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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
$1B – 5B
$500M – $1B
$250M – $500M
Equity Grants (fair market value)
Benefits & Perks
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
$1B – 5B
$500M – $1B
$250M – $500M
Fee per board meeting
Annual cash retainer
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.