Do You Have the Right Incentive Goals?


The first quarter of every fiscal year finds compensation committees and management teams wrestling with setting performance goals for the coming year’s incentive arrangements. What does that process look like for your institution?  If your company hasn’t conducted a ground-up assessment of the goal setting process in recent years, consider taking a fresh look at your approach this year.

How does your institution select the performance measures?
In Pearl Meyer’s recent survey, Looking Ahead to Executive Pay Practices in 2016 – Banking Edition, respondents indicated the following three factors as having the greatest influence on performance measure selection:

We would argue that the “long-range or strategic plan” should carry substantially more influence in the selection of performance measures than the other two factors–doing so also takes substantially more effort and intentionality. In contrast to plucking some high profile measures from the approved budget, copying what peers are doing, or appeasing institutional investors or their advisors, selecting measures that effectively support the long-range or strategic plan requires a multi-step line of thinking that starts with the end goal in mind (long-term growth in enterprise value) and drills down to very specific actions that need to occur now in order to achieve the end goal.

Some practical steps in the process include the following:

  • Outline the company’s business objectives and strategy and the drivers of long-term value creation. Then select short- and long-term incentive performance measures that directly tie to the achievement of milestones toward these goals.
  • Identify and focus on the centerpiece financial metrics that will signal success within your company, your industry and the global economic environment.
  • Incorporate both “lag” metrics (that reward achievement) and “lead” metrics (that spur desired new actions and behaviors).

Once the measures are selected, how does your institution set performance expectations?
Respondents to our survey identified the following five factors as having the greatest influence on their performance goal setting process:

For performance measures that can tie directly back to the annual budget, the budget is a very common way to establish “target” performance expectations. This can be effective and appropriate, so long as there is high confidence among the board and management team that the annual budget represents the proper amount of rigor deserving of target incentive payouts. But the budget is not terribly helpful at setting performance expectations appropriate for “threshold” or “stretch/maximum” payouts. This is where observations regarding historical performance, both for your institution and your peers, can be extremely helpful.

Evaluating actual performance against the selected measures over the last several years (preferably five or more) can provide excellent information about the likelihood of achieving specific performance outcomes and can help you to be confident that the appropriate rigor is represented at all payout opportunity levels (i.e., threshold, target and maximum). A rule of thumb for the rigor of performance expectations is as follows:

  • Threshold performance/payout should be achievable about 80 percent of the time
  • Target achievable 50 percent to 60 percent of the time
  • Stretch/Maximum achievable only 10 percent to 20 percent of the time

Observing historical performance is an excellent way to calibrate the performance expectations with the respective payout opportunities and to understand directional trending on specific measures.

Most of the attention and speculation by investor groups surrounds the potential for insufficient rigor in the performance expectations, relative to the payout opportunities. This is a valid concern. It’s also a valid concern when performance expectations are unreasonably high, relative to payout opportunities, because that could discourage employees or potentially encourage them to expose the bank to excessive risks in pursuit of otherwise unattainable levels of performance. A little effort and historical data can go a long way toward addressing both concerns.

Selecting incentive performance measures and establishing the performance expectations are not routine, one-meeting-per-year exercises. If conducted in a thoughtful, intentional manner, your incentive plan design in the first quarter of 2016 can truly support your business strategy and drive behaviors that lead to growth in the value of your company. Make 2016 the year that you challenge—and improve—your incentive goal-setting process.

Succeeding With Your Succession Plan


succession--12-2-15.pngOne of the areas of corporate governance that is receiving increasing focus by regulators and investors is succession planning. Succession planning is important at the board and management level and is especially challenging for community banks that do not normally have the bench strength to choose from a wide talent pool. Often the principal challenge is to incentivize potential successors to remain in a subordinate position while at the same time transitioning a CEO to retirement.

Integration of the Succession Plan
Corporate governance documents should be reviewed and revised if necessary to identify the appropriate members of the board that will adopt and administer succession guidelines. This is typically the governance committee or the compensation committee. The guidelines should be reviewed by counsel to assure that they do not create unintended expectations or rights that are not consistent with exiting plans and contracts. Employment contracts should be revised to clarify the obligation of senior executives to ensure succession development of identified officers.

It is not uncommon that a specific duty to cooperate and implement the succession of a subordinate according to an agreed upon schedule be made part of the contract. Position descriptions should support and facilitate an evaluation of the candidates’ potential for advancement. Further, term provisions should be revised to contemplate expected retirement dates. Short-term bonus plans are a particularly useful method to incentivize cooperation in the development of subordinate executives. A key metric in determining performance of a senior executive should be his or her skills in mentoring and developing subordinates.

Retaining the Next Generation of Bank Leaders
While the mentoring relationship is key, it is often the case that senior executives who are considered the likely successor for the next level, be it CEO, COO or CFO, are lured away by competitors who can offer more immediate advancement. This is sometimes due to the ambition and impatience of the junior executive but also the resistance of the incumbent. There are a number of legal arrangements that can reduce the risk of this occurring. In general, once a designated successor is identified, that person should be granted unvested stock or cash which will vest fully upon their promotion. This is a critical stage as the CEO and board must work closely together to ensure the candidate is prepared to carry the full responsibility of the senior executive. This could take several years and involves familiarizing the candidate with key customers, regulators and the board.

In the event the candidate is not promoted but an outside candidate is chosen, a succession plan agreement would cause a significant portion of the unvested benefits to vest and the candidate would have a window to determine if he or she would remain with the bank. This should have the effect of causing most candidates to resist any capricious impulses to forego the final laps on the succession track and make it more expensive for competitors to raid key talent. It is also the fair thing to do, as the candidate is not guaranteed that he or she will succeed to the desired position but is being asked to remain loyal and forego outside opportunities at the point in the career path where he or she is most attractive to outside companies. It also should allay any fears concerning the risk that an 11th hour outside candidate will be chosen.

Transitioning Retirement of the Senior Executive
For every CEO who has dragged his or her feet in agreeing to a retirement date, there are boards who refuse to accept the planned retirement date given by the CEO. This is human nature, but good corporate governance demands that specific provisions be put in place that counteract this tendency.

While the succession plan if properly administered should groom a successor who at the proper time is ready to replace the incumbent CEO, there need to be specific provisions that ensure that the incumbent is incentivized to facilitate the transition at that time. It is not unusual to execute a transition and retirement agreement with the CEO. The agreement would amend existing agreements and plans to include, among other things, accelerated cash and stock benefits, a lump sum payout of remaining salary, contract benefits and describe a transitional role for the CEO. It could continue health and welfare benefits. This would be in addition to any retirement benefits.

Conclusion
Succession planning is often neglected until it becomes a serious issue because of a sudden departure of a executive. Boards must work harder to ensure that the bank has a dynamic succession plan in place to meet the competitive challenges of the future.

Compensation and Governance Committees: Sharing the Hot Seat in 2016


hot-seat-11-19-15.pngThe compensation committee has been on the hot seat for several years. Outrage regarding executive pay and its perceived role in the financial crisis has put the spotlight on the board members who serve on this committee. Say-on-pay, the non-binding shareholder vote on executive compensation practices, was one of the first new Securities and Exchange Commission (SEC) requirements implemented as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010. Since that time, public companies have responded to shareholder feedback and changed compensation programs and policies to garner support from shareholders and advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co. In recent years, only 2 percent of public companies have “failed” their say-on-pay vote. The significant majority of public companies (approximately 75 percent of Russell 3000 companies) received shareholder support of 90 percent or greater during the 2015 proxy season. Today, companies with less than 90 percent should increase their shareholder outreach, as a dip below that level is often an indicator of emerging concerns.

Compensation committees can’t sit back and relax on these results. The SEC’s proposed rule for pay versus performance disclosure (published in April) and the final rule for the CEO pay ratio (published in August) will further intensify the focus on executive pay and require compensation committees to dedicate much more time and energy to evaluate and explain their pay decisions in light of these new disclosures. Fortunately, implementation of the CEO pay ratio is delayed until the 2018 proxy season while the SEC has not yet adopted final rules for the pay versus performance disclosure (as of September). It is hard to predict what influence these additional disclosures will have on shareholders’ say-on-pay votes. What is clear is that boards will need to monitor these and other pending Dodd-Frank Act rules (i.e. mandatory clawback, disclosure on hedging policies, incentive risk management) in the coming year.  

In the meantime, however, boards may face increased shareholder scrutiny in key governance areas.

Proxy access, the ability of significant shareholders to nominate board members on the company’s proxy ballot, achieved momentum in 2015 when New York City Comptroller Scott Singer submitted proxy access proposals at 75 public companies as part of his 2015 Boardroom Accountability Project. We expect proxy access proposals will remain a focus among activist shareholders during the 2016 proxy season. Dissatisfaction with executive compensation and board governance are often the reasons cited by shareholders seeking proxy access.

Institutional shareholders and governance groups have also started to focus on board independence, tenure and diversity. Institutional investors such as Vanguard and State Street Global Advisors consider director tenure as part of their voting process and ISS includes director tenure as part of their governance review process. This could lead to a push for term and/or age limits for directors in the near future. While many companies use retirement age policies as a means to force board refreshment, it is unclear if that will be enough. Boards would be wise to start reviewing their board composition and succession processes in light of their specific business strategies but also in consideration of these emerging governance and shareholder perspectives.

The intense scrutiny by investors and proxy advisors of public companies’ compensation and governance practices shows no signs of abating. Bank boards will need to develop their philosophies, programs and policies with an acknowledgement of emerging regulations and perspectives. Board composition and processes such as member education, evaluation, nomination and independence will gain focus. Executive pay levels and performance alignment will continue to be scrutinized based on new disclosures mandated by Dodd-Frank. The spotlight on pay and governance is not winding down, but rather widening and both the compensation and governance committees will need to spend more time addressing these issues in the years to come.

Keeping Your Compensation Committee On Track During the Busy Winter Season


executive-compensation-11-11-15.pngThe Dodd-Frank Act, regulatory guidelines on compensation risk and shareholder advisory votes on executive compensation have all contributed to an increase in the compensation committee’s responsibilities and time requirements. That pressure is compounded this time of year as committees enter their “busy season.” The fourth quarter is the start of many critical and often scrutinized committee activities: reviewing performance, approving 2015 incentive awards and developing 2016 performance incentive plans.  This article provides a sample full year committee calendar and a checklist of activities and actions compensation committees should be focusing on during Q4 2015 and Q1 2016.

It is best practice for compensation committees to define and schedule their annual activities for the year in advance. A well-defined calendar helps members better plan and prepare for the critical, and often timely, decisions that are required. There are three key cycles to the annual calendar: Assessment, Program Design and Pay Decisions.

Assessment occurs during the more “quiet” months following the prior year’s performance cycle where pay decisions are made, but before the start of the next performance cycle when a new program starts. For companies whose fiscal year follows the calendar year, this typically occurs between June and October (following most public company annual meetings). While there may be less pressure to approve and take action during this time, the analysis conducted during this phase will be critical for decisions made later in the year. Compensation committees should use this time to reflect on the pay program and decisions of the prior year and assess peer, market and regulatory trends that might influence programs in the coming year. This is a perfect time to conduct robust tally sheets, assess the pay and performance of your company relative to peers, conduct peer/competitive benchmarking, and if you are a public company, review say-on-pay results and conduct shareholder outreach. Information reviewed during this phase provides the foundational knowledge needed for the upcoming design and decision cycles.

Program Design typically occurs in the late fall and early winter (e.g. November–January), when compensation committees review the assessment phase results and begin defining total pay opportunities and programs for the upcoming year (i.e. base salary, annual and long-term incentive opportunities and performance goals). Compensation committees should pay careful attention to performance metric selection and goal setting to ensure proper pay-performance alignment. It is also critical to ensure the incentive plans support sound risk management practices. Many banks will complete their annual incentive risk review at this time. This is also an opportune time to consider implementing or revising compensation policies or practices, perhaps in light of shareholder feedback.

Pay Decisions occur in the late winter (e.g. January–April). During this phase, performance evaluations are conducted and decisions are made related to incentive payouts. Pay opportunities for the new year are also set, including annual incentive opportunities and long-term incentive grants. All banks should have conducted their risk assessment review by this time as well. Once Section 956 of the Dodd-Frank Act is finalized, banks will be required to provide documentation of their risk review to regulators. For companies whose fiscal year ends at the end of the year, this will occur during the same timeframe, in the late winter or early spring. This is also a very busy time for public companies that are required to document the prior year’s pay decisions in the proxy in preparation for shareholder review. Many committees spend several meetings discussing these issues.

Periodic activities include, but are not limited to: executive and board succession planning, incentive risk assessment, board and committee evaluations, consultant evaluations, benefit plan review, employment agreement/severance arrangement review and shareholder engagement.

Ongoing updates throughout the year include incentive payout projections and regulatory updates.

Below is an illustration of a typical compensation committee annual cycle with a check list of key activities for Q4 and Q1:

Today’s environment of increased scrutiny on executive compensation and governance requires compensation committees to spend more time fulfilling their responsibilities. Having a well-planned calendar, with a heightened focus on the “off season” assessment activities, can help committees be better prepared for the many critical year-end decisions.

*Section 162(m) of the Internal Revenue Code allows public companies to deduct performance-based compensation above $1 million if it meets specific requirements.

Bank Compensation Committees Lose a Whole Lot of Discretion


compensation-committee-11-6-15.pngA lot has changed since Bank Director hosted its first compensation conference 10 years ago. I was at the inaugural conference in Dallas in 2005, and back then, the big issues in bank compensation were the competitiveness of CEO pay plans, proxy trends, the attitudes of institutional shareholders, and the structuring of incentive compensation plan for executives.

As we all know, 2005 was still something of an age of innocence for the banking industry. The financial crisis, which was in full bloom two years later, changed everything. Congress and the bank regulatory agencies responded to the crisis with an avalanche of new requirements and restrictions, including many that targeted the industry’s compensation practices. It was taken as an article of faith in Washington that out-of-control pay practices in the financial services industry during the home mortgage boom helped precipitate the crisis, and bank incentive compensation practices are now under tight regulatory scrutiny. The compensation committee was a fairly uneventful assignment for bank directors prior to the crisis, but now rivals the audit committee for regulatory complexity. Serving on the compensation committee was once analogous to a military posting well behind the front lines, but now it is the front line from a governance perspective.

At the front lines this year, Bank Director hosts its annual Bank Executive and Board Compensation Conference Nov. 10-11 in Chicago at the Swissotel. Granted, this is a time of year when the weather is so unpredictable, it might be warm or it might be snowing.

While the weather might be uncertain, the change in compensation committee responsibilities will be pretty clear.

The initial barrage of regulations occurred in 2010, when the four bank regulatory agencies—led by the Federal Reserve—issued joint guidance on what has come to be called Sound Incentive Compensation Practices, or SICP. This guidance focused on the relationship between risk and compensation and has had several practical results, including a new emphasis on compensation risk management (banks are required to perform an annual risk analysis of their incentive compensation programs); a much longer payout of incentive awards; and a significant reduction in the use of stock options, which the regulators generally frown upon because they might promote risky behavior, as stock prices generally have to rise for the options to be worth anything.

Another big shoe that is about to fall is a series of new requirements that are part of the Dodd-Frank Act of 2010, which was the U.S. Congress’ signature response to the financial crisis. Although far reaching in its scope, Dodd-Frank did address bank compensation practices as well. Some of its compensation-related provisions—including public company mandated, nonbinding shareholder votes on executive compensation and independence requirements for compensation committees—have already been put into place. Other requirements that will apply to all public companies, including disclosure of the ratio of the CEO’s total compensation to the median compensation for all of a company’s employees, and a clawback provision that allows companies to recover incentive compensation paid to executives if it was based on inaccurate financial statements, are expected to take effect in 2016 or 2017.

Perhaps the greatest difference between service on a compensation committee today compared to 2005 is the loss of discretion, and this cuts across the entire industry even though the most serious compensation abuses leading up to the crisis were found at the big banks, or at unregulated financial companies operating outside of the banking industry. Bank boards must be able to justify their compensation decisions to the institution’s primary regulator, who are standing at their shoulder like a shop floor supervisor. There might still be some element of discretion left when it comes to the specifics of an incentive compensation award to a senior bank executive, but it’s certainly much less than it used to be. In the banking industry today, the regulators are the primary drivers of incentive compensation for senior executives, and the greatest challenge for compensation committees is compliance.

As for the weather in Chicago, what are a few snow flurries to compensation committees buried under a blizzard of regulations?

What Behavior Does Your Incentive Plan Reward?


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.

What Compensation Committees Are Asking Right Now About Incentive Plans


9-26-14-pearl.pngAutumn is here and that means a busy season for compensation committees. They need to review the current year’s incentive plans and finalize those for the coming year. In the era of pay-for-performance, committees are feeling more pressure to ensure the right metrics are incorporated into the incentive plan framework, to set performance goals with an appropriate level of rigor, and to assess the plan’s response to performance. At Pearl Meyer & Partners, we have noted three questions frequently asked by compensation committees during the incentive planning process:

Our committee is wrestling with whether we have selected the right performance metrics for maximum effectiveness. What should we consider?
One of the first things to consider is whether the performance metrics within your incentive programs make sense in light of the bank’s current business strategy. If a new strategic plan has been developed or updated recently, do the current incentive metrics support the new strategy? How do your performance metrics work together as part of long- and short-term incentive plans to drive sustainable results? Choosing metrics that support the business strategy while also reflecting a balance of growth measures (i.e. loan/asset/deposit growth), earnings/returns (i.e. return on assets, return on equity, earnings per share, and total shareholder return), and quality/operational efficiency (i.e. non-performing assets, efficiency ratio) will help create a balanced incentive strategy. In times when higher growth outcomes could come with lower earnings and/or operational efficiency, it is important to achieve a balance among metrics in order to optimize shareholder returns.

We tend to set our incentive plan goals based on our budgets/forecasts. How can the committee evaluate the level of rigor represented by the goals?
Goal setting is one of the most challenging aspects of incentive plan design. It is common practice by many banks to use only the annual budget when setting target performance goals. However, committees are sometimes wary of this approach and can be concerned that management might manipulate the budget given that it is linked to the incentive plan. As a rule of thumb, the probability of achieving the threshold (minimum level of performance which must be achieved in order to earn an award), target and stretch goals (the target and maximum level of performance above which no additional award is earned) should be 70−80 percent, 50−60 percent, and 10−20 percent, respectively.

There are two ways to help measure probability:

  • The internal perspective examines the bank’s own historical performance. For example, you could look at the bank’s performance during the past five to eight years. How often in any given year did the bank achieve your current proposed goals? If the analysis indicates that the historical probability of achievement for the proposed target goal is 80 percent, then maybe the goal has been set too low and should instead be the threshold goal.
  • The external perspective examines the historical performance of peer institutions in order to determine their cumulative probability of achieving the proposed performance goals compared to the internal perspective. For example: the bank’s historical probability of achievement is 80 percent likelihood at threshold and 5 percent at the stretch goal. However, the peers’ historical probability of achievement is 60 percent at threshold and 40 percent at stretch. Since the bank’s spread is wider than peers, you may need to raise the threshold and lower the stretch goals.

Besides evaluating peer historical performance, committees can consider investor expectations by examining analyst estimates for various performance metrics and how they relate to the proposed goals. However, there is the potential for some circularity in this analysis given that analyst estimates often take into consideration management input regarding the bank’s expected performance.

How can we determine the right level of payouts in our incentive programs?
Many banks are re-examining and modifying incentive metrics and payout slopes to help find the proper balance between pay-for-performance and prudent risk management. Incentive payouts typically range from 50 percent of the target incentive payment at threshold to 125 or 150 percent of the target payment at maximum. An exception to this approach is with revenue-generating employees such as loan officers, who might get payouts up to 200 percent of target if they reach their stretch goals.

To validate, committees can examine peer practices in terms of the range of payouts. This might require analysis on a metric-by-metric basis. For example, net income may range from +/- 20 percent of target between threshold and stretch goals, but the range for the efficiency ratio will likely be narrower given it is a percentage metric.

For more information, watch a video of Kristine Oliver discussing the topic of Ensuring Dynamic Tension and Rigor Within Your Incentive Programs.

Four Topics to Add to Your Summer Compensation Committee Agenda


7-16-14-article.pngProxy season has recently ended, and the beginning of the third quarter marks the start of a new compensation planning season. The summer meeting of a bank’s compensation committee is an ideal opportunity to reflect on the previous compensation cycle and to consider the next—often by focusing on topics like proxy season trends, pending regulatory/legislative and other emerging compensation issues. However, the summer committee meeting can also be used to focus on issues of more strategic importance to the bank. Consider adding one or more of the following topics to your summer discussions to increase your committee’s effectiveness over the upcoming year.

  1. Succession Planning
    Our experience in working with community banks is that many board members do not view succession planning as a high priority issue. They either don’t view retention of their CEO as a risk, and/or their CEO is still several years away from retirement. As a consequence, many directors cannot articulate what would occur if a CEO’s departure, death or disability left the bank suddenly leaderless.

    Considering that it takes several years to develop and cultivate a CEO successor in the best circumstances, boards should identify potential candidates to succeed the CEO long before he or she retires. High-potential executives are always in demand, and developing your bench will strengthen the team and mitigate the risks associated with unexpected and unwanted executive turnover.

    And even if long-term cultivation of candidates is less of a priority right now, an emergency CEO succession plan should be a requirement for all organizations, to mitigate the business continuity risk should tragedy strike. An emergency CEO succession plan will minimize board deliberations and discussions of interim CEO candidates in crisis situations by articulating a structured process (the timing of internal and external communications and board decisions), as well identifying one or more interim CEO candidates (who could come from the senior leadership ranks or the board).

  2. Pay-for-Performance Analysis
    The most common pay-for-performance analysis retrospectively evaluates historical financial performance and total shareholder return relative to actual compensation received by the CEO (and potentially other proxy executives), compared against the performance and pay of peer companies. Simply put: did the incentive programs deliver appropriate pay for the performance results achieved?

    Summer is an effective time to discuss these pay-for-performance results with the committee, since pay data for peers is publicly available following the end of proxy season. The results may encourage further discussions about the organization’s compensation philosophy, and especially the effectiveness of incentive plans in supporting your business strategy and results.

  3. Compensation Philosophy and Peer Group
    Wholesale changes in compensation philosophy from one year to the next are rare, but as your bank’s business strategy evolves, your compensation philosophy ideally will evolve as well. For example, as a business strategy evolves from growth to profitability (or vice versa), the corresponding compensation philosophy should consider re-weighting incentive plan metrics to more effectively support such a change in priorities.

    Peer group changes are less frequent in banking than in other industries, but your peer group may require re-evaluation if the bank has grown significantly, or changed business focus (for example, geographic footprint, or retail vs. commercial lending). Likewise, continued industry shifts (mergers, business shifts, etc.) require an annual review to ensure that peers are still a good “fit” with the bank.

  4. Committee Meeting Calendar and Agenda
    A compensation committee’s summer meeting tends to include fewer time-sensitive items than most other meetings. It is an ideal time to review your annual committee meeting calendar and standing agenda items relative to the committee charter. Work collaboratively with your executive team and outside advisors to ensure that no key issues are overlooked, and that items are spaced throughout the year to allow enough time for consideration of relevant information and thoughtful deliberation prior to key decisions.

Remember that the purpose of your executive pay programs is to support and reinforce your bank’s business strategy. Proactive planning of your meeting calendar and agenda will ensure your committee is addressing all its compliance-related requirements, while allowing sufficient time to thoughtfully consider strategic implications of compensation design decisions.

To find a full year’s Compensation Committee agenda items for community banks in our recently published document, Managing an Effective Compensation Committee Calendar for Community Banks, go here.

Case Study: The Perfect Peer Group


For Banker, By Banker Video Series
The development of a compensation peer group is important for making informed decisions regarding executive pay and addressing questions from regulators.  In this short video, Barbara Stephens, compensation committee chairman for First Business Financial Services, Inc., shares the process behind forming a peer group that best resembled the company’s business model.