Fall is executive compensation planning season. Board compensation committees are busy with familiar tasks, such as gathering performance data and establishing metrics for next year. But 2020 has been anything but typical, and based on recent discussions, we see three additional areas of concern in the months ahead:
Incentive pay adjustment
Next-generation leadership issues
Non-employee director pay
Typically, compensation committees are responsible for these issues. As they arise, committees should consider certain legal and tax implications, particularly when modifying existing compensation arrangements. If changes are significant or impact director compensation, the committee may be required — or may want — to obtain full board approval.
Short- and Long-Term Incentive Pay
Committees will undoubtedly confer with compensation advisors to determine adjustments to formulas and metrics, review comparison peer groups and evaluate the impact of Covid-19 on annual and multi-year performance measurements. When doing so, committees should also:
Review plan documents and employment agreements to avoid violating contractual terms. Committees should determine whether alteration of incentive pay could allow executives to terminate their agreements for “good reason.” Such terminations may entitle executives to severance benefits, and/or limit the scope of restrictive covenants.
Consider Code Section 409A. This is critical if modifications could be viewed as a replacement or substitution for other pay. These deferred compensation rules are wide ranging; even inadvertent violation can subject executives to significant income taxes, interest and penalties — potentially causing legal disputes.
Consider “golden parachute” issues under Code Section 280G. If a strategic transaction is in the near term, committees should carefully evaluate potential impacts on Section 280G calculations, including whether payable amounts could be nondeductible or taxable to executives.
Consider applicable disclosure requirements. Public banks may need to file a Form 8-K and determine how to communicate changes in future proxy statements. It is important to accurately disclose and explain changes to educate and engage with interested shareholders. In addition, public banks should evaluate any impacts on “grandfathering” under Code Section 162(m).
Evaluate any impacts on stock ownership guidelines. A decrease in equity grants or in share price (where guidelines are denominated in dollars) may hinder executives from satisfying the guidelines.
Next-Generation Leadership
Most banks are comfortable with their succession plans, allowing for a renewed focus on the next generation of bank leaders. The topic is challenging, particularly when considering the impact of Covid-19, and generational and cultural differences that influence the motivation of younger employees.
For years, these employees have requested more responsibility and less face time than required in office-centered cultures that were common at most banks as recently as March. The pandemic resulted in greater acceptance of such requests, making 2020 a valuable trial run for how well remote arrangements and more flexible schedules can work. Now is the time for banks to evaluate whether, and to what extent, they will embrace these changes, potentially obtaining a competitive edge.
In connection with next-generation issues, committees should:
Consider whether HR policies (e.g., company property, privacy, social media, business hours) are up to date.
Determine what incentives are most impactful — current compensation or future, potentially tax-deferred compensation.
Understand restrictive covenants to which external candidates are subject and the extent to which remote work interacts with their obligations.
Non-Employee Director Pay
Bank directors have been tasked with more and more since the financial crisis in 2007. With the pandemic, as well as environmental, social and governance concerns, this workload shows no sign of abating. Pay has not always kept pace with the workload and understandably, directors desire fair compensation for their time and efforts.
But director compensation decisions are subject to a strict “entire fairness” review, under which there has been significant litigation in recent years. Committees should obtain adequate legal advice and keep appropriate documentation with respect to all director compensation decisions, and consider obtaining full board approval for all alterations in pay.
The evolution of pay and governance practices tends to be led by large companies—organizations that are under the watchful eyes of institutional shareholders, proxy advisors and the media. Smaller organizations have less visibility, fewer constituents, and can afford to take more time evaluating whether or not to adopt emerging pay practices, some of which may take years to be adopted or ultimately rejected due to unwarranted complexity, cost or irrelevance. But certain current pay and governance trends are worth considering right away, regardless of company size.
Pearl Meyer recently completed its annual Director Compensation Report analyzing director pay practices for 1,400 public companies. We have identified three practices that are nearly universal among the largest 200 companies in the S&P 500 (we’ll call them the Top 200) that we believe transcend company size and deserve consideration at banks, both large and small:
The shift toward retainer-based pay;
Delivery of over half of pay for board service in stock; and
The adoption of stock ownership guidelines.
Shift from Attendance-Based to Retainer-Based Pay The largest companies generally have the most complex compensation structures. But on rare occasions, they actually lead the way toward greater simplicity in pay practices. One example is the shift from a retainer plus meeting fees structure to a retainer-only approach. This simplification of director pay has been an increasing trend among large public companies for a decade. Today, fewer than one in five Top 200 companies now pay meeting fees for board service, while roughly 40 percent of companies with revenues of $50 to $500 million (so-called micro companies) continue this practice.
The most compelling argument for retainer-based compensation is the investor expectation that a director’s full commitment to attend all meetings should be a given. A retainer structure emphasizes that directors are compensated for the skills and experience they bring to the position, an expectation just as relevant for small companies as the Top 200. A side benefit of this approach is its greater simplicity, something community banks may find attractive.
Increase in Equity Pay A long-promoted principle of the National Association of Corporate Directors (NACD) is to align director compensation with the interests of the shareholders they represent, in part by delivering at least half of director pay in the form of stock. Two-thirds of all companies studied, and nearly 90 percent of the Top 200 companies, comply with this guideline. Practices among banks in the study were similar to the general industry. The prevalence of companies meeting this threshold generally increases with the size of the organization.
With certain exceptions (mutual organizations, family-owned, closely-held, etc.), the rationale for paying at least half of director compensation in equity is no less compelling for community banks than for large corporations:
Directors at community banks are equally responsible for representing their shareholders;
The governance practice of aligning director pay with the long-term interests of shareholders is universal; and
Stock-based compensation is more capital-friendly than cash, which may add special appeal for banking organizations.
Community bank boards may include a diverse group of directors and demographics, and cash-focused director pay may at times be more appropriate. However, the benefits of a greater mix of equity-based compensation may be appropriate for your organization.
Director Stock Ownership and Retention Larger companies have almost universally adopted stock ownership guidelines requiring directors to accumulate or retain shares received over a defined period of time. The rationale is consistent with the purpose of stock-based pay—greater alignment with the long-term interests of shareholders. This is a reasonable objective for stock companies, regardless of industry or size.
While ownership requirements vary from company to company, they are typically attainable through retention of shares received under the compensation program. A common structure might require ownership equal to a multiple of the annual cash retainer (for example, three to five times the retainer), with retention of at least 50 percent of shares until an ownership level requirement is met. For community banks looking to score points within the governance community, adopting modest, achievable stock ownership guidelines can be a relatively easy win.
Community banks aren’t known to be early adopters of pay trends, and that’s a good thing much of the time. But the three director compensation trends discussed above have been tested and refined at large companies for many years and they have direct and immediate applications to smaller organizations. Consider exploring the merits of these big company director compensation practices for your bank in 2016.
Though the executives and directors from privately held institutions in Bank Director’s 2014 Compensation Survey say that they face the same challenges as the board members and senior executives of publicly traded banks, the data on compensation and benefits show they are paid less and receive fewer benefits.
Privately held banks tend to be smaller, and this also impacts how well these boards can compensate their CEO. Still, there are pay issues particular to private banks, including how to compensate executives without publicly traded stock, that private banks must address.
Private Banks Offer Equity, Too Naturally, public banks are more likely to offer equity grants. Not only is a public company’s stock more liquid, but the company tends to have more shares outstanding. Just 31 percent of respondents from private banks report that their executives receive annual equity grants. Of those, almost half use restricted stock, and 40 percent grant stock options.
Many smaller, private institutions that offer equity compensation emulate the practices of big public banks, but don’t consider that their shares are not as actively traded and difficult to convert the cash—negatively impacting executives and shareholders, says Gallagher. Just 11 percent use synthetic equity, but this type of long-term incentive can be a good alternative to traditional equity. Synthetic equity behaves much like a traditional stock incentive—as the value of the company rises, so does the reward to the executive—but the reward is all cash.
Synthetic equity does have its drawbacks. Compared to stock, the cost of which is fixed at its initial value when granted to the executive, the cost of synthetic equity to the bank appreciates along with its value. If an executive’s reward doubles, then the cost to the bank doubles right along with it. However, Gallagher says that the value to the executive outweighs its costs—and executives reveal a preference for cash incentives, according to the survey.
The percentage of private institutions that award annual equity grants has dropped by five percentage points in 2014 since last year, while the percentage of banks allocating synthetic equity remains the same.
Does the bank allocate any of the following to executives annually?
No matter what the board decides is best to offer the CEO and other executives as a long-term incentive, it’s vital to think through the exit plan for the executive. Gallagher shares a story that would chill many bank directors. A privately-held community bank allocated a large amount of stock over the course of several years as part of its CEO’s compensation package. Since the stock isn’t traded, once the CEO retired, he had to sell a significant stake in the company, triggering a sale. “The board knows the only course of action is to sell the bank. That’s not a good answer,” he says.
The CEOs of privately held banks with between $500 million and $5 billion in assets are earning less in salary and cash bonuses than their peers at public institutions of the same size. The median compensation in 2013 for the CEO of a private bank between $1 billion and $5 billion was $373,000 in salary and a $75,000 cash bonus, less than his public peer, who earned $409,004 in salary and $122,000. For banks between $500 million and $1 billion in assets, the private CEO earned a median $266,490 salary and $50,000 cash incentive, compared to the public CEO with a median $278,417 salary and $54,000 cash bonus. Private banks are also less likely to offer retirement and deferred compensation benefits.
Median compensation for CEOs Private ownership, by asset size
Asset Size
$1B – 5B
$500M – $1B
$250M – $500M
< $250M
Salary
$373,000
$266,490
$212,500
$173,000
Cash Incentive
$75,000
$50,000
$35,000
$27,500
Equity Grants (fair market value)
$27,543
$37,500
$57,000
$35,000
Benefits & Perks
$67,761
$25,000
$18,330
$15,000
Private Banks Mix Up Metrics The use of performance indicators by private banks has grown over the past year, from 56 percent in 2013 to 71 percent in this year’s survey. But compared to publicly traded banks, which place a high priority on asset quality and return on equity (ROE), private institutions as a whole are less likely to rely on one metric. One-third of respondents from private banks say they link CEO pay to return on assets (ROA) or ROE. Half tie CEO compensation to corporate goals.
Improved performance and conditions for many smaller, private banks is impacting their boards’ approach to incentive compensation, including the increased use of performance indicators. “They’re profitable again [and] they can start considering performance-based compensation,” Gallagher says. “Smaller banks were too focused on sheer survival [following the economic downturn].” With more banks able to pay for performance, more are apt to use a metric that makes sense for the bank as a way to determine whether the CEO met the bank’s goals.
Compensation Committees Decide Pay Forty-two percent of executives and directors from private banks say that the compensation committee bears the responsibility of setting director compensation levels for their bank, compared to three-quarters of publicly traded institutions and 60 percent of respondents overall. Private banks are more likely to rely on the board, at 30 percent. Less than 20 percent of respondents from public banks place the responsibility for director pay on the full board.
Sixteen percent of private banks place this responsibility in the hands of the CEO, which Gallagher says can indicate a dangerous board dynamic. If the board disagrees with an executive decision, the CEO could retaliate by cutting board pay. Directors should never be beholden to the CEO. “Boards should set their own pay with no say from the CEO,” he says.
Overall, the survey shows a shift from board meeting fees to annual retainers. For smaller, private banks, board meeting fees remain steady, though the percentage of directors receiving an annual cash retainer has risen by 10 percentage points, to 39 percent—still significantly lower than public banks, where 69 percent receive an annual retainer. As directors spend more time outside the boardroom on banking matters, retainers may better reflect a board member’s contribution to the governance of the institution. The median board fee for a private bank was $650 per meeting, and the median annual retainer totaled $9,300, for the independent director of a privately held bank in fiscal year 2014.
Median compensation for independent directors Private ownership, by asset size
Asset Size
$1B – 5B
$500M – $1B
$250M – $500M
< $250M
Fee per board meeting
$775
$725
$600
$500
Annual cash retainer
$11,00
$16,250
$5,500
$7,600
Stock Guidelines Recommended Stock ownership guidelines, which outline the expectations of the company regarding the level of stock ownership by members of the board, may not be top of mind for the boards of private banks. Half of private bank respondents indicate that the bank does not have stock ownership guidelines for the board, though this represents a decline of 10 percentage points from 2013. Stock ownership guidelines are a best practice for bank boards, as they further align the board’s interests with that of bank ownership.
A stock ownership policy can be easily set by the bank’s board, setting the number or value of shares that must be owned by a director within a set amount of time. For those at private banks that set stock ownership guidelines, the majority require a minimum or fixed number of shares. Gallagher says that this makes sense for private boards, due to the illiquid nature of the stock. The price isn’t firm, so bank boards focus more on the number of shares.
About the survey Bank Director’s 2014 Compensation Survey, sponsored by Meyer-Chatfield Compensation Advisors, surveyed online 322 independent directors and senior executives, including chief executive officers and human resources officers, at banks of all sizes across the United States to uncover trends in executive hires as well as director and executive pay. Director pay data was also collected from the proxy statements of 99 publicly traded institutions. Based on regional definitions from the U.S. Census Bureau, 35 percent of the data came from banks in the Midwest, one-third from banks in the South, 23 percent from banks in the Northeast and 9 percent from banks in the West.
Bank directors have experienced an increased workload in recent years with many new regulations and compliance guidelines. It is now more important than ever to ensure the total compensation program for your directors is competitive and linked to the bank’s overall compensation philosophy. In addition, it is important that your bank has an independent compensation committee that ensures that the compensation programs for both executive officers and directors are designed appropriately.
How Directors Get Paid Once banks become profitable, they typically begin to pay cash fees to the board of directors to compensate them for the time they spend on board activities. Many banks have adopted a “pay-for-time” director compensation philosophy that is based on participation in board and committee meetings. These meeting fees can range from a couple hundred dollars to thousands of dollars per meeting with larger banks typically paying higher per meeting fees. Since the chairman of the board and the chairmen of committees typically spend more time preparing and presenting, these positions will often receive 20 percent to 30 percent more compensation per meeting than regular board or committee members.
In addition to per meeting fees, many banks use retainers in the form of cash to compensate directors. Retainers can be useful to attract directors in competitive markets when meeting fees may not provide enough to retain high quality professionals.
Paying Long-Term Incentives Cash bonuses for directors are not considered a best practice in the banking industry. Best practices from the National Association of Corporate Directors state that the board should not receive compensation based on the achievement of annual performance metrics, as the board should be focused on making decisions for the long-term success of the bank. In place of annual cash-based incentives, the suggested incentive for the board is in the form of stock grants or cash-based deferred compensation programs such as phantom stock for private corporations, where compensation is given based on the bank’s long-term increase in book value. These types of long-term incentive plans have replaced or supplemented many of the cash retainer programs.
Paying Benefits to Directors Director health and welfare programs are not common in the industry, as most insurance and retirement programs for directors are cost-prohibitive. A cost-effective benefit for directors is a voluntary deferred compensation plan where directors can defer their cash fees or retainers to retirement or an agreed upon date. The cost of these plans to the bank is any above-market interest rates applied to these types of deferred compensation programs, which typically makes this the most affordable benefit for bank directors.
The Importance of Compensation Committee Independence Typically, the compensation committee is made up entirely of independent outside directors, which is now a requirement for publicly traded banks under the new Securities and Exchange Commission (SEC) compensation committee governance rules. These rules dictate that an independent director must not be an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Hiring Independent Advisors The SEC also is now requiring public banks to conduct an independence assessment of individuals who are advisers to the compensation committee. Prior to retaining or receiving the advice of any advisor, we believe all compensation committees should ask the following questions to assess independence:
Does the advisor offer any other services to the bank that are paid by management?
Are the amounts paid to the advisor a significant portion of the advisor group’s total revenue?
Does the advisor have any business or personal relationship with a member of the compensation committee or an executive officer?
Does the advisor own any stock of the company?
Director compensation programs are becoming more of a strategic focus in the banking industry as the workload and risk associated with being a bank director has increased. Also, there are more requirements now for the compensation committee to be aware of. It is more important than ever to ensure that the total compensation program for your directors is competitive and is in line with the compensation philosophy of the bank, and that the bank is following compensation rules. This will help ensure that the bank attracts and retains high quality directors to help direct the bank to future success.
With the close of 2012 fast approaching, directors and compensation committees continue discussions on how to produce acceptable growth under the weight of banking reform legislation. Understandably, banks are nervous. In the face of regulatory actions, weak performance, or cuts in compensation, valuable bank officers may opt to move elsewhere.
In spring of this year, Meyer-Chatfield Compensation Advisors and Bank Director conducted a comprehensive survey to understand industry viewpoints on executive and directors pay. Download Full Report. To further validate our findings, we identified six questions from the original spring survey, and re-surveyed the audience of bank directors and executives in attendance at the Bank Executive & Board Compensation conference in Chicago in November this year. William MacDonald, advisory board member for Meyer-Chatfield Corp., the parent company of Meyer-Chatfield Compensation Advisors, talks about the survey results and trends in compensation, including the increasing use of stock in director compensation and the movement away from Supplemental Executive Retirement Plans (SERPs).
1. How well do you believe your bank’s board is managing its executive and director compensation?
Board members at the November conference felt they were doing a better job handling compensation than board members felt in the spring survey. In my opinion, the improvement in numbers is due to compensation committees and board members getting their arms around the changes, and developing a process to deal with the issues.
Very Well
Well
Not Well At All
Spring Survey
26%
35%
13%
November Survey
37%
13%
2%
2. What is your top compensation challenge for 2013?
The top challenges in both the spring 2012 survey and November Chicago conference were “tying compensation to performance” and “retaining key people.” Historically, bank incentive plans have been tied to financial performance using matrixes such as return on assets and earnings per share.
3. Do you have stock ownership guidelines for your directors?
More than half (58 percent) of the Chicago survey group have directors’ guidelines in place, compared to 47 percent of the spring survey. Many banks use deferred compensation plans to offer restricted stock compensation for directors, and pay directors a larger portion of compensation in stock than they have historically.
4. If you have stock ownership guidelines for directors, what are the ownership requirements?
In the annual spring study, most respondents who had stock ownership guidelines had guidelines requiring a minimum or fixed number of shares, while the Chicago group more often had a multiple of retainer or annual compensation. I think a multiple is a better idea. Not all directors are financially able to meet a fixed amount of shares.
5. Who is primarily responsible for setting directors compensation levels at your bank?
To follow high standards in corporate governance, a board should work with an outside consultant with access to meaningful data and best practices. All parties need to weigh in on this subject; the chairman, full board, the compensation committee, as well as the bank CEO.
Source: Bank Director and Meyer-Chatfield Compensation Advisors spring 2012 survey on director compensation.
6. Does your bank offer a nonqualified retirement benefit to your management team?
Both survey groups weigh in at 60 percent roughly offering a nonqualified retirement benefit. Nonqualified plans are effective tools for banks to attract, retain and reward key people.
Many community banks structure supplemental executive retirement plans (SERPs) for senior management. SERPs became prevalent at community banks as a way to compete with major banks. Now, SERPs are on the chopping block. Institutional investors, shareholders and many boards are focused on inherent plan costs. Most SERPs are fixed defined benefits, and expensive from a profit and loss standpoint. During the conference and in a break-out session with Flynt Gallagher, president of Meyer-Chatfield Compensation Advisors, we discussed ways banks are maintaining these plans with much lower costs. In some cases, the bank can maintain the benefit at a 50 percent reduction in the expense that must be recorded for employee pensions (FAS 87).
Going Forward
Compensation for executives and directors will remain a hot topic in 2013. Look for incentive compensation to gain momentum as banks align interests of executive teams with shareholders. What’s more, I envision the sprouting of new measurements to better balance shareholder and regulatory interests. I would also watch for shareholders to require executive and director benefit plans do more heavy-lifting in the war for talent, because flexibility trumps tradition hands-down.
Bank Director asked speakers at its upcoming Bank Executive & Board Compensation Conference November 5-6 in Chicago to answer a question lots of bank directors want to know: Is it time for a raise? Even if the industry’s financial performance is still lackluster, do bank directors deserve a raise?
Yes, if performance is good.
Bank Directors deserve a raise if the bank performs benchmarked against industry peers. Performance should be an obvious consideration. The regulatory burden and expectations of serving as a director has exponentially increased. Regulators expect directors to be capable, competent, knowledgeable, engaged and responsible and they are increasingly held to those standards. Our performance is directly related to the economy which is a complex challenge for our industry. This demands more of our directors. Finally, regulation has diminished our revenue and increased our costs. All these things require directors who need to be compensated appropriately so banks can acquire and retain capable talent to represent shareholder interests and provide advice and counsel to management.
– Ed Balderston, former executive vice president and chief administrative officer, Susquehanna Bancshares, Inc., Lititz, PA
Yes.
Director work load and risk has increased significantly as has the need for continuing education.
– James C. Bean, Principal, McLagan, An Aon Hewitt Company
It depends.
I think the answer could be yes or no, depending on how current director compensation is positioned in the marketplace. If a bank has a median market compensation (not too high or too low), I would recommend that the board should increase pay as the common philosophy is “pay for time” rather than pay for performance and many directors are working harder than ever in these tough times. Of note, if the bank has frozen salaries for all employees or executive officers, I wouldn’t recommend the pay raise for the board, as it wouldn’t look good for the organization.
– Mike Blanchard, CEO, Blanchard Consulting Group
It depends.
Each compensation situation for bank directors is unique. In general the expectations, involvement and liability of being a bank director has increased substantially over the last several years. In order to attract high quality directors, the overall compensation package for a bank director needs to be commensurate with those responsibilities and expectations. Bank directors need to be held accountable for a high level of engagement and should be compensated for that engagement.
– Daniel E. Bockhorst, executive vice president and chief risk officer, CenterState Banks
It depends.
This question does not have a simple yes or no answer. I certainly believe directors have seen their workload and responsibility increase in recent years and this may very well warrant a raise. Market data trends in recent years have not shown an increase in director compensation, but I do believe we will see that change in the near future. So, if the bank is performing at an adequate level and the directors have been working harder than in the past, I think it certainly might be time to give the directors a raise.
– Matt Brei, senior vice president and partner, Blanchard Consulting Group
It depends.
While all corporate directors are facing increased responsibilities, the demands on bank directors have particularly escalated. In light of the expanding requirements, the need for more diverse skills and expertise on boards has never been greater. Meanwhile, surveys show director compensation at banks continues to lag other industries. While financial performance and affordability are both important for banks to consider when evaluating director compensation, the following factors should also be assessed:
competitive positioning of director compensation against industry peers;
changes in board structure, such as the creation of a lead director position;
historical frequency of changes in director compensation at the company (many companies consider changes to director compensation every 2-3 years); and
consistency with employee pay decisions (e.g., have employee salaries been frozen?)
– Michael W. Brittian, partner and senior consultant and Daniel Rodda, senior consultant, Meridian Compensation Partners LLC
No.
I hate to look at shareholders who have entrusted their ownership stakes to me and tell them I should be paid more as they see the value of their bank diminish. Directors should feel the pain as shareholders. Perhaps rather than cash, perks or restricted stock (which is real economic value today), the best way to compensate directors for the added time is through option grants. At least through this, directors will make more only if the shareholders make more. It’s called alignment.
– Frank Farnesi, compensation committee chairman, Beneficial Mutual Bancorp Inc., Malvern, PA
It depends.
Bank directors’ fees like everyone else’s compensation are driven by a number of factors. The first is performance of the director. If the director performs in a manner that enhances the operation of the bank and its profitability, then an increase may be in order. The second is performance of the bank. If the bank is performing favorably against its peers in meaningful ways, an increase is not unreasonable. However, if stock prices are at disappointing levels, it is not always effective to point to the bank’s or director’s above average performance. Stockholders in most cases will have the ability to vote against directors at least every three years.
– Douglas P. Faucette, partner, Locke Lorde LLP
It depends.
The answer is not an easy one. Responsibilities for directors dealing with compliance requirements, time commitments and personal liability have significantly increased. Recent studies suggest non-executive directors are not compensated adequately relative for their role. What is also clear is the expectations of directors have increased significantly and include a greater time commitment, exposure to legal liability and scrutiny by the public. Director pay is not simply an honorarium; it’s one the most difficult issues to assess. For a director to deserve a raise, they should be able to answer “yes” to these questions:
Has the board performed a self-assessment as recommended by regulatory agencies?
Are all directors performing at a satisfactory level?
Is shareholder value increasing?
Have peer evaluations been conducted?
Finally, pay should be commensurate with the time and expertise required. Shareholders should recognize that without qualified individuals, it is the company and eventually the other shareholders who will suffer.
There is certainly no question that bank directors are spending increasing amounts of time in the performance of their duties. Most bank directors have a “day job” from which they take time to perform bank business, which creates an additional expense relative to lost time. In addition to the time requirement is the potential risk of personal assets. The short answer to the question is “yes,” but the reality is “not really.” The current environment makes it difficult to justify raises when the full-time employees are asked to sacrifice raises or additional benefits. The bottom line is to improve performance, which will result in better financial footings, improved stockholder relations and conceivably more satisfied employees.
– W. Scott Gallaway, compensation committee chairman, Millington Savings Bank, Millington, NJ
Yes.
Directors’ compensation at any bank can only be evaluated against the specific performance of that bank. The compensation committee needs to weigh both the performance of the bank for all of its stakeholders (shareholders, customers, employees and communities) and compensation for directors against market. In difficult times like these, banks need to seek out the best talent when searching for a new director and can’t afford to be less competitive than other industries when searching for talented and experienced directors. While raises are probably not on the table this year, each committee needs to thoughtfully evaluate its package for directors each year.
– Barbara Jeremiah, compensation committee chairman, First Niagara Financial Group, Inc., Allison Park, PA
Yes, more challenges should mean more pay.
The overall financial performance of the industry is not the only determining factor when considering whether bank directors deserve raises. Directors must work harder than ever to fulfill their duties in these times of shrinking margins, deteriorating asset quality, lackluster growth and increased government regulations. Because of these challenges, assessing risks and creating policies responsive to those risks is increasingly difficult and now requires extra diligence and continual education. Our shareholders deserve directors who commit the additional time, energy and effort to fulfill their fiduciary obligations. Likewise, bank directors fully engaged to these tasks deserve to be fairly and adequately compensation for their effort and experience.
– Dallas Kayser, compensation committee chairman, City Holding Company, Point Pleasant, WV
No, pay should match the bank’s performance.
Industry performance good or bad should not be a major factor in setting director pay. Far more relevant is the performance of the director’s bank. The current climate for pay raises is negative because of generally lackluster industry performance. In a back drop of significantly increased regulatory burdens, director workload and responsibility, there is some justification for adjusting director pay to compensate for these factors. In the current industry situation however, it is my opinion that director pay increases should be undertaken with great reluctance and only after careful study. The optics of increased director pay in the current environment can be negative from an investor’s point of view.
Obviously, an involved director of any board will spend more time, energy and will be subject to more stress during times of adversity. However it is rare that all members share equally in the process of problem resolution. Therefore it is difficult to recommend blanket increases for all board members. How to financially recognize the ones heavily involved and critical to success would be a good topic of discussion.
– E. Lyle Miller, compensation committee chairman, Ouachita Independent Bank, Monroe, LA
Yes.
That would depend on the circumstances of the individual bank. First, if the bank’s performance exceeded peers and met or exceeded expectations for return on equity, return on assets, adequate capital ratios, etc., a raise for directors might be in order if the directors’ compensation remained within its peer group. Secondly, if the bank was having difficulty attracting qualified directors, a raise would most likely be in order unless the compensation was deemed unreasonable by best practices of the industry. Thirdly, for individual directors who had certain expertise (i.e. financial experts) who carried additional responsibilities, an increase in compensation would be justified and prudent. To base directors’ compensation solely on the industry’s overall performance would be counterproductive.
– John Mitchell, compensation committee chairman, NBT Bancorp Inc., Ithaca, NY
Yes.
Since the financial crisis, the role of a bank director has become increasingly demanding as the industry faces economic uncertainty and an expanded regulatory environment. Bank directors must practice a delicate balance of executing their duties, while allowing bank management the latitude to do their jobs as experts in a complex, heavily regulated industry. The progress an institution makes against its strategic objectives, combined with a strong link to long-term incentives, should also be factored into the decision.
– Cathy Nash, president and CEO, Citizens Republic Bancorp, Troy, MI
It depends.
Whether compensation should be “raised” depends on each bank’s current pay levels, program structure and unique requirements. While the financial crisis brought several years of flat /modest increases, many banks recognized additional [board responsibilities] through increased retainers for board and committee chairs as well as meeting fees for key committees. Public banks tended to make increases in the form of equity, to reinforce shareholder alignment. With further regulations and a spotlight on the banking industry governance, we expect board pay will continue to evolve and increase to meet demands.
– Susan O’Donnell, managing partner, Pearl Meyer & Partners
It depends.
There is no one answer to the question of whether or not bank directors as a group deserve a raise in the present environment. Treating all directors as a class would be manifestly unfair; each bank has faced different challenges and boards have reacted to these challenges in significantly different ways.
Pay raises need to be reviewed for boards while concentrating on the individual circumstances of each bank. Pay raises need to be reviewed on a case-by-case situation to determine if the appropriate strategies and tactics were put into place.
– Dave Payne, senior vice president, Meyer Chatfield
Maybe.
I think bank directors are deserving of consideration for raises, even despite lackluster industry performance, based upon the increased workload and accountability board members are facing. Whether members of any particular bank board are deserving [of a raise] depends on the each bank’s unique circumstances, such as the bank’s long term shareholder return performance relative to peers, the bank’s status with regard to regulatory compliance issues and, of course, the current board member compensation relative to peers. So, the direct answer to your question is “maybe.”
– Kent L. Roberts, executive vice president and human resources director, Columbia Bank, Tacoma, WA
Yes.
According to a recent survey performed by a well known executive search firm which used National Association of Corporate Directors data, bank directors in smaller publicly traded banks (market capitalization under $1 billion) are currently paid less on average than directors in other similarly sized public companies. Given the greater responsibilities and regulatory requirements imposed on banks and bank directors, if we are to continue to attract the quality of directors we need, I do believe bank directors should be paid competitively with those in other public companies. Do we “deserve” it? That’s more subject to personal opinion and a good topic for cocktail discussion!
– Charles Schalliol, compensation committee chairman, First Merchants Corporation, Indianapolis, IN
Tell us what you think in the comments section below.
Bank directors face familiar compensation challenges this year, but frustration with the board’s ability to handle these challenges appears to be increasing. That is according to the results of Bank Director’s 2012 board compensation survey co-sponsored by Meyer-Chatfield Compensation Advisors, which included nearly 550 CEO and director responses.
This year, only 58 percent of respondents feel their board is managing executive compensation well or very well, compared to 63 percent last year and 74 percent in 2010. Similarly, only 53 percent feel director compensation is being managed well or very well, compared to 56 percent last year and 68 percent in 2010.
Meyer-Chatfield Compensation Advisors President Flynt Gallagher says that some of this dissatisfaction is the result of increased scrutiny from shareholders, regulators and the market.
In some cases, this increased scrutiny may be translating to increasing workloads for directors. The median hours spent on the job for institutions of all asset sizes remained the same this year as last year at 15 per month, but there were large changes in the hours reported by banks in the highest and lowest asset categories. While directors from the largest banks reported working fewer hours this year, the opposite was true for their small counterparts. Directors at banks with under $100 million in assets report working 20 hours per month this year; that is 5 hours more than they reported working last year and double the year before.
Justin Heideman, a director at Town & Country Bank in Saint George, Utah, a de novo institution with less than $70 million in assets, says he has no doubt directors at these smaller institutions are putting in more hours. He says the main reason is compliance. “We have the same requirements on the [information technology] side in terms of safeguards that a major bank has,” says Heideman. “It’s nonsensical the amount of time that is required to make sure that compliance is appropriate and to make sure we do all of our training. We have to do pop quizzes like I was in second grade during board meetings to make sure our training is done and to prove we are being trained. It’s ridiculous.”
On a positive note for directors, more respondents (32 percent) expect director compensation at their banks to increase in 2013 than in 2012 (28 percent). Only 1 percent of respondents expect a decrease in compensation in 2013, and 67 percent expect director pay to stay the same.
Gallagher says the financial performance of many banks is showing an improvement after struggling with asset quality issues, lower margins and lower profits in recent years. With this improvement some banks are feeling relief and even optimism.
The median board meeting fee for outside directors stayed the same this year as last year at $600 per meeting, while the median meeting fee for a chairman rose slightly from $600 last year to $675 this year.
And yet, even as compensation holds steady or even increases, benefits for directors continue to erode. The number of banks offering zero benefits to outside directors has significantly increased—46 percent this year compared to 39 percent last year and only 28 percent the year before.
Making cuts to benefits while keeping compensation steady might make sense for many banks, as it seems to align with what directors find most important when considering a new board seat. When asked to rank the importance of types of benefits and compensation when considering a new board seat, 51 percent of directors assign little or no importance to retirement plans while only 27 percent find them important or very important. Similarly, 44 percent of directors assign little or no importance to insurance benefits, while 28 percent find them important or very important.
It is important to note that many respondents report liability and potential growth of the institution are even more important factors when considering a board seat than the compensation or benefits package. Clyde White, chairman and CEO of Ouachita Independent Bank, a commercial bank in Monroe, Louisiana, with $570 million in assets, had this to say: “If I were considering joining a bank board, I would want to know what investment opportunity I would have and what the potential for growth is of that investment. I would also want to know what value I would be expected to bring to the table [i.e., business development activities, business acumen].”
The compensation survey was emailed throughout April and May to CEOs and directors at banks ranging in asset size from under $100 million to more than $5 billion. The response rate was 5.7 percent, with 549 responses. Of the banks represented, 9 percent have less than $100 million in assets, 25 percent are between $100 million and $250 million, 24 percent are between $251 million and $500 million, 17 percent are between $501 million and $1 billion, 18 percent are between $1.1 billion and $5 billion and 6 percent have more than $5 billion in assets. Of the respondents, 40 percent are publicly traded, 56 percent are private and 4 percent are mutual. Only 14 percent are de novo banks.
For the survey report including committee fee pay breakdowns, click here.
The evolution of pay and governance practices tends to be led by large companies—organizations that are under the watchful eyes of institutional shareholders, proxy advisors and the media. Smaller organizations have less visibility, fewer constituents, and can afford to take more time evaluating whether or not to adopt emerging pay practices, some of which may take years to be adopted or ultimately rejected due to unwarranted complexity, cost or irrelevance. But certain current pay and governance trends are worth considering right away, regardless of company size.
Though the executives and directors from privately held institutions in Bank Director’s 
Bank directors have experienced an increased workload in recent years with many new regulations and compliance guidelines. It is now more important than ever to ensure the total compensation program for your directors is competitive and linked to the bank’s overall compensation philosophy. In addition, it is important that your bank has an independent compensation committee that ensures that the compensation programs for both executive officers and directors are designed appropriately.
Yes, if performance is good. 
It depends.
It depends.
It depends.
No.
It depends.
Yes, with conditions.
Yes.
Yes, more challenges should mean more pay.
Yes.
It depends.
Maybe.
Yes.