Anna Barnitz estimates she spends about eight hours per week on board matters as an independent director for a bank in Ohio.
“That has become a little challenging,’’ she says. “Right now, I’m on seven committees of the bank.”
Bank directors are working quite a few hours these days on board business, more than in previous years, and many of them have full-time careers outside the bank, like Barnitz does. Barnitz is the chief financial officer of family-owned Bob’s Market and Greenhouses.
She also serves as compensation committee chairman for Ohio Valley Banc Corp, the $824-million-asset holding company for Ohio Valley Bank. A few years ago, the bank reduced its board from 13 to nine members and she’s had extra work to do to prepare for increased regulation regarding executive pay. The board has a mandatory retirement age of 70, but it’s been thinking of moving that up to 72, to deal with a dearth of qualified directors who want to do the job.
Henry Oehmann III, the director of national executive compensation services at audit, tax and advisory firm Grant Thornton LLP, says what Barnitz is going through is typical. On an hourly basis, directors are losing compensation because they’re working more hours without more pay.
He imagines that it might be appropriate to pay compensation committees members more, given their increased responsibilities lately.
Bank directors for banks with less than $1 billion in assets get paid a median of $26,830 per year, according to Grant Thornton. That means half of the directors got paid more and half were paid less. For banks with $1 billion to $5 billion in assets, the median pay is a little more, $39,243. Pay really jumps for large banks, or those with more than $5 billion in assets. Directors on those boards get paid $81,581 as the median. The results are similar to Bank Director’s own research on bank director pay, conducted last summer.
Directors of banks in the Southeast get paid the least: just $33,528 as a median, which isn’t surprising, given the region’s economic troubles. Northeast bank directors get paid the most: $54,681 per year.
Oehmann and Justin Waller, a senior associate with Grant Thornton, presented some advice for boards considering pay at Bank Director’s Bank Executive & Board Compensation conference recently in Chicago:
Anchor the director’s pay with a significant annual retainer designed to serve as a basis for the director’s commitment to the director role.
Employ a mix of cash and stock-based pay with the target of at least 50 percent of the director’s total compensation in company stock.
When setting committee and board meeting fees, set fees based on market competitiveness and current activity level. If activity level is high, meeting fees can drive total board pay well above competitive market levels. Year-to-year swings in director pay can be minimized if retainer makes up a larger component of total compensation.
Keep in mind that many banks pay both holding company and bank meeting fees; but most banks pay only one meeting fee if the holding company and bank board meet on the same day.
Most banks differentiate pay if the director attends in person versus via telephone.
Equity-based pay includes stock and stock options; the trend is a move away from options to full value stock awards.
Many banks have director ownership guidelines where a director is required to own a fixed amount of bank stock.
Deferral of board fees and stock deferrals are frequently used to provide a tax benefit, as well as achieve ownership goals.
The financial crisis has had a huge impact on the way banks pay their executives and even their loan officers, but CEO pay is definitely creeping back upward. The smallest community banks to the international mega-banks have all made changes in the last few years to reduce the likelihood that employees will take big risks that threaten the long-term health of their financial institutions.
Many banks are moving away from short-term incentives, paying smaller amounts in cash bonuses for meeting short-term performance goals, and paying equity gradually over a longer period of time in the form of restricted stock based on performance goals.
One of those banks is First Commonwealth Financial Corp. in Indiana, Pennsylvania, a $6 billion-asset institution with 112 offices.
Bob Ventura, chairman of the board’s compensation and human resources committee, said at Bank Director’s Bank Executive & Board Compensation conference in Chicago recently that the bank has moved from paying a roughly 75 percent/25 percent ratio of compensation in short/long term pay to now using a 65/35 ratio.
Even more changes have been made from a risk standpoint among loan officers.
“We have gotten away from volume goals and put some profitability goals in there,’’ he said, adding that there’s an 18-month time period to get paid the full incentive package.
Even though the bank is not a recipient of Troubled Asset Relief Program money from the federal government, it still follows TARP compensation guidelines. The bank conducts third-party annual reviews of its compensation plans, and has created a position for a chief risk officer who reviews compensation plans and makes recommendations to the risk committee of the board.
“We have evolved from plans that were primarily paid in cash,’’ he said.
Todd Leone, a principal at McLagan compensation consultants in Minneapolis and a speaker at the conference, laid out some general trends, including:
The use of full value equity plans (such as restricted stock) continues to increase.
Most banks don’t use stock options as a form of equity compensation, no matter what the bank size is.
The larger the bank, the more frequent the use of equity compensation.
Banks are increasingly using credit quality measures in performance plans.
Bank CEO pay increased last year as the economy strengthened and bank balance sheets improved, although most of the increases were tied to cash and equity incentives, Leone said. The biggest pay increases were for CEOs at the largest banks, who saw their paychecks drop substantially in 2008 and 2009 following the financial crisis. The median cash compensation for big bank CEOs is now roughly what it was in 2006, $2.3 million, according to McLagan’s analysis of 717 publicly traded bank proxy statements, 41 of them banks with more than $15 billion in assets.
The following table shows the breakdown in CEO pay last year:
Median 2010 CEO Compensation
*Cash compensation is salary plus all other cash incentives, like bonuses. Direct comp is cash compensation plus equity. Total compensation adds direct compensation, retiree benefits and all other compensation.
With the increased regulatory conditions, compensation committees are finding themselves knee deep in overseeing compensation plans across their financial institutions. In this video, Robert Ventura, Compensation Committee Chairman, talks about the new normal at First Commonwealth Financial Corp. and how his committee has handled their biggest challenge over the past year.
Are your institution’s compensation plans structured to benefit or hurt your shareholders? In this five-minute video, William Flynt Gallagher, president of Meyer-Chatfield Compensation Advisors, offers insight and advice on strategies the compensation committee can use to maximize benefits and structure executive agreements to actually enhance shareholder value.
In connection with another successful Bank Director & Bank Executive Compensation conference, I thought it would be helpful to recap three important issues raised by the attendees, as well as some of the action items that need to be addressed in the short time left before year-end.
You are Not Alone
During the day-long Peer Exchange held prior to the conference, compensation committee directors met in small groups to discuss issues of common interest. One of the universal feelings was that the directors are feeling awash in new regulations and regulatory guidance that are making it very difficult to do their jobs. One director noted, to everyone’s agreement, that focusing so heavily on all of the new rules has materially detracted from time spent on truly strategic matters.
Consistent with prior years, directors conveyed that their time commitment to board activities and the complexity of the rules they have to work through in compensation continue to increase. When this is combined with the minimal annual increases in director compensation and the increasing threat of personal liability, it is a wonder that these directors continue to be as focused and committed to their institutions as they are.
Succession Planning at the Board Level
Though most directors felt that their boards are in a position to actively oversee their senior executives, including the wherewithal to replace underperforming or otherwise problematic individuals, there was almost universal agreement that this is very difficult (and increasingly more difficult) to do so at the board level. The smaller the institution, the more likely it is that any given director may be either a founding investor, major business producer or both. Though many directors indicated they had some level of succession planning for their executive ranks, few have actively planned for succession at the board level, other than using a mandatory retirement age for directors, which only guarantees transition rather than improvement. This is consistent with the difficulties faced by many of our clients. We frequently meet with board members to discuss proper succession planning at both the executive and board levels.
The directors agreed that one of the best methods to surface these issues is to perform a review of each board member and the functionality of each committee. Prior to nominating board members for each successive term, a summary of these reviews should be considered by the board, or its nominations committee. If necessary, to arrive at the conclusion to remove a board member, it can be helpful to have a third party involved in the evaluation process. A third party can take an independent role in the process and may also have a much more robust review process than would otherwise be developed internally. The resulting evaluation report should be circulated to the relevant board members as part of the annual nominations process. One director noted at the Peer Exchange that after the first 360-degree review was completed at the board level, the CEO/chairman decided it was best to keep the results of future reviews confidential from the other board members, so as to avoid conflict. Unfortunately, this is not the end result you would hope for.
Risk is All Around Us
Not surprisingly, the general theme of the conference seemed to be risk. The issue of risk, as it relates to compensation, was raised and discussed in almost every presentation and each director exchange. This echoes our experience with our own clients over the past year. For public and private banks of all sizes, the universal set of rules applicable to incentive compensation and risk is the Joint Guidance on Sound Incentive Compensation Policies (effective June 2010). This guidance provides the principles-based approach to identifying, monitoring and mitigating risk as it may exist in your incentive compensation plans. Subsequent risk-based rules found in Section 956 of Dodd-Frank and the proposed Interagency Guidance on Incentive-Based Compensation Arrangements (proposed April 2011) provide great direction on how Congress and the regulatory bodies will look at the risk associated with incentive compensation plans for banks with assets in excess of $1 billion, though they are not all currently effective.
Consistent with the Joint Guidance that is currently effective, every banking organization should be reviewing their incentive compensation arrangements to assess the risk such arrangements may pose to the institution. The company should insure that proper oversight and controls are in place with respect to each plan to monitor ongoing risk and to participate in the design and development of new plans in a manner so that risk is fully understood and actively managed. Lastly, the board, or a committee of the board, should regularly meet with the individuals responsible for the oversight and controls of these plans and the board minutes should reflect this process. Together, they can properly judge whether changes need to be made to either the incentive compensation arrangements, or to the procedures and controls to monitor such programs, in order to protect the institution from unreasonable risk. The board must be actively engaged in this process and have a good understanding of each element of incentive compensation as it exists at the bank.
Recent federal guidance on bank incentive compensation practices, combined with the landmark Dodd-Frank Act, is requiring bank compensation committees and their audit or risk committee counterparts to take a collaborative approach to determining whether their plans pose a material financial risk to the institution. This and other topics were covered at a roundtable discussion on compensation risk that brought together directors and human resources professionals at large, publicly traded banks, representatives of the McLagan consulting firm and the law firm Kilpatrick, Townsend & Stockton. The half-day event was held in late September at the University Club in Washington, DC.
Released in June 2010, the new rules mandate that banks must review all of their incentive compensation programs annually to make sure they have an appropriate balance of risk and reward, and that the board of directors is providing an adequate level of governance oversight.
Al Moschner, who is chairman of the compensation committee at $13.9 billion-asset Wintrust Financial Corp. in Lake Forest, Illinois, said the compensation committee sponsored a meeting with the chairmen of the other board committees, the chief executive officer, the chief financial officer and the chief risk officer to review the risk profile of the bank in the current environment. A head of the bank’s human resources department also described the various levels of compensation that are being contemplated for the coming year. “And then there was a robust discussion about whether that makes sense from a risk perspective,” Moschner says.
Wintrust also emphasizes an integrative approach to managing compensation risk by having some directors serve on both its compensation and audit committees. “We try to make sure we have some cross-pollination between the two committees,” Moschner explains.
“The compensation committee needs to work collaboratively with the bank’s risk committee,” says Todd Leone, a principal at McLagan. “The risk committee needs to review the goals that drive the bank’s incentive plans. They have to ensure what is being motivated doesn’t have unintended consequences. The compensation committee drives plan design; the audit/risk committee ensures it is within the bank’s overall risk tolerance.”
Compensation committees today also face the challenge of developing an appropriate set of performance metrics for long-term incentive plans. Part of the problem is that federal regulators are now focusing greater attention on compensation risk generally, but fundamental changes that have affected the entire industry add to the challenge. “How banks make money now is now very different and that makes it harder to develop incentive compensation plans,” says Clifford J. Isroff, the lead independent director at $14 billion-asset FirstMerit Corp. in Akron, Ohio, and a member of both the compensation and risk committees.
Wintrust’s long-term incentive plan used to be based on a single metric—annual earnings growth?but the current operating environment has led the bank to build multiple performance metrics into its plan, including return on assets and growth in tangible net assets.
Another controversial issue that compensation committees are being forced to deal with is the clawback provision in the Dodd-Frank Act. The act requires the Securities and Exchange Commission to direct the national securities exchanges like NYSE Euronext and NASDAQ OMX to prohibit companies from listing their stocks if they have not adopted clawback policies that would allow them to recover incentive compensation that has already been paid to former or current executives if it was based on incorrect data.
Gayle Applebaum, a principal director at McLagan, said many of her bank clients are finding some resistance from their senior managers to the very notion of clawbacks, as well as deferrals that are now being built into many incentive plans. “Oftentimes managers don’t want these things for their people,” Applebaum says. “They are worried about their ability to retain talent.”
One point that most of the participants agreed on was the importance of having a strong risk culture throughout the organization. Although it will still be necessary to vet the bank’s incentive compensation plans annually to satisfy the new federal requirements, a strong risk culture is every bank’s first line of defense.
“If you manage the risk, I’m not worried about the compensation plan,” said Frank Farnesi, who is chairman of the compensation committee at Beneficial Mutual Bancorp Inc., a $4.7 billion-asset mutual holding company in Philadelphia.
While financial institutions will shy away from the hint of a “troubled condition” designation, such designations are unfortunately a common fact of life in today’s economy. Many more banks and thrifts are finding themselves subject to new compensation restrictions when they fall into the “troubled” category. After an institution is determined to be in troubled condition, it becomes subject to the restrictions on golden parachute payments set forth in 12 C.F.R. Part 359 (“Part 359”).If its condition continues to deteriorate, the institution might also become subject to the prompt corrective action (“PCA”) rules, which limits the ability to pay bonuses and increase salaries.
Overview of Part 359.Part 359 limits the ability of financial institutions and their holding companies to pay, or enter into contracts to pay, golden parachute payments to institution-affiliated parties (“IAPs”).The Part 359 troubled condition “taint” will flow from a troubled institution to its healthy holding company and also from a troubled holding company to a healthy institution (but not from a troubled institution, through a healthy holding company, to a healthy subsidiary).
An IAP is broadly defined and can include any director, officer, employee, shareholder, or consultant.In certain situations, it can also capture independent contractors including attorneys, appraisers, and accountants.
A “golden parachute payment” (“parachute payment”) is any payment of compensation (or agreement to make such a payment) to a current or former IAP of a troubled institution that meets three criteria.First, the payment or agreement must be contingent upon the termination of the IAP’s employment or association with the financial institution.Second, the payment or agreement is received on or after, or made in contemplation of, a determination that, among other things, the institution is in troubled condition.Third, the payment or agreement must be payable to an IAP who is terminated at a time when the institution meets certain conditions, including being subject to a determination that it is in troubled condition.Even where a contract pre-dates the troubled condition designation, any parachute payment payable thereunder will be prohibited by Part 359 while the institution is in troubled condition.
Certain types of payments and arrangements are excluded from the definition of a parachute payment. Generally, payments made under tax-qualified retirement plans, welfare benefit plan, “bona fide deferred compensation plans or arrangements,” and certain “nondiscriminatory” severance plans, as well as those required by statute or payable by reason of the death or disability of an IAP are excluded.
In addition to the general categories of excepted payments, the rules under Part 359 permit a financial institution to make certain parachute payments, or enter into agreements providing for parachute payments, where the institution obtains the prior approval of one or more regulatory agencies. Such approval is required to pay obligations that pre-date the troubled condition, for the institution to pay, or enter into an agreement to pay, severance to someone who is retained as a “white knight,” or to enter into agreements that provide for change in control termination payments (that are contingent on both the occurrence of a change in control and termination of employment).In nearly every case, if approval is granted, the approved severance payments will be limited to no more than 12 months of base salary (tax gross-ups will not be permitted in any form) to be paid over time and subject to claw back.
In October 2010, the FDIC issued Financial Institution Letter 66-2010 (“FIL-66-2010”) which expanded the information required to be submitted with an application for approval under Part 359 by requiring an institution to demonstrate that the IAP is not a “bad actor” and is not materially responsible for the institution’s troubled condition.The guidance also provides for a de minimis severance of up to $5,000 per individual that can be paid without regulatory approval, so long as the institution maintains records detailing the recipient’s name, date of payment and payment amount, and also maintains a certification covering each individual who receives a payment.
Overview of Prompt Corrective Action Rules. The PCA rules designate four capital categories: “adequately capitalized” (which is an institution in “troubled condition”); “undercapitalized;” “significantly undercapitalized;” and “critically undercapitalized.” If an institution is significantly undercapitalized or critically undercapitalized, the institution becomes subject to additional compensation restrictions. Undercapitalized institutions may also become subject to these additional restrictions.When subject to the PCA compensation restrictions, the institution generally cannot pay any bonus to or increase the salary level of senior executive officers.
Bank directors at smaller banks are working longer hours than last year, and some are being paid less with fewer benefits, according to the results of Bank Director’s annual Compensation Survey co-sponsored with Blanchard Consulting Group.
The survey, conducted in July and August, comes following a multi-year recession and economic slump that bank balance sheets are only now recovering from. But with a host of new regulations on the drawing board and diminished profitability, bank boards in some cases have responded by getting less and doing more.
The median number of hours spent on the job for all asset sizes is the same as last year, 15 hours per month.
However, for smaller banks, those under $100 million in assets, the median number of hours spent on the job went from 10 hours per month last year to 15 hours. Banks between $251 million and $500 million in assets had directors who spent about 13 hours per month on the job last year. This year, they are spending three more hours per month on bank business, suggesting the economic environment is disproportionately impacting smaller banks and the workload of their directors.
The most common form of compensation for outside directors is board meeting fees, with 51 percent of all banks paying them. That was down from 62 percent of respondents who said their bank paid meeting fees last year.Twenty-eight (28) percent also get a cash retainer, down from 32 percent last year.
However, for the banks that continue to pay fees and retainers, the median amounts stayed the same as last year, $600 for a full board meeting and $10,000 for an annual retainer.
Fifteen (15) percent of respondents to the survey say they get some sort of equity compensation, compared to 16 percent last year.
Benefits appear to have eroded.
Thirty-nine (39) percent of banks offer no benefits to board members, up from 28 percent last year, with the percentage of private banks offering no benefits higher than public, 44 percent to 35 percent.
Satisfaction with the board’s job handling compensation issues also has gone down. This year, 63 percent of respondents give their board high marks for managing the executive compensation program. That compares to 74 percent last year who said their bank was managing executive compensation well or very well. This year, 56 percent think the board is managing director compensation well or very well, compared to 68 percent last year.
Pay-for-performance metrics and gathering and understanding peer/comparison data continue to be the most challenging issues for the bank’s compensation committee this year. The same percentage named those two topics as the most challenging issues this year, 26 percent.
New federal regulations requiring banks to analyze risk in incentive compensation plans has led slightly more than one-third, or 34 percent, of banks in the survey to make changes. Only 29 percent say they have implemented a claw back provision for executive pay. Of those who do have a claw back provision, 65 percent have one for the management team, and 60 percent have one for the CEO. Twenty-eight percent (28) have claw backs on pay for loan officers.
In a new question this year, half of all respondents say they link CEO pay to the strategic plan. Another sixty-eight (68) percent say they link CEO pay to performance metrics. Of those who link CEO pay to performance, 66 percent use asset quality, 59 percent use return on assets and 62 percent use return on equity. Only 35 percent tie CEO pay to total shareholder return and 37 percent tie it to earnings per share growth.
The Compensation Survey was sent to 8,675 U.S. bank CEOs and directors via e-mail on July 21, Aug. 4 and Aug. 18. Surveys were returned by 617 people, for a response rate of 7.1 percent.
For more details on the survey and bank director pay, review our analysis in the fourth quarter issue of Bank Director magazine.
The principals in our firm have completed over five hundred board projects, in our experience the answer to who should sit on your board is, in every case… it depends. Every search is unique.
Who Should Be On Your Board – Determine Your Needs
There are a myriad of factors that determine who should serve on your board. The composition and culture of your current board are important factors. Similarly, the nature of your company is a variable in determining who should serve on your board:
Your current board of directors, in some of its composition, is reflective of what the company was, or aspired to be, in years past. Your company’s profile is just a snapshot of what the company is today. Therefore, importantly, where is the company headed? What are the most important objectives to be achieved? In other words, what is your corporate strategy? The answers to these questions need to be understood in determining who will be the most valuable director(s) for your board. The person or people who should serve on your board are born from your strategy.
When you overlay your corporate strategy with an assessment of the toolkits of each director on your board and consider your company’s profile, you can create a matrix. The matrix illustrates the competencies you need to acquire to enable your board to guide your company toward its strategic goals. Add to this sensitivity to the board’s culture and you will see who should be on your board.
Who Should Be On Your Board – Universal Elements
Every company’s board competency matrix will be different, but there are a few common components that are found on most well-built boards:
Diversity: This is stating the obvious, but a variety of perspectives is an important component for all boards.
Operators: Among the members of every board should be one or two current CEOs or COOs, who will provide the board with an operator’s perspective and often act as a sounding board to the company’s CEO.
Financial Acumen: This is a broad skill set, ranging from accounting and audit skills to treasury, financing, and M&A experience. We have not worked with a client yet who has said, “We have too many board members with financial savvy.”
Industry Knowledge: An independent director with deep experience in the company’s industry will augment management’s expertise, can serve to educate other directors on the industry, and can provide an informed board level evaluation of industry specific items.
Customer Knowledge: Board members with significant knowledge of major customer categories provide valuable insight in board discussions.
Regulatory / Compliance: Knowledge of regulatory issues facing a company may be critical. The same holds true for risk.
Technology: Every business relies on technology. Having a director who can evaluate the impact of technology on the company, make strategic recommendations and communicate effectively with other members is always valuable.
International: This may not apply to all companies, but to those it does, it is a major concern. Boards are clamoring for directors who not only have a global perspective, but boots-on-the-ground international experience running a business, particularly in the BRIC countries.
Committee Composition: Members should have relevant domain knowledge. (e.g. People on the compensation or audit committee have to understand the material).
Who Should Be On Your Board – Personality Traits of Great Directors
The depth of experience, level of success, and amount of talent a director has is irrelevant if it cannot be effectively utilized. Individuals should be intellectually and emotionally strong enough to actively participate and offer positive critical review, yet modest and mature enough to recognize their appropriate role as a board member and the need for partnership with their fellow board members and company management. They should be analytical and able to constructively evaluate a strategy, acquisition, and business plan. The candidate should be forward thinking and strategic, yet pragmatic and operationally savvy, with a passion for building true shareholder value. The personality/chemistry must be a fit. Honesty, openness, and high ethical standards are mandatory. It is important that a potential board member be prepared to be an active and engaged director, and willing to make a long-term commitment to the company.
Who Should Be On Your Board – Get The Leadership Right
Roles on the board are not created equal. There are four leadership roles that every board must have: non-executive chair / lead director, audit committee chair, compensation committee chair, and nominating & governance committee chair. Get these roles right and it will translate directly into shareholder value.
1) Non-Executive Chairman / Lead Director
Shareholders have always entrusted the board to carry out its fiduciary responsibilities, but in our contemporary business environment, regardless of the title given to the role (non-executive chair, lead director, presiding director…), it is essential for effective corporate governance that the board of directors have a non-management director as the recognized leader of the board, not the CEO. Dividing the duties of the leader of the company (the CEO) and the leader of the board acknowledges the new and increased responsibilities of both positions. It also creates checks and balances between management and the board, and is meant to be a deliberate expression of independence to shareholders and the market.
The clearest distinction between the two roles is, simply, the non-executive chairman / lead director runs the board, not the company (that is the domain of the CEO). In running the board, the non-executive chairman / lead director has a wide range of responsibilities, which can vary from company to company, but in almost all cases he/she:
presides at all meetings of the board and the shareholders, ensuring that all issues on the agenda are efficiently attended to and that each director contributes to their full potential.
establishes, in consultation with the CEO, an agenda for each meeting of the board.
leads a critical evaluation of the board as well as of management, its practices and its adherence to the board-approved strategic plan and its objectives.
facilitates an open flow of information between management and the Board.
The non-executive chairman / lead director role is a delicate role requiring a respected executive with broad business acumen, who is a strong communicator with evident interpersonal skills, and someone who has refined leadership ability (capable of focusing the board and building consensus). This role is not for someone who has an ambition to run the company. Non-executive chairman / lead directors should be complementary and compatible with the CEO (not seen as a rival); if their chemistry is poor, the function of the board suffers and ultimately, so does the company. Optimal candidates are capable of facilitating positive dialog on diverse subjects, and act as a buffer on behalf of the CEO and senior management, so that the board is not intrusive. The non-executive chairman / lead directors must have ethical standards beyond reproach, a passion for the role, and must take personal pride in the level of quality in the boardroom.
2) Audit Committee Chairman
Given the heavy responsibility and continued intense spotlight on the audit committee, this is a key role to fill for the success of the board and the company. An outstanding audit committee chair instills a greater sense of confidence in the company at the board, management, and investor levels, and likely individually impacts shareholder value. This role requires an extremely well qualified financial expert, preferably with independent director experience and the time to commit to this role. Optimal candidates would typically be retired executives who have been CEOs (with strong financial skills), public company CFOs, or broadly experienced audit partners.
3) Compensation Committee Chairman
The intense examination of executive compensation has also thrust compensation committees into the spotlight and has made its chairmanship a very important responsibility. This role requires a background with executive compensation matters and current knowledge of compensation issues and trends. Preferably, this person would also have prior public company board experience. Optimal candidates for this role would typically be a long-tenured CEO, an experienced compensation committee member, or another executive with significant executive compensation experience (e.g.: chief human resources officer).
4) Nominating / Governance Committee Chairman
Charged with leading the committee responsible for shaping the company’s corporate governance, evaluating the performance of the board and its directors, and recommending new directors for the board, the nominating/governance committee chairman is a critical role in today’s climate. Directors in this role need to have a deep knowledge of corporate governance and be committed to keeping up with its trends and best practices.
Who Should Be On Your Board
There are common components of all well-built boards, beginning with getting the leadership roles filled correctly. But who should be on your board is truly unique to each company. Through an assessment of the competencies on your current board, along with your company’s profile, viewed in comparison to the vision of your company going forward, and an appreciation of your board’s culture, a clear picture should emerge.
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.
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).
Do you know how compensation might change under different risk scenarios? (e.g. impact of interest rates, economy, customer retention, etc.)
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.
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?
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.