How To Prepare Compensation Plans For An IPO


IPO-11-5-18.pngThe decision to take your bank public will set the course of your company for years to come. There are several critical steps to prepare your compensation program before the IPO and before your bank is a public company.

Steps to prepare for the IPO

1. Assemble Your Compensation Team
Determine the team focused on compensation matters. If you have employees with IPO experience and compensation plans, they could be a key asset. Similarly, if you have employees without IPO experience but have public company experience, they could be a key team member as well.

2. Create Your IPO-Related Task List
Your bank may have implemented many compensation and governance related items already, but they should be reviewed for their appropriateness for a public company.

Key tasks required prior to the IPO will vary, however, here is a list of compensation tasks on every pre-IPO list.

  • Develop an executive compensation philosophy and key objectives – What is your bank’s strategy? Where do you target compensation? Is your pay aligned with performance? What are the objectives of your compensation program? What message do you want to send to shareholders? Craft overarching guidelines to support the process going forward.
  • Evaluate and establish appropriate executive and director compensation levels – Prior to the IPO, your company will have to disclose its executive and director compensation. You want to be sure your compensation programs are reasonable, competitive, and based on peer group data. Establishing a suitable peer group and incorporating the data into your process is key.
  • Equity plan considerations – Will a new equity plan be required, and when will you need shareholder approval? How will you determine the share pool so long-term incentive and equity grant needs can be met for three to five years? Have you evaluated the shareholder advisory firms’ current standards to receive favorable support? Avoid any pitfalls that would result in a “no” vote recommendation.

    If the company is considering one-time IPO-related equity grants, evaluate these in light of market trends, shareholder expectations, retention concerns, financial impact to the company and dilution. Many institutions consider sizeable one-time grants a front-loaded award, and decide to wait before awarding additional equity. Such decisions are based on share pool impact, financial implications, and size of the one-time grants. Carefully determine the value of these awards to minimize risks of unfavorable optics and legal actions.

  • Design ongoing annual and long-term incentive plans – As a public company, it is important to have annual and long-term incentive plans that align pay and performance, are competitive, consistent with company objectives and provide an appropriate mix of pay. As new incentive plans are designed, know that plan details will be disclosed in future public filings. Private banks are accustomed to implementing plans that are regulatory compliant and competitive, but public disclosure has not been required.
  • Implement executive agreements – In many cases, new employment and change-in-control agreements are put in place, often the case even if similar agreements were in effect before the IPO. Several details, including the terms, are subject to public disclosure. Shareholder advisory firms take issue with certain terms and, and having them can automatically result in ‘no’ vote for Management Say on Pay and the re-election of the board’s compensation committee. It is critical to be aware of these pitfalls and avoid them whenever possible.

3. Determine appropriate technical and governance actions
There are key technical and governance issues to evaluate. Some items are required while others are not. Many are considered best practices and important to achieving strong governance. Some of the key items in this category include:

  • Drafting of the SEC required filings including the CD&A (Compensation Discussion and Analysis), compensation tables and other requirements. Reporting errors and omissions can delay the IPO.
  • Determining company stock ownership guidelines – Many new public banks do not adopt stock ownership guidelines immediately, however, if one-time equity grants are awarded, adopting such guidelines immediately sets the parameters for holding these shares. Determine who will be covered by the guidelines (e.g., executives, Section 16 officers, non-employee directors), what the required holdings are, the timeframe permitted, and other terms.
  • Drafting the Compensation Committee Charter – A charter establishes the role and responsibilities of the committee, how it will interact with the board and management, and its ability to engage outside advisors. The charter is typically published on the company’s website.

4. Create a compensation committee calendar after the IPO
Once the IPO is completed, it is important for the compensation committee to focus on its new role, responsibilities and annual tasks. Setting up a calendar of activities supports effective management and should include all areas of committee oversight.

Taking your bank public can be a very exciting endeavor. Do not underestimate the number of new issues management, the compensation committee and the board will have to become familiar with to complete a successful IPO and operate a public company. Being organized, having the right knowledge and support and a flexible timeline will be great tools to help your organization get through this process.

Compensation Planning In Today’s Talent Market



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

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

The Battle for Bank Talent: Trends and Strategies


Motivated, talented employees always have been critical to the success of financial services organizations, meaning there always has been competition to attract high-performing employees. However, recent research indicates that competition has heated up considerably in the past few years, making it even more important for banks to stay abreast of current trends in compensation and human resource practices.

Trends in the Battle for Talent
The most recent indicator of the intensifying competition for talent can be found in the Crowe Horwath LLP 2016 Financial Institutions Compensation and Benefits Survey. Of the many trends in compensation, incentive and benefits strategies that are tracked in this annual survey, three areas were particularly revealing in 2016:

Employees are changing jobs at the fastest pace in at least a decade, with both officer and nonofficer turnover trending sharply upward over the past two years. Some turnover is the result of consolidations or performance issues, but most turnover represents the voluntary departure of employees–usually at a significant cost to the banks.

employee-turnover.PNG

Bank staffing strategies appear to have recovered from the recession. More banks today are planning for normal growth in staffing (35.6 percent), while the number of banks planning to maintain (34.1 percent) or reduce (3.6 percent) staffing levels is declining to pre-recession levels.

staffing-plans.PNG

The percentage of banks that plan to implement above-market compensation strategies has increased steadily over the past four years. In the 2016 survey, 28.5 percent of banks reported their strategy was to pay more than 10 percent above the market average.

compensation-strategy.PNG

Taken together, these three trends–higher turnover, expected staffing increases, and growing use of above-market compensation strategies–suggest that the battle for talent is likely to continue and intensify.

Factors Driving the Competition
Viewing the survey results through the lens of current industry experience, one might reasonably conclude that bank compensation strategies are no longer responding to recession and credit crisis concerns. The survey responses suggest that banks are now being driven by a new set of economic and competitive factors including:

  • Employee expectations: As memories of recession-driven job insecurity fade, events such as bank consolidations, increased profitability and rising executive compensation are catching employees’ attention. The increased turnover rate suggests that high performers in search of better opportunities are more willing to take a chance and make a move now.
  • Growth strategies: Although mergers or acquisitions often are associated with net reductions in payroll, bank consolidations also can create demand for managers and executives who are more experienced in handling larger organizations. Other market strategies—such as enhanced digital banking or a relationship-banking approach—also can drive demand for employees with technical or consultative-selling skills.
  • Technology: Just as technology affects some of the skills needed to serve bank customers, it also is changing some employer-employee relationships. The “gig economy,” where short-term contract workers provide specialized services to multiple employers, has not yet affected most traditional bank jobs but certain positions—marketers, data analysts and website or mobile banking developers, for example—often can be filled by contract workers rather than full-time employees.
  • Competition: Banks with strong market positions in commercial lending or other desirable business lines sometimes find themselves on the defensive as they ward off competitors trying to lure away their most productive employees. Often banks end up offering selective pay boosts and bonuses to discourage so-called “lift out” strategies, in which a competitor lures away key managers or an entire department.

New Approaches to the Battle for Talent
Putting more emphasis on pay—particularly performance-based pay or incentives—is one way to attract and retain high performers. But higher pay scales are not the only solution.

Many banks that are consistently regarded as “employers of choice” are not the highest paying employers in their markets—or even the highest paying among comparable banks. Instead, they shift a portion of their workforce investments toward maintaining benefit programs and work cultures that promote work-life balance.

Some banks now present employees with an annual “total rewards statement” that spells out all the investments their employers are making in them. Such statements can help motivate employees by reminding them of their value to the organization. Individual personal recognition, status and career opportunities can also be powerful motivators.

Regardless of the specific mix of techniques that are used, the intensifying battle for talent means banks will need to pursue a deliberate, multifaceted approach to attract, motivate and retain the talented and high-performing employees they need to pursue their business strategies.

The Four Habits of Successful Bank Compensation Committees


compensation-committee-6-17-16.pngCompensation committees are responsible for setting the foundation of a bank’s compensation program, subsequently impacting the bank’s underlying culture. The banking industry is more competitive than ever, so attracting and retaining top talent should be the number one priority. With a compensation committee that is educated on industry trends and modern-day compensation best practices, your bank will be on its way to developing programs that attract and retain top talent. Here are the top four best practices a bank’s compensation committee should consider.

1. Committee Members Should Take Steps to Stay Educated
Your committee members are responsible for staying aware of compensation trends. They need to always be in-the-know of complications, IRS penalties, and other factors with unintended consequences or expenses that can impact both the bank and the executives. Committee members should regularly review market trends in executive compensation; staying aware of banking trends as well as trends in other industries will better position the bank for success in recruiting, rewarding, and retaining talent. Your board should also be educated by the committee regarding your compensation philosophy and how the committee functions.

A few areas the compensation committee has direction over include equity grants, incentive structure, benefits, qualified plans, board compensation and other aspects of compensation. The directors should have a full understanding of structuring compensation plans, and if not, the committee should consult an adviser.

2. Establish the Duties and Responsibilities of Each Committee Member
In addition to staying educated, members of the compensation committee must have a framework for their efforts. This involves establishing the duties and responsibilities of each member, but before you begin, you’ll need to develop a compensation philosophy if you don’t already have one. Without an established compensation philosophy, your compensation committee will lack direction, clarity, and consistency regarding compensation practices. In addition to putting your philosophy in print, you should ensure that everyone on your committee understands it and is able to relay its message. The philosophy should be comprehensive as well as consistent with the culture of your bank, the interests of your shareholders and market trends.

3. Review the Committee’s Performance Quarterly
Quarterly, you should hold a meeting to assess the success of your committee. Check on what’s working and what isn’t with regards to committee function, meeting processes and other aspects. It’s important to look at whether you’re hitting benchmarks—and whether you’re attracting and retaining the talent you need to hit those benchmarks. There’s always room for improvement, so discuss what the committee may need to change in order for your bank to be more successful with recruiting and retention.

4. Engage Expert Consultants When Necessary
There’s a delicate balance that must be struck with compensation; it needs to be competitive enough to retain executives but as efficient as possible to drive shareholder value. With the increasing competition for talent and the rising costs of benefits like health care plans, many banks have been pre-funding benefits through plans such as bank-owned life insurance (BOLI). Choosing the best insurance carriers and structuring pre-funding plans is something that requires outside help from qualified consultants.

Professionals can help you determine competitive compensation packages and discern what investments will bring you the greatest return for the lowest risk.

If you don’t feel your compensation committee is hitting the mark, it’s time for something to change. Rewarding talent and funding those rewards is a complicated topic, so outside help from a compensation consultant who specializes in banking may be helpful to bring direction to your committee. If your committee follows these four best practices, you’ll be on a path to success applying your finest approach to compensation and benefits plans.

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.

Getting the Best People to Work For Your Bank



Filmed during Bank Director’s 2013 Bank Executive and Board Compensation conference in Chicago in early November. A panel of CEOs at top performing banks discuss how their companies develop executives, attract leadership and approach compensation in today’s highly competitive and economically challenging world.

Video Length: 55 minutes

About the Speakers:

Leon J. Holschbach, President & CEO, Midland States Bancorp, Inc.
Leon Holschbach is the president & CEO of Midland States Bancorp, Inc. Prior to joining Midland, Mr. Holschbach held the positions of region market president, community bank group at AMCORE Bank, N.A., president and chief executive officer of AMCORE Bank North Central N.A. and president of Citizen’s State Bank in Clinton, Wisconsin.

Ron Samuels, Chairman & CEO, Avenue Bank
Ron Samuels is the chairman & CEO at Avenue Bank. He is an experienced leader, executive and marketer and has been a banker in Nashville, TN for 40 years. Mr. Samuels was a founder in 2007 of Avenue Bank, which today has assets of more than $725 million. Mr. Samuels is recognized as one of Nashville’s most visible and engaged community leaders, having concluded his term as chairman of the Nashville Chamber of Commerce in July 2010, along with service on many other boards and committees in the arenas of economic development, professional sports, education and more.

Frank Sorrentino III, Chairman & CEO, ConnectOne Bank
Frank Sorrentino is the chairman & CEO of ConnectOne Bank. He is responsible for its business development plan, serves as the community liaison, sits on the loan committee and serves as the bank’s spokesperson. Mr. Sorrentino has been instrumental in developing the bank’s branch and expansion strategy and oversees all marketing activities.

Stock Bonus Plans for Community Banks


nest-egg.jpgCompanies are cutting employee benefits to conserve cash. There is another approach. Banks can sponsor retirement plans which provide deductible employee benefits in the form of stock, not cash, and reward the folks who build value over time.

How Does a Stock Bonus Plan Work?

It is a retirement program that works much like a profit-sharing plan, permitting the sponsoring company to make tax-deductible contributions in cash or stock to participant accounts. The limit is 25 percent of eligible compensation aggregated for all qualified plans.  

So, if a community bank with a payroll of $2 million makes a $50,000 match on the 401(k) plan, the deduction limit for an additional stock bonus contribution would be $50,000 less than 25 percent of $2 million, or $450,000. While most banks would typically contribute a much smaller percentage of compensation, the key is to understand the limits. 

Who Benefits from a Stock Bonus Plan?

In the above example, the bank had 49 employees with seven employees making more than $100,000 annually; these seven received 47 percent of the total compensation.  Since the allocations to participant accounts were made in proportion to pay, the 10 percent of payroll ($200,000) contributed meant that the key group received $94,000 in stock. The non-discriminatory plan meant that the non-highly compensated group received the balance of the shares in the plan.

Curiously, these plans sometimes better suit smaller banks specifically because of the need to reward key players and the ability of some stock bonus designs to skew benefits to them. Large plans with hundreds of participants can spread ownership more broadly.

The bank holding company sponsoring the plan received a tax deduction for the $200,000 non-cash expense and a resulting cash flow improvement (analogous to the tax effect of depreciation). This would not be possible if you contributed cash instead of stock to a retirement plan. The end result is more cash saved on the balance sheet. The table below illustrates this in a hypothetical example.

Three retirement plan options were considered: A) cash contribution; B) no contribution; C) stock contribution.  

ccrv-stock-chart.png

What Are Five Must Dos for Stock Bonus Plans? 

  1. Use an independent stock valuation for the share value, if the corporation is closely held or thinly traded.
  2. Coordinate the capitalization and shareholder (dilution) effects with a comprehensive benefit strategy for both the highly and non-highly compensated employees.
  3. Base the cost/benefit analysis on the ongoing plan operating costs, cash savings and the long-term obligation to repurchase shares from former plan participants when they retire. 
  4. Maximize the benefit of employee ownership by communicating the plan clearly to the participants.
  5. Consider using the more versatile Employee Stock Ownership Plan (a sub-class of stock bonus plans), if the intent is for the plan to purchase shares rather than operate as a simple contributory plan. A stock bonus plan cannot purchase stock from shareholders, while an ESOP can; the ESOP can even borrow money to buy the shares; both types of plans hold the majority of their assets in company stock.

What Are Three Things Not to Do?

  1. Implement a stock plan where the organization’s operating profits (<$500K) or numbers of employees (<30) do not warrant the cost.
  2. Convert the 401(k) plan of a closely-held sponsor to any of the forms of stock bonus arrangements and use employee money to purchase shares or otherwise have stock in employee-directed accounts.
  3. Consider stock compensation in troubled banks with problematic “going concern” valuations or questions about viability. 

Conclusion

Successful banks may be tempted to curtail employee benefits in a difficult economic environment, but may in fact be better served in terms of employee motivation and operating results by a restructuring of the benefit program. There are many other rules and variations on the stock bonus theme; a decision should be narrowed to the main pros and cons through a review with skilled designers.

Eight Changes To Expect in 2013


The past year saw the banking industry recover significantly from the fallout of bad loans and poor asset quality. While profitability improved, the impact of new banking regulations began to take effect, including provisions that cut debit fee income for banks above $10 billion in assets. So what is in store for 2013? Bank Director asked industry experts to answer the question: What will be the biggest change in banking in 2013? Here are their responses:

The Future of Executive Compensation


fortune-cookie.jpgEveryone from shareholders to regulators wants a “say on pay” these days, but compensation committees must continue to ensure their programs attract, retain and motivate executive talent in a way that is aligned with the bank’s strategy and culture.

Meridian recently completed a study of CEO compensation practices at 58 publicly-traded banks with assets between $1 and $5 billion. Based on our work with clients and the results of our research, we anticipate the following will be some of the key trends in executive pay as compensation committees work to balance competing expectations.

Increase in percentage of pay delivered through incentives.  In our study, on average, base salary comprised half of CEO total direct compensation (base salary, annual incentive and long-term incentives). Incentives have become a larger component of total pay over the past few years, and we anticipate that trend will continue as shareholders expect a more direct alignment of pay and performance. The majority of this increase will likely come through equity-based long-term incentives, which defer compensation through multi-year vesting and payment schedules and help mitigate the overall compensation risk.

Broader view of performance. With the rising regulatory focus on the perceived risk of compensation programs, committees are using a variety of performance factors to determine incentive payouts. Some committees use a fully discretionary approach to determining incentive payouts, which typically involves a holistic review of performance. Banks with formulaic approaches to annual incentives are increasingly using multiple measures, and we expect the trend to continue. Almost half of the banks in our study included four or five measures in their formula, while only 20 percent rely on just a single measure. While earnings measures (e.g. earnings per share) remain prominent, banks are also including measures focused on returns, capital levels, credit quality, and growth.

Increased rigor around discretion.  Regulators have recognized that discretion can play an important role in ensuring that payouts appropriately reflect risks taken during the performance period, as well as make it less likely that executives will manipulate performance results to increase payouts.  However, they expect sufficient structure around discretion so that decisions can be justified and made consistently. Shareholders and their advisors generally prefer formulaic plans, but will accept the use of discretion if it is reasonable and well explained. More than 80 percent of the banks in our study indicated that their committees use discretion in determining incentive payouts. We anticipate committees will refine their use of discretion to include the development of scorecards that reflect a variety of measures from both an absolute and relative perspective, as well as principled guidelines that specify the types of circumstances that will trigger discretionary adjustments.

Use of multiple long term incentives, with increasing use of performance-based vesting.  Among banks in our study, the prevalence of performance-based vesting on long-term incentives doubled from 17 percent to 34 percent between 2009 and 2011. We expect this trend to continue in response to shareholder expectations and broader industry trends. While we expect the use of performance-based long-term incentives to increase, we do not anticipate the elimination of time-based awards. We expect most banks will choose to grant a combination of awards—both performance-based and time-based. Many shareholders and their advisors expect a minimum of 50 percent of long-term awards to be performance-based, but the inclusion of time-based awards can help provide balance. Additionally, many time-based awards will likely begin to include provisions that provide for reductions if poor risk outcomes occur during the vesting period. 

More transparency.  Say-on-pay has given public company shareholders an advisory vote on executive compensation, and their expectations for insight into the committee’s decision making have increased. Likewise, the Securities and Exchange Commission is expecting clear disclosure of performance targets in most circumstances. We expect proxy disclosures to increase their clarity as to how compensation decisions are made, particularly how performance criteria were established and how those performance results led to incentive payouts.   

The banking industry continues to be on the forefront of change in executive compensation due to scrutiny from both regulators and shareholders. Compensation committees must remain vigilant to ensure their executive pay programs balance the increasing expectations of regulators and shareholders while continuing to support bank objectives.

What to Do When Caught Between Investors and Regulators


hands-tied.jpgIt’s tough to please both regulators and shareholders these days, especially when they want contradictory things. Take the case of executive compensation.

Shareholder groups have been pushing for a greater tie between performance and executive pay. One of the most powerful of these, Institutional Shareholder Services, screens executive pay packages to see how they stack up against peers relative to performance and how the change in CEO pay mirrors change in total shareholder value over five years. ISS recommendations to shareholders on such matters can strongly influence a company’s say-on-pay shareholder advisory vote. Umpqua Holdings Corp. and other banks found this out, as described in a recent story in Bank Director magazine.

But looking at the stock price and shareholder value is exactly what regulators don’t like.

Jim Nelson, a senior vice president of supervision and regulator for the Federal Reserve Bank of Chicago overseeing large banks and savings institutions, is concerned with the use of stock price or return on equity as a measure of performance in making pay determinations. Return on equity doesn’t factor in the risk that executives might be taking to achieve such returns, he said at Bank Director’s Bank Executive & Board Compensation conference recently in Chicago.  There are many factors that can influence the stock price which are outside the realm of management’s control, he said.

“We think most of the people in the firm don’t have a direct impact on the value of the stock price,’’ he said. “We’re looking for a measurement tied to something that that person does control.”

Regulators also explained how they feel about shareholders in their 2010 Guidance on Sound Incentive Compensation Policies, which applies to all banks and thrifts.

The joint regulatory guidance says “shareholders of a banking organization in some cases may be willing to tolerate a degree of risk that is inconsistent with the organization’s safety and soundness.”

So there’s the rub. Do you please shareholders or do you please regulators? But there are ways to combine the concerns of both.

“It’s not the amount [of bonus or incentive pay],’’ Nelson said. “What we’re looking at is the arrangements. You should reward individuals who are producing an attractive risk-adjusted return for you. If they are making more money with low risk, they should be paid more than someone who is making money with high risk. I think that is aligned with what shareholders want and the board wants. There is a lot more free enterprise in this approach than people think.”

He said some big banks are adjusting their profits based on risk metrics before handing out bonuses.

Meanwhile, big banks also are taking into account the needs of shareholders and the recommendations of shareholder advisory groups. Tying short and long-term bonuses, at least in part, to shareholder return is one way to do that.

For example, Buffalo, New York-based First Niagara Financial Corp., one of the nation’s 25 largest bank holding companies with $35 billion in assets, paid out long term incentives to top executives in three ways: stock options, time-vested restricted stock and performance-based restricted stock that vests in three years based on total shareholder return relative to the SNL Mid-Cap Bank Index.

Barbara Jeremiah, a First Niagara director who chairs it compensation committee, said when the bank ran into troubles trying to raise capital for its acquisition last May of HSBC branches in New York and had to cut its dividend in half, the board recognized the hit shareholders took and wasn’t locked into paying short-term bonuses based on earnings per share. The board had made sure it had some level of discretion in determining the bonus, she said.

The board adjusted incentive compensation for CEO John Koelmel to reflect the decline in stock price and reduction of the dividend. Jeremiah encouraged compensation committee members and human resources directors at the Bank Director conference to read and stay abreast of how others viewed executive pay, making note of an article by Gretchen Morgenson of The New York Times entitled  “C.E.O.’s and the Pay-‘Em-or-Lose-‘Em Myth.”

 “We need to keep that outside view,’’ Jeremiah said. “How do our customers and others view us?”