Bank Salaries Creeping Upward

Accounting and consulting firm Crowe Horwath LLP has conducted an annual review of bank compensation every year for 30 years. This year’s results from 280 banks show a modest increase in bank employee salaries, while CEO pay has rebounded after declining the year before. Crowe Senior Consultant Timothy Reimink, who is in charge of the survey, talks about the results.

What surprised you about the findings this year?

We were somewhat surprised to see how quickly financial institutions have shifted priorities from containing costs to developing employees.  It seems to be a good sign of the health of the financial industry.  Respondents to our survey cite “containing costs” at a lower level of priority in 2011 than in 2009 or 2010.

What general trends are you seeing in terms of compensation?

Pay increases continue to be modest.  Since the onset of the recession, banks have slowed salary increases for employees.  The average salary increase for officers in 2011 was 2.4 percent, the same as in 2010.  For non-officers, salary increases in 2011 were also comparable to 2010.  Increases planned for 2012 are only 2.5 percent.

This change in salary practices appears to be part of a fundamental shift in strategy, to have compensation more in line with competitors.  Only 12 percent of banks have a strategy of paying above market compensation, compared to 17 percent in years prior to the recession.

What about CEO and executive level pay?

We saw CEO compensation rebound in 2011, with total compensation increasing 6.5 percent from 2010, after declining in 2010 from 2009.  The increase was in base salary.   Bonuses as a percentage of base salary were 9.8 percent in 2011, similar to 2010 levels.  Growth in total compensation for CEOs had been slowing during the prior three years, reflecting the decline in financial institution performance during the last three years.  As the economy and financial condition of banks have both stabilized, CEO compensation appears to be on the upswing.

Do you have an opinion on how banks might change their compensation practices to better attract and retain good employees?

Financial institutions should reward above-average performers by increasing their salaries at a significantly faster pace than for average performers.  While 87.7 percent of financial institutions say they have a pay-for-performance program, their actual practices in granting merit pay increases don’t appear to support their expressed objective.  There appears to be little difference between salary increases for average performers and above-average performers.  Banks rated 26.9 percent of their employees as “exceeded expectations” in 2011, and on average gave a 3.2 percent salary increase.  This level of salary increase is not much more than the average 2.6 percent increase given to those employees meeting expectations.

Pay-for-performance may be primarily a downside phenomenon, with average increases of only 0.5 percent given to the 5.9 percent of employees rated as “below expectations.”

How have regulatory changes influenced pay trends?

Executive compensation has certainly been a focus of attention for the regulators and the media in recent years.  The most controversial pay practices have been at large banks and investment firms.  In contrast, for the majority of financial institutions, 55 percent, these regulatory changes have required no change in compensation practices.  Of our survey participants, 42 percent have reviewed their compensation practices, but only 21 percent have made changes because of regulatory concerns.  Our review of the trends indicates that there has been a shift away from cash bonuses and toward restricted stock as a form of incentives for executives.

So, you thought you were done with TARP? Post-repayment compensation surprises.

ball-chain.jpgDon Norman and Andy Strimaitis, partners in Chicago-based law firm Barack Ferrazzano who specialize in executive compensation matters for financial institutions, will be speaking at Bank Director’s compensation conference November 8-9 in Chicago.  Here, they discuss the legacy issues from the TARP compensation limits that may remain after repayment of TARP funds.


When a banking organization participating in Treasury’s Troubled Asset Relief Program, better known as TARP, considers repayment, it is commonplace to presume that the organization will be free from the shackles of various compensation limitations, governance rules and reporting requirements that applied during the TARP period. Unfortunately, upon closer examination, it becomes apparent that several areas will require ongoing vigilance to ensure full compliance with the TARP rules.

Generally, following the repayment date, the organization and its employees will no longer be subject to the TARP rules with respect to future compensation decisions (i.e., with respect to time periods following the repayment date).  There are, however, a few important exceptions and distinctions to note with respect to this general rule.

Bonus Restriction.  Even after the repayment date, an organization will continue to be prohibited from paying to, or accruing on behalf of, any employee who was subject to the bonus prohibition any bonus, retention award or incentive compensation with respect to the time period during which that employee was subject to the TARP bonus restriction.  This is supported by an interpretive letter from the Secretary of the Treasury Timothy F. Geithner to Elizabeth Warrren, then-chairman of the Congressional Oversight Panel, dated February 16, 2010, concerning certain aspects of the TARP-related executive compensation restrictions.

For example, assume that for 2011, Joe Smith is the highest paid employee of XYZ, Inc. (based on 2010 compensation).  Further, assume that XYZ, Inc. repays 100 percent of its TARP funds on June 30, 2011.  In determining annual bonuses for 2011, XYZ, Inc. could pay to, or accrue on behalf of, Joe Smith a bonus with respect to the performance period from July 1, 2011 through December 31, 2011.  However, even though its TARP funds have been repaid, it could not pay to, or accrue on behalf of, Joe Smith a bonus with respect to the performance period from January 1, 2011 through June 30, 2011. 

The same treatment also applies to equity awards that were granted during the TARP period and after February 17, 2009, to employees who became subject to the bonus prohibition during a year following the year of grant (these awards would not be qualified “long term restricted stock” awards, as they would have been granted to employees not subject to the bonus prohibition).  In this case, while the employee was subject to the bonus prohibition, the employee could not continue to vest in the equity award.  Once the employee is no longer subject to the bonus prohibition (because TARP was repaid, or the employee was no longer one of the highly compensated employees subject to the prohibition), the employee cannot “catch up” the vesting that was tolled during the bonus prohibition period.  Thus, an equity award that may have had a five-year vesting period, will now have a total vesting period equal to five years plus the period the employee was subject to the bonus prohibition.

Severance Restriction.  Pursuant to the TARP rules, a “golden parachute” payment (i.e., severance) is considered to be made at the time of termination rather than at the time of payment.  As such, after the TARP repayment date, an organization cannot revisit a termination that occurred during the TARP period and make a severance payment or provide other post-termination benefits to an employee who left the company while subject to the TARP severance restriction. 

Deduction Limitation.  A TARP participant is also prohibited from deducting, with respect to its “senior executive officers,” more than $500,000 of compensation expense per year during the TARP period.  Under the TARP rules, the deduction limitation applies to currently available compensation as well as deferred compensation earned during the TARP period.  As such, an organization participating in TARP is obligated to continue to track, post-TARP repayment, the deduction limitation with respect to compensation earned during the TARP period even if those amounts are paid after the repayment date. 

Reporting Requirements.  After the end of the year that includes the TARP repayment, the organization will be required to submit its annual PEO/PFO and compensation committee certifications, risk assessment analysis and narrative and other disclosures with respect to the period preceding the repayment date.  For public companies, this will include attaching the PEO/PFO certifications to the annual Form 10-K and also including the compensation committee certification and narrative summary in the annual proxy statement.  For public and private organizations, all required disclosures will also have to be submitted to the Treasury electronically, and in some cases, to the organization’s primary federal regulator.

Five Questions the Compensation Committees Should Consider when Evaluating the CEO

When it comes to determining what your CEO is worth, the compensation committee must balance the need to attract, reward and retain top executive talent with the shareholders concern that performance is in alignment with pay.

The latest round of regulations will start to mandate that bank boards understand the pay-performance relationships, whether they exist and whether they motivate risk taking. As banking regulators begin to demand further risk analysis or modeling to better meet these needs, Susan O’Donnell, managing partner for Pearl Meyers & Partners suggests compensation committees consider conducting five types of additional scenario analysis or modeling.

  1. Do you know the full range of potential compensation that might result from your programs in aggregate and under different performance scenarios? For example:
    • What is potential upside/downside if both short and long-term incentive plans paid out at threshold and max performance?
    • What is total realized value of compensation received including stock value under different stock price assumptions over the next several years?
    • The totals should be understood by the compensation committee and the recipients. It is different than what is disclosed in the proxy which only shows grant value (which may be worthless in the long run if performance of stock/goals is not achieved).
  2. Do you know how compensation might change under different risk scenarios? (e.g. impact of interest rates, economy, customer retention, etc.)
  3. Can you show a link between pay and performance? Relative to the annual decisions you make, but more importantly the long-term accumulation/rewards and alignment.
  4. Do you know what retention hooks you have on your high performing executives? How much unvested, in the money value they would leave on the table if they left? 
  5. Do you know how much equity/ownership your executives have? Is it sufficient to ensure their alignment with shareholders? Do they hold and retain stock over the long-term?

Compensation committees will need to be ready to answer these questions in the coming months. It’s how you can communicate a CEO’s worth, ensure a proper relationship between pay-performance, increase the likelihood of retaining your top performers and mitigate risk in your compensation programs.

Next Steps for Compensation Committees

As our annual Bank Executive and Board Compensation event came to a close, I had a chance to catch up with Todd Leone, president & founder of Amalfi Consulting, to get his perspective on what directors should do once they leave the conference. With so much advice and recommendations communicated over the two-day event, I couldn’t help but wonder where do compensation committee members go from here. 

Here is what Todd had to offer:

Compensation Down the Ranks

It’s no real secret that the key to a successful organization is a strong and talented team of people. However, in today’s competitive and changing market, recruiting, rewarding and retaining top employees is a challenge. On the last day of our annual Bank Executive and Board Compensation event held at the InterContinental hotel in Chicago, this session focused on the role the compensation committee should take when planning competitive yet acceptable compensation plans for employees past the CEO.

Moderated by Jack Milligan, editor for Bank Director magazine, our panelists included Gayle Applebaum, managing director and founder of Amalfi Consulting, Kimberly Ellwanger, compensation committee chair at Heritage Financial Corp. in Olympia, WA and Donald Norman, partner at law firm, Barack Ferrazzano.


Oversee Not Micro-Manage

To begin the session, panelists addressed the less than obvious question of the compensation committee’s role when it comes to employees below the senior management team. With the liability now resting on the compensation committee, their responsibility for managing performance incentive plans now requires a more holistic approach. As Applebaum points out, the responsibility of the board is not to micromanage each plan, but rather to be aware of how they are designed. Compensation committees should actively review and evaluate the structure of all plans from the executive team down to the teller staff.

Don’t Have to Go it Alone

Sounds overwhelming? It can be, although the panelists agreed that the burden should not rest on the compensation committee alone, and that committee members should work in conjunction with the management team. While the board is ultimately responsible for oversight, they will most surely need input from the CEO and other senior team members.

The concern of some audience members was how to determine who was objective and well-versed enough in the requirements to help the board evaluate these plans thoroughly. Ellwanger openly shared that Heritage Financial Corp. had taken on a Chief Risk Officer whose responsibilities included sharing the list of all compensation plans semi-annually with the board for review. For those banks with limited resources, the following personnel should be able to help committee members analyze the plans on a regular basis:

  • Chief Risk Officer
  • Human Resources Officer
  • CEO/Executive Team
  • Inside Legal Counsel
  • Outside Compensation Advisor

Global Metrics Less Risky

Of course, assembling a qualified team of people to review and oversee all significant compensation plans at an institution is only part of the equation. Designing plans that are attractive to top talent is a critical piece of the puzzle. The panel encouraged smaller banks to not be hasty by cutting out bonuses and raising salaries as this would certainly result in the loss of key employees. Instead, banks should consider varying the levels of performance in their incentive plans by employee rank and then base those on individual and/or company-wide goals. Ellwanger provided the following example:

  • Top Level Team (Executives) = Metrics are driven by corporate performance
  • Next Level Team = Metrics are driven by bank and individual performance

As it turns out, regulators tend to lean more towards global metrics used in compensation plans as these are deemed less risky than behavioral based incentive plans.

Document, Document and then Document

Norman suggested that boards conduct at least a semi-annual risk analysis to evaluate the risks, goals and metrics developed. Throughout those sessions, it’s important to document thoroughly including meeting minutes, review changes and anything that speaks to the thought process behind the plans. A constant theme heard throughout the two-day conference was again reiterated in this session — be prepared to tell your story.

Navigating the Sea of Financial Reform

navigate.jpgRecently, Bank Director and the American Banker presented the 2nd annual America’s Bank Board Symposium tailored to provide bank boards with the knowledge to develop, implement, and monitor strategies for their institutions. Several key industry speakers joined CEOs, board members and experienced financial leaders in Dallas to help navigate the sea of challenges facing bank directors today.

On the heels this event, I had the chance to catch up with one of the presenters, Susan O’Donnell, Managing Director with Pearl Meyer & Partners, an independent compensation consulting firm, to further explore her insights on what she believes are the top three issues concerning directors. Below is what she shared with me via email:

1. Responding to a Rapidly Changing Regulatory Environment
New regulations and requirements are coming at bank directors at an unprecedented pace, particularly in the last decade. Whether Sarbanes Oxley, recent banking regulatory agency guidance on risk assessment of incentive compensation practices, or new proxy disclosure requirements under the Dodd-Frank Act – there is a much greater need for board members to keep up with the rapid and constantly changing regulatory environment. This is particularly true of public banks that now have to meet even more disclosure requirements.

2. Understanding Changing Executive Compensation Trends, Including the Role of Risk Management
Keeping informed of the emerging best practices has also become a major challenge, as boards today must ensure their executive compensation practices reflect sound risk management, pay-for-performance alignment and align with shareholder interests. Board members (particularly compensation committee members) need to adapt their institution’s compensation practices, where appropriate, to reflect the new regulations and emerging best practices, while continuing to support their unique compensation philosophy.

What was ‘acceptable’ practice several years ago might be considered inappropriate today. For example, incentive compensation programs that place significant (or sole) focus on profits and top line growth may be perceived as potentially diverting banks’ focus on safety and soundness. Regulators are reviewing incentive plans with a new “set of glasses” and board must also review their executive compensation programs through these new lenses.

Severance/change in control benefits are also changing in response to increased scrutiny and transparency. Provisions such as the gross-up payments to cover the taxes to the executive under certain situations used to be common several years ago, but are no longer considered appropriate. And companies that continue to put such provisions in place with new contracts will come under increased pressure from shareholders and shareholder advisory groups, potentially impacting future Say on Pay votes. Boards need to be aware of these changing perspectives and the potential reaction from regulators and shareholders.

As executive compensation is under increased pressure, boards need to be ready to respond to the new level of scrutiny. More importantly, they will need to articulate their own compensation philosophy and develop programs that address their own unique needs, rather than chase historical market practice, which in many cases is no longer applicable or appropriate.

3. Responding to Increased Transparency, Disclosure and Shareholder Influence
The new disclosure requirements, starting in 2006 and culminating with many new requirements enacted through the Dodd-Frank Act, are placing a greater spotlight on executive compensation (and governance) practices. With a brighter light comes increased scrutiny.

With Say on Pay, shareholders will have an opportunity to vote their approval (or disapproval) of bank compensation programs. While non-binding, the votes will be public information, subject to media scrutiny. As such, boards will need to listen and be prepared to adapt or change in response to the feedback they receive.  It is critical that boards today focus on ensuring their proxy disclosure effectively communicates their compensation philosophy, programs, decisions, rationale for decisions and pay –performance alignment.

Boards will also need to know and understand their shareholders better. Say on Pay, Proxy Access and the loss of the Broker vote will increase shareholders’ influence on compensation programs and banks should be prepared for this new level of transparency and disclosure.

The Characteristics of Success

With all the new regulations and increased scrutiny within the financial industry, I was curious to know what characteristics would separate the winning banks from the losing ones over the next five years. O’Donnell highlighted these top three traits that she recommends bankers will need to make it through this period of reform:

1. Adaptability: Bank boards will need to be responsive to all the changes going on in the industry, including the new economic, business and regulatory requirements.

2. Leadership: Boards that exercise strong leadership as they navigate the bank through challenging times will more than likely come out on the winning side.

3. Focused: Boards must have clearly defined goals and strategies, knowing what needs to be done to execute them effectively.

One thing I’ve learned very quickly since joining Bank Director is that these are without a doubt some of the most challenging times the U.S. banking industry has experienced in quite some time. But with knowledge, flexibility and effective execution, I am confident that smart bankers will continue to excel at growing their financial institutions.