respondents from private banks report that their executives receive annual equity grants. Of those, almost half use restricted stock, and 40 percent grant stock options.

Many smaller, private institutions that offer equity compensation emulate the practices of big public banks, but don’t consider that their shares are not as actively traded and difficult to convert the cash—negatively impacting executives and shareholders, says Gallagher. Just 11 percent use synthetic equity, but this type of long-term incentive can be a good alternative to traditional equity. Synthetic equity behaves much like a traditional stock incentive—as the value of the company rises, so does the reward to the executive—but the reward is all cash.

Synthetic equity does have its drawbacks. Compared to stock, the cost of which is fixed at its initial value when granted to the executive, the cost of synthetic equity to the bank appreciates along with its value. If an executive’s reward doubles, then the cost to the bank doubles right along with it. However, Gallagher says that the value to the executive outweighs its costs—and executives reveal a preference for cash incentives, according to the survey.

The percentage of private institutions that award annual equity grants has dropped by five percentage points in 2014 since last year, while the percentage of banks allocating synthetic equity remains the same.

Does the bank allocate any of the following to executives annually?

8-14-14-DC-comp-bar-chart.png

No matter what the board decides is best to offer the CEO and other executives as a long-term incentive, it’s vital to think through the exit plan for the executive. Gallagher shares a story that would chill many bank directors. A privately-held community bank allocated a large amount of stock over the course of several years as part of its CEO’s compensation package. Since the stock isn’t traded, once the CEO retired, he had to sell a significant stake in the company, triggering a sale. “The board knows the only course of action is to sell the bank. That’s not a good answer,” he says.

The CEOs of privately held banks with between $500 million and $5 billion in assets are earning less in salary and cash bonuses than their peers at public institutions of the same size. The median compensation in 2013 for the CEO of a private bank between $1 billion and $5 billion was $373,000 in salary and a $75,000 cash bonus, less than his public peer, who earned $409,004 in salary and $122,000. For banks between $500 million and $1 billion in assets, the private CEO earned a median $266,490 salary and $50,000 cash incentive, compared to the public CEO with a median $278,417 salary and $54,000 cash bonus. Private banks are also less likely to offer retirement and deferred compensation benefits.

Median compensation for CEOs
Private ownership, by asset size
Asset Size $1B – 5B $500M – $1B $250M – $500M < $250M
Salary $373,000 $266,490 $212,500 $173,000
Cash Incentive $75,000 $50,000 $35,000 $27,500
Equity Grants
(fair market value) 		 $27,543 $37,500 $57,000 $35,000
Benefits & Perks $67,761 $25,000 $18,330 $15,000

Private Banks Mix Up Metrics
The use of performance indicators by private banks has grown over the past year, from 56 percent in 2013 to 71 percent in this year’s survey. But compared to publicly traded banks, which place a high priority on asset quality and return on equity (ROE), private institutions as a whole are less likely to rely on one metric. One-third of respondents from private banks say they link CEO pay to return on assets (ROA) or ROE. Half tie CEO compensation to corporate goals.

Improved performance and conditions for many smaller, private banks is impacting their boards’ approach to incentive compensation, including the increased use of performance indicators. “They’re profitable again [and] they can start considering performance-based compensation,” Gallagher says. “Smaller banks were too focused on sheer survival [following the economic downturn].” With more banks able to pay for performance, more are apt to use a metric that makes sense for the bank as a way to determine whether the CEO met the bank’s goals.

Compensation Committees Decide Pay
Forty-two percent of executives and directors from private banks say that the compensation committee bears the responsibility of setting director compensation levels for their bank, compared to three-quarters of publicly traded institutions and 60 percent of respondents overall. Private banks are more likely to rely on the board, at 30 percent. Less than 20 percent of respondents from public banks place the responsibility for director pay on the full board.

Sixteen percent of private banks place this responsibility in the hands of the CEO, which Gallagher says can indicate a dangerous board dynamic. If the board disagrees with an executive decision, the CEO could retaliate by cutting board pay. Directors should never be beholden to the CEO. “Boards should set their own pay with no say from the CEO,” he says.

Overall, the survey shows a shift from board meeting fees to annual retainers. For smaller, private banks, board meeting fees remain steady, though the percentage of directors receiving an annual cash retainer has risen by 10 percentage points, to 39 percent—still significantly lower than public banks, where 69 percent receive an annual retainer. As directors spend more time outside the boardroom on banking matters, retainers may better reflect a board member’s contribution to the governance of the institution. The median board fee for a private bank was $650 per meeting, and the median annual retainer totaled $9,300, for the independent director of a privately held bank in fiscal year 2014.

Median compensation for independent directors
Private ownership, by asset size
Asset Size $1B – 5B $500M – $1B $250M – $500M < $250M
Fee per board meeting $775 $725 $600 $500
Annual cash retainer $11,00 $16,250 $5,500 $7,600

Stock Guidelines Recommended
Stock ownership guidelines, which outline the expectations of the company regarding the level of stock ownership by members of the board, may not be top of mind for the boards of private banks. Half of private bank respondents indicate that the bank does not have stock ownership guidelines for the board, though this represents a decline of 10 percentage points from 2013. Stock ownership guidelines are a best practice for bank boards, as they further align the board’s interests with that of bank ownership.

A stock ownership policy can be easily set by the bank’s board, setting the number or value of shares that must be owned by a director within a set amount of time. For those at private banks that set stock ownership guidelines, the majority require a minimum or fixed number of shares. Gallagher says that this makes sense for private boards, due to the illiquid nature of the stock. The price isn’t firm, so bank boards focus more on the number of shares.

About the survey
Bank Director’s 2014 Compensation Survey, sponsored by Meyer-Chatfield Compensation Advisors, surveyed online 322 independent directors and senior executives, including chief executive officers and human resources officers, at banks of all sizes across the United States to uncover trends in executive hires as well as director and executive pay. Director pay data was also collected from the proxy statements of 99 publicly traded institutions. Based on regional definitions from the U.S. Census Bureau, 35 percent of the data came from banks in the Midwest, one-third from banks in the South, 23 percent from banks in the Northeast and 9 percent from banks in the West.

Quizzing Bank Compensation Leaders

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11-18-13-ARS.pngPaying executives in a way that keeps shareholders happy and retains top executive talent remains challenging, and 44 percent of attendees of Bank Director’s Bank Executive and Board Compensation Conference in Chicago cited tying compensation to performance as the top compensation challenge they face heading into 2014.

Bank Director and consulting firm Compensation Advisors by Meyer-Chatfield polled more than 175 members of the audience at the conference, which occurred Nov. 4-5.

Bill MacDonald, chairman of the advisory board at Meyer-Chatfield, said he’s not surprised by the challenges faced by compensation committee members and human resources executives attending the conference. Many banks tie compensation to performance indicators like return on assets or return on equity, which for many banks have not been great in a flat economy. MacDonald recommended that boards should not rely solely on these metrics. They should also compare pay to peer groups and base incentives on strategic goals, “coming up with measurements of improvement that the executive and directors can control,” he said. Strategic goals might include revenue growth, opening new branches or improving loan quality.

Forty-one percent of attendees said that the development of competitive compensation packages is their board’s biggest challenge when it comes to attracting and retaining talent for the bank. When asked about specific challenges in offering competitive compensation packages, 30 percent of attendees said that their bank simply cannot afford to pay as much as other financial institutions. “I don’t think affordability should be an objection to not putting in a performance-based plan, because if the performance is there, the economics are there [and] the shareholders will be rewarded,” said MacDonald.

What do you see as the most challenging aspect in attracting and retaining talent for your bank?

Comp-14-ARS-pie1.png

James Dent, an attendee of the event and chairman of the compensation committee at Old Line Bancshares Inc., a $1.2 billion-asset holding company headquartered in Bowie, Maryland, said it’s important to stay competitive with the market in order to attract and retain talented staff. “If you want good talent, you’re going to have to pay for it,” he said. “It’s just a question of whether you want to step up to the plate and do the number that’s required.”

Thirty-nine percent of attendees said there is a lack of talented candidates, while 15 percent cited a talent vacuum caused by the retirement of experienced executives. MacDonald said that many executives have been unable to retire due to the economic downturn and its impact on retirement plans. “The stock didn’t perform, they can’t leave, and we’ve got a great group of middle management stuck behind this group of Baby Boomers,” he said. “So the challenge really is, how do you continue to retain and grow this middle management talent?”

Forty-two percent of attendees expressed satisfaction with their bank’s succession plan, while 36 percent were unhappy with the bank’s succession plan and 15 percent said that their banks don’t have a plan in place. Dent said that his bank is more comfortable with succession planning than they were two years ago, with a plan in place not just for the chief executive officer, but also for executives like the bank’s chief financial officer, senior lender and credit officer. “We have the talent in place to move forward if something were to happen,” he said.

Are you satisfied with your bank’s succession plan?

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Bob Greer, chairman of Business First Bank, based in Baton Rouge, Louisiana, with $684 million in assets, said that his bank doesn’t have a formal succession plan in place. Business First’s president and CEO, Jude Melville, is under 40, but if Melville left the bank, “We have very good bankers right under him,” he said. “I don’t think our bank would miss a beat, so I’m not that concerned.”

When asked about board pay, 40 percent of attendees expected to see director compensation increase in 2014, while 58 percent expected pay to remain the same. So are directors fairly compensated? Fifty-three percent of attendees said yes, while 43 percent said no.

After spending two years gradually raising the board’s pay to better meet peer averages, Dent believed that Old Line’s board is fairly paid. “We have brought on some new talent,” he said. “They’re very busy people and we feel we should be paid for the time and the responsibility,” he said.

Do you believe you are fairly compensated for the amount of time you devote to your role as a director?

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MacDonald said board compensation differs based on the maturity and structure of the board, as well as what phase of growth the bank is in. Community bank board members, already large shareholders at their banks, are focused on protecting their investment and less likely to crave a cash reward. A larger bank may favor a blend of cash compensation and restricted stock.

Greer said that Business First just started to compensate the board, in cash, in 2012. Right now he expects board pay to remain steady in 2014, and said that board pay will likely never be enough to compensate for the time, liability and responsibility of being a director. “It’s taking so much more time,” he said. “Most people own stock in their particular bank and want their bank to do well, so [they] don’t mind giving the time. I think the only problem is… I don’t see it slowing down any.”