Wilmington Trust blunders on CEO Pay

pencil.jpgIt’s been a bad few weeks for Wilmington Trust Corp. Make that a bad year.

The $10.4-billion-asset Wilmington, Delaware-based bank, which specializes in advisory services for wealthy clients and personal trust accounts, reported a $370 million loss in the third quarter of 2010 after it beefed up its loan loss provision. The bank, which has been around since 1903 but recently stumbled on bad commercial real estate loans, will be acquired this year by Buffalo, New York-based M&T Bank Corp. The deal was announced Nov. 1 at a value of $351 million or $3.84 per Wilmington Trust share, a 46 percent discount to the prior trading day’s closing price. No doubt Wilmington Trust shareholders are still unhappy because the bank was trading at about $4.41 per share Tuesday morning on the New York Stock Exchange.

It gets worse.

The bank subsequently announced in December that it was yanking back most of the CEO’s 2010 compensation, more than $1.75 million, because his pay package violated the rules for banks that participated in the federal government’s Troubled Asset Relief Program. (Wilmington Trust received $330 million in TARP funds in December 2008.) Oops! Bloomberg News picked up the story last week from one of the bank’s regulatory filings.

The TARP rules can be fairly complicated. But they aren’t complicated on this point:No retention or signing bonuses are allowed for banks that took TARP money according to multiple compensation experts, including Paul Hodgson, senior research associate at GovernanceMetrics International, formerly known as The Corporate Library, and Susan O’Donnell, managing director at compensation consulting firm Pearl Meyer & Partners.

Back in June, when Wilmington Trust board member Donald Foley was hired by the board to replace Ted T. Cecala as CEO, Foley was given a $1.75 million signing bonus that was clearly disclosed to shareholders. A full $1.3 million of that was to be paid in restricted stock vesting immediately and the rest of the $450,000 was in cash.

Then in December, the bank said it was taking back the full $1.75 million signing bonus and an additional 16,000 shares in restricted stock. And it also rescinded a part of the pay agreement that awarded Foley 14 years credit on the company’s executive retirement plan. Ouch!

The board did agree to increase Foley’s base pay from $1.2 million to $1.5 million, which is allowed under TARP, but the move doesn’t nearly make up for what was taken away.

Contrary to news reports, this doesn’t look like a claw-back, where a company is forced to take back executive pay based on a restatement of earnings or fraud.

“It’s a unique situation,” says Tim Bartl, senior vice president and general counsel for the Washington, DC-based Center on Executive Compensation, which was started by the human resources industry group, the HR Policy Association. “(This was) a do-over, more than it was a claw-back.

So who screwed up? Did the compensation committee fail to look at the TARP rules when granting the incentive package? Or did a consultant paid to do this job fail to understand the TARP restrictions? Foley did not return a phone call this week on the matter and a company spokesman, Bill Benintende, issued a statement saying the board took the action to comply with TARP rules and:  ” . . . the Board wishes to express its recognition and appreciation of the fact that since he became CEO in June, Mr. Foley has worked tirelessly and effectively to address both the challenges and opportunities facing Wilmington Trust.”

O’Donnell and Hodgson had never heard of a TARP bank having to take back a signing bonus, and TARP rules have been in place for more than a year.
But what about Wilmington Trust? How long will Foley’s tenure last at this point, especially since M&T is buying the company? (He has been invited to join the board of the newly merged bank). What kind of fruitful relationship can the board possibly have with Foley after reaching into his pocket and taking back nearly $2 million?

“That has to be a difficult conversation,” Hodgson says, in what may be the understatement of the year.

Stanley Baum, an attorney who consults with companies on compensation issues for Lerner Law Firm & Associates in Westbury, New York, was less circumspect.

“My impression is, ‘what the heck is going on over there?”’ he says. “It’s so blatant, you wonder what sort of procedures are in place here and at other companies.”

The upside is there probably won’t be too many more of these banks that have this problem, say Bartl and O’Donnell – not after Wilmington Trust embarrassed itself publicly.

For a full primer on the pay rules regarding TARP banks, check this out:http://www.kattenlaw.com/treasury-releases-tarp-executive-compensation-and-corporate-governance-guidance-06-19-2009/

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.

Different Voices; One Sound Board

As was I waiting for the next session to get started in the grand ballroom of the InterContinenal Hotel, I had this thought: If I was an outside director of a local community bank, would I rather spend one of my afternoons golfing, getting a root canal or telling the CEO of my board’s bank that he or she wasn’t doing the job as expected? Personally, I’d choose none of the above, but I’m positive that the majority of the 270-plus attendees would not have chosen the latter.

Which brings us to the last general session of day one where TK Kerstetter, of Corporate Board Member, artfully moderated the somewhat uncomfortable topic on handling situations most compensation committees want to avoid. The panel of compensation experts included Susan O’Donnell of Pearl Meyers & Partners, Henry Oehmann of Grant Thornton, and Alice Cho from Promontory Financial Group, who all naturally suggested what any expert would when you’re faced with a conflict — confront it.


Despite the somewhat obvious advice, the session focused specifically on guidelines for proactively managing the board and CEO relationship, effectively overseeing the CEO’s compensation and consistently conducting board evaluations. Susan O’Donnell started the discussions by outlining the following scenarios that many board members all too often find themselves struggling with:

  1. The compensation committee has designed the entire plan with no input from the management team and thus are experiencing an unexpected backlash that is costing the company time and money.

  2. The bank is being led by a dominate, yet high-performing, CEO who is driving most of compensation planning process, and therefore board members essentially have become lame ducks who rely too much on CEO.

  3. The CEO is best buddies with a few directors and as a result the board has lost all sense of objectivity.

If the above scenarios feel all too familiar to you, then the question became, how should the board deal with these scenarios, or at the very least work towards avoiding them in the future? The panelists all agreed that the following approaches will go a long way in setting the board up for success:

  • Set expectations with the CEO early on in the relationship.
  • Use outside advisers to help evaluate compensation plans, especially the CEOs.
  • Rely on the chair, lead director or compensation advisor to help have the tough discussions.
  • Don’t be afraid to think independently as healthy debates are important.
  • Know the compensation plans even for audit and risk team members.
  • Use board evaluations to hold each other accountable.

Clearly, the goal is to avoid dissension between the management team and the board while keeping the bank’s CEO happy and cooperative. Building these positive relationships starts by setting expectations, staying objective despite having differing opinions, and regularly evaluating your peers and the situation. Luckily, the National Association of Corporate Directors has a diagnostic book on doing peer reviews with directors available on its website at nacdonline.org.  

Be Prepared To Tell Your Compensation Story

Off to a good start on day one of the annual Bank Executive and Board Compensation event, as the general session continued with the next panel members settling into their soft brown leather chairs to present their viewpoints on how the latest round of regulations was shaping compensation planning. Moderated by Jack Milligan, the newly-appointed editor of Bank Director magazine, the panelist included compensation industry experts Michael Blanchard, partner for compensation advisor Blanchard Chase, Thomas Hutton at the law firm of Kilpatrick Stockton and Charles Tharp, EVP at the Center on Executive Compensation.


With increased government intervention courtesy of the Dodd-Frank Act, here are five key insights on the level of impact facing today’s compensation committee shared by the panel. 

  1. Be proactive! You just may find yourself in the position of having to actually educate the regulators on the guidelines. Just goes to show that everyone is still trying to figure these new requirements out.
  2. It’s not about the what but the how! New regulation isn’t about shaping compensation but rather changing the process of designing performance based plans.
  3. An emerging trend among many banks is to have an independent compensation consultant attend the committee meetings. While there are no hard stats on file to date, this process may be looked at more favorably by shareholders.
  4. Before developing compensation plans, do your homework by researching what your peers and public banks are doing with their incentive packages.
  5. Private banks under $1 billion are more at an advantage than disadvantage with regulation requirements, but every institutions should be prepared for regulatory reviews.

It was clear throughout this session that being prepared and ready to tell your story was the best approach when dealing with the new regulations. Knowledge is power and having the right team on the board and in management will go a long way in staying ahead of the curve.

Extra Credit: If you need a place to start, download this eight point checklist, courtesy of the Center on Executive Compensation, for help planning a pay structure for your institution. You may even gain some inside knowledge on what the regulators will be looking for during their reviews.