2019 Survey Results: CEO and Board Pay Trends

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Today, more banks are tying their chief executive officers’ pay to performance indicators, as indicated by 80 percent of the directors and executives responding to Bank Director’s 2019 Compensation Survey, sponsored by Compensation Advisors. That’s up from 75 percent when Bank Director last posed the question, in 2015.

Most, at 59 percent, tie CEO compensation to their strategic plan or corporate goals.

But the metrics banks prefer vary according to their structure. Public banks are more apt to tie pay to performance—just 8 percent indicate they don’t do so—and tend to favor goals established in the strategic plan (72 percent), as well as metrics such as return on assets (58 percent), return on equity (53 percent) and efficiency (40 percent).

Among private banks, net income is the preferred metric, at 55 percent. Twenty-seven percent of respondents in this group say CEO compensation is not tied to performance.

The survey was conducted in April 2019, and includes the perspectives of more than 300 bank directors and executives—including chief executives and human resources officers—as well as data obtained from the proxy statements of more than 100 publicly traded banks.

It includes details about current CEO and director compensation packages—in the aggregate, and by asset size and ownership structure. The survey also focuses on succession planning and board refreshment.

Respondents indicate that their CEOs all received a salary in fiscal year 2018, at a median of $325,000; the median total compensation was $515,728. Paying a cash incentive (78 percent), and offering benefits and perks (75 percent) are also common forms of compensation throughout the industry. Less common are nonqualified deferred compensation or retirement benefits (49 percent) and equity grants (47 percent). However, payment of equity differs broadly based on the ownership of the bank: Almost three-quarters of respondents from public banks say their CEO received an equity grant last year.

Additional Findings

  • When asked how compensation for the CEO could be improved, 36 percent point to offering non-equity, long-term incentive compensation. Twenty-three percent believe the bank should offer equity at greater levels, and 21 percent say they should offer some form of ownership in the bank. Twenty-two percent believe the bank should pay a higher salary to the CEO.
  • The median age of a bank CEO is 58. Seventy percent are baby boomers, between the ages of 55 and 73.
  • Seventy-two percent believe the current CEO will remain at their bank for at least the next two years.
  • Twenty-one percent believe it’s time for their CEO to announce his or her retirement.
  • Thirty-one percent say their bank has designated a successor for the CEO. One-quarter have identified potential successors.
  • Nearly one-third indicate their board conducts an annual evaluation.
  • Forty-one percent have a mandatory retirement policy in place for directors. The median retirement age is 75—an increase from 72, as reported three years ago.
  • Forty-seven percent indicate their board is working to recruit younger directors. The median age of the youngest director serving on responding boards is 48.
  • Seventy-two percent say their directors receive a board meeting fee, at a median of $900 per meeting. Sixty-nine percent pay an annual cash retainer, at a median of $20,000.
  • Forty-three percent say that tying compensation to performance is a top compensation challenge facing their institution, followed by managing compensation and benefit costs (37 percent) and recruiting commercial lenders (36 percent).

To view the full results of the survey, click here.

One Way to Compensate and Keep Your Bank’s Top Talent

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compensation-6-11-19.pngBank-owned life insurance (BOLI) continues to be an attractive investment alternative for banks, given the number of banks that hold policies and high retention rates across the industries. An increasing percentage of banks hold BOLI, many of them using the policies as an important part of their compensation and retention strategies for key personnel.

A significant industry trend driving interest in BOLI is their use by banks in compensation strategies to attract and retain the best talent. Bank management and boards of directors are reevaluating their existing compensation plans and strategically implementing new ones in order to retain key executives given increasing competition for scarce talent.

BOLI assets reached $171.16 billion at the end of 2018, growing 2 percent year-over-year, according to the Equias Alliance/Michael White Bank-Owned Life Insurance (BOLI) Holdings Report. Sixty-four percent of banks reported holding BOLI assets; about 71 percent of banks with more than $100 million in assets owned BOLI. Most BOLI purchased is by banks that hold existing policies; of those banks, more than half have purchased BOLI as an add-on for a current group of executives. In 2018, about 86 percent of new premiums were invested in general account products, compared to hybrid and separate account products, according to IBIS Associates.

Although the pace of BOLI purchases slowed last year compared to 2017, purchases exceeded $1.7 billion and were steady throughout 2018. The reasons for slower BOLI purchases were due to continued strong loan demand that reduced bank liquidity and the reduction in the tax-equivalent yield on BOLI following the federal corporate tax cut.

Credited interest rates and net yields, the crediting rate minus the cost of insurance charges, on new BOLI purchases are expected be similar to 2018 figures. The interest rates that carriers can obtain on investment-grade securities held for between five and 10 years has remained relatively flat, given the modest increases in this portion of the yield curve. Corporate bonds usually comprise the largest holding in the portfolio, but it can also include commercial mortgages and mortgage-backed securities, private placements, government and municipal bonds, a small percentage of non-investment grade bonds and other holdings.

BOLI plans fund many of the most common retention plans, which can include supplemental executive retirement plans, deferred compensation plans, split-dollar plans and survivor income plans. Additionally, some banks are using deferred compensation plans to create flexibility in designing plans to retain young “up and coming” officers. Unlike a supplemental executive plan, which provides a specific benefit at a specific date or age, a deferred compensation plan allows the bank to make contributions to the executive’s account using a fixed dollar amount, fixed percentage of salary or bonus or a variable amount based on performance. A deferred compensation plan also permits voluntary deferrals of compensation, which could be valuable to executives who would prefer to defer more compensation but are limited in the 401(k) plans.

BOLI financing helps offset and recover some or all of the expenses for the employer. For example, a bank provides an officer with supplemental retirement benefits of $50,000 per year for 15 years, for a total cost of $750,000. The bank could purchase a BOLI policy on the officer with a net death benefit of $1 million to $2 million that would allow it to recover the cost of the paid benefits, as well as a return on its premium.

We expect that community banks will continue to implement these types of nonqualified benefit plans in 2019, using BOLI to help attract and retain key personnel.

How Bananas and Tech Firms Can Help Tackle the Talent Challenge

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management-11-8-18.pngAll bank executives and directors say that recruiting, retaining and properly incentivizing top talent is a priority, but it’s the banks that truly excel at this that are able to separate themselves on the competitive playing field.

How to tackle the talent challenge was the theme of Bank Director’s 2018 Bank Compensation and Talent Conference, hosted this week at the Four Seasons Resort and Club at Las Colinas in Dallas, Texas.

The first day of the conference laid the groundwork by introducing the conventional techniques used today by human resources professionals throughout the bank industry.

On Monday morning, before the formal beginning of the conference, attendees participated in a half-day workshop, presided over by a panel of experts from Compensation Advisory Partners and Kilpatrick Townsend & Stockton LLP. The topics covered a broad range of issues, from common executive compensation challenges, to strategies for promoting diversity and inclusion, to tools that can be used to properly align pay and performance.

The second day of the conference built on this, in part through a pair of audience surveys.

In one survey, nearly a third (31 percent) of attendees said managing rising compensation and benefit costs is their top compensation challenge for 2019, more than half (56 percent) said they’ve raised wages to better compete for talent and in response to last year’s tax cut, and nearly three-quarters (70 percent) said they’ve expanded their internal training programs to develop young leaders.

These statistics were borne out with anecdotes. Beth Bauman, the head of human resources at Bank of Butterfield, an $11 billion bank based in Bermuda, talked about implementing a talent management program to help guide and groom the bank’s younger employees. And human resources officers from Cadence Bancorporation and Union Bankshares discussed the challenges of merging compensation cultures after an acquisition.

The final day of the conference delved into less conventional approaches to talent management.

The day started with an anecdote from Bank Director’s CEO, Al Dominick, about an Asian grocery store chain that figured out a new way to sell bananas. Instead of selling them in traditional, equally ripe bunches, the chain sold bananas in packages of five, with each banana at a different stage of ripeness. As a result, the bananas ripen in stages over a period of a week, not all at the same time.

The anecdote illustrates how approaching an issue in a creative way can result in an unconventional yet effective solution.

The first presenter on stage on Wednesday, Jason Mars, came not from a bank, but rather from a fintech company. Mars is the founder and CEO of Clinc, a company focused on bridging the gap between research on conversational artificial intelligence and its application for enterprises.

“My No. 1 criterion for hiring is intellectual curiosity, because that’s what drives people to do really hard stuff,” said Mars. This is more important to Mars than other, more orthodox measures, like a prospective employee’s college grade point average or even their performance in the interview process.

“Passion is another priority, and flexibility,” said Mars. “It’s about figuring out whether they will be motivated to do hard stuff because they’re passionate, curious and interested.”

And finishing out the conference was a panel of three bank CEOs from across the country, all of whom shared their respective talent and compensation strategies.

One of the more innovative philosophies came from John Holt, CEO NexBank, a rapidly growing bank based in Dallas.
A group of investors acquired control of the bank in 2004, when it had only $55 million in assets. Seven years later, a new management team was brought in to hasten its growth. One way it did so was to promise its employees a bonus equal to 100 percent of their base pay when the bank passed the $8-billion threshold, which it recently eclipsed. The strategy should serve as a retention policy as well, explained Holt, because the bonus pays out over 24 months.

NexBank also buys lunch for its employees every day, offering them a menu of multiple restaurants to order from. It pays 100 percent of their health insurance premiums. And it has added a millennial to its board of directors—the bank’s 37-year-old chief operating officer, now the CEO heir apparent.

The net result, said Holt, was the bank has fewer, better people than many of its competitors, and it faces little employee turnover, sidestepping a perennial problem in any industry.

The point is while there is no magic bullet that will solve all of a bank’s talent and compensation challenges, understanding the tried-and-true approaches to doing so, as well as the less conventional strategies used in the market today, will help banks better compete for the next generation of employees.

Keeping Pace with Wages After Corporate Tax Cuts

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compensation-4-12-18.pngSince the reduction of the corporate tax rate from 35 to 21 percent, 64 banks nationwide have raised their minimum salaries to $15 per hour or given bonuses that range from $500-1,500, or both.

This number has increased by 50 percent since Jan. 1. Some have increased their 401(k) matching contributions. Some have made significant donations to nonprofit organizations in their communities.

Companies in the market at-large with whom financial institutions often compete for frontline talent are increasing their starting wage. For example, Target has announced it will raise its salaries to $15 per hour by 2020. Apple has announced it will reinvest $350 billion and add 20,000 jobs in the U.S. over the next five years. Companies with freed up capital are investing in the war for talent and in their communities.

All of this has caused concern for community banks and credit unions as they wrestle with whether they should follow suit and raise pay to $15 an hour. Here are our suggestions:

  • Know the market rate for wages. This requires examining external data and internal equity by a professional who is not bound to internal politics and long-term relationships between incumbents. You may need a midpoint that is 10 percent above the market as a competitive advantage.
  • Have a compensation philosophy and salary administration guidelines. Audit against those standards for consistency. If the next administration reduces the tax advantage, you would not need a knee-jerk reaction to adjust.
  • Don’t overpay for inexperienced new hires. We strongly recommend new employees with little or no background receive a starting salary of approximately 85 percent of the midpoint for most jobs and 90 percent of midpoint for “hot jobs.”
  • Develop a salary increase process that ensures that pay levels are getting to their midpoint in a reasonable period of time. Non-exempt employees with three years of experience in their job would have a pay level at 100 percent of the midpoint. Exempt employees with five years of experience in their job would get to their midpoint in five years. (This is where most salary administration programs fall down.)
  • Pay for Performance. The average salary increase differential by performance is 2 percent. If the difference between a high performer and an average performer is 1 percent, you are not differentiating the salary increase significantly enough to “pay for performance.”

When I review the pay levels of clients that have contacted us about an appropriate response to the market, it is easily to determine they were inconsistently applying their own salary administration guidelines. This should have been an obvious step even before the tax cut incented companies to offer more competitive pay.

If your competitive advantage is your people, then the war for talent is growing more heated. Have a well thought out compensation plan. Get out of the guessing game. Live up to your plan consistently. Update your salary ranges annually. Reevaluate and commit to your compensation strategies.

How to Give Employees a Slice of the Tax Reform Pie

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compensation-3-2-18.pngThe $1.5 trillion tax law that was signed in December reduces the corporate tax rate from 35 percent to 21 percent, and should provide an economic windfall for U.S. companies as well as the banking industry. The legislation does include some negative impacts to executive compensation by ending the performance-based exemption through Internal Revenue Code Section 162(m) for compensation over $1 million, but overall, the change in tax rate should bring additional revenue to all companies. Employees are expecting a slice of the pie.

Several Fortune 500 companies, including Wells Fargo & Co., AT&T, JP Morgan Chase & Co., U.S. Bancorp, Wal-Mart, Apple and The Walt Disney Co. have given employees special bonuses, and in certain instances have raised the minimum wage to $15 per hour. These bonuses and raises were given without consideration to employee or company performance, and may set expectations or encourage a feeling of entitlement to future compensation increases regardless of performance.

Community banks should exercise caution when making special salary adjustments and bonus payouts. Salary increases and bonuses without performance or market-driven reasons will drive up fixed costs for the bank, which could impact the achievement of future budget or profitability goals. Raising the minimum wage may also cause salary compression at lower levels of the organization, and make differentiating pay between managers and employees, or high performers and low performers, difficult.

Be Strategic with Salary Increases
Because employee expectations for pay increases are high in relation to the potential for the organization to reap additional profits, we recommend that banks make strategic changes to their salary increase methodology.

One such change is to increase the overall budget for salary increases. A study conducted by Blanchard Consulting Group at the end of 2017, which included over 100 banks, found that the average projected salary increase in the banking industry is 3 percent for 2018. Instead of raising the minimum wage, an alternative would be to increase the salary increase budget from 3 percent to 3.25 or 3.5 percent. This would allow all employees to enjoy the windfall from the additional income projected from tax reform, and maintain the bank’s ability to tie performance and market position into the salary increase process. For example, if an employee is meeting performance expectations, that person would be eligible for the higher base salary increase of 3.25 percent. If the employee is exceeding performance expectations or the salary is below market, that employee may get a higher increase. If the employee is meeting some expectations or no expectations, that individual may get half of the budgeted increase or no increase at all.

Use the Windfall to Increase the Bonus Pool
In regard to employee bonus plans, your bank may consider increasing its annual incentive plan payout levels to coincide with the anticipated increase in bank profitability. For example, if the target bonus payout was 4 percent of salary (or about two weeks’ pay) for staff-level employees, the bank may want to increase the target payout to 6 percent of salary because of the additional profits from the tax reform law. In order to pay out this 6 percent bonus, end-of-year bank profitability goals still need to be met, which keeps the employee’s focus on performance and does not encourage a feeling of entitlement to the bonus payout.

We also recommend that a threshold payout—the minimum performance level at which a bonus may be paid—be incorporated into the incentive plan design. The payout may be linked to a performance goal that is similar to the previous year’s profitability level, with a bonus amount equal to the previous year’s payout. This methodology could also be used for officer and executive plans that typically incorporate higher payout opportunity levels.

If your bank considers this approach, we recommend testing the reasonableness of the program by examining the total payouts of your bonus plan for all employees (staff and executives) as compared to total profits. Typically, if a bank is meeting budget, the bonus plan will share approximately 10 percent of the profits with all employees through cash incentive payouts. If the bank is exceeding budget—for example, profits are 20 percent above the target—the bank may share 15 to 20 percent of the profits with employees.

The passage of tax reform has created an expectation with employees across the nation that their compensation packages will be positively impacted. Despite the expected positive effect on bank income, it is still a difficult environment for banks due to regulations and increased competition. We recommend that banks be strategic in allocating increased profits into a compensation plan that rewards employees for performance and ensures that the bank is meeting or exceeding its annual goals.