How Bananas and Tech Firms Can Help Tackle the Talent Challenge


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.

Solving the Puzzle of Compensation Plans and Diversity


compensation-11-6-18.pngThere are some tasks that seem innocuous and administrative, but are nevertheless incredibly important. Assembling the puzzle pieces of effective executive and employee compensation plans is one such task.

This is why hundreds of bank executives and directors have assembled at Bank Director’s 2018 Bank Compensation and Talent Conference in Dallas, Texas, this week.

A number of themes began to emerge on the first day of the annual event, hosted at the Four Seasons Resort and Club at Las Colinas, the first of which is that many banks and their boards are still fully figuring out exactly how to structure executive and employee pay.

The starting point, according to a panel of experts from Compensation Advisory Partners and Kilpatrick Townsend & Stockton LLP during a morning workshop, is the interagency guidance issued in 2009 by the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

There are three overarching principles:

  • Provide employees incentives that appropriately balance risk and reward.
  • Be compatible with effective controls and risk-management.
  • Be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

These may seem simple in theory, but the challenges for banks are real and complicated, which explains why compensation plans at so many banks are still a work in process.

On one hand, banks face one of the most competitive labor markets in decades, with the lowest unemployment rate in half a century. To attract talented workers, banks have to pay accordingly, which is why so many bankers raised their hands during a Monday morning workshop when asked if their banks boosted their minimum wages after tax reform passed Congress late last year.

On the other hand, as Steve Hovde, chairman and CEO of Hovde Group LLC, pointed out in his analysis of the industry, banks are facing well-seasoned business and credit cycles. This creates a quandary about how aggressive a bank should be in incenting rapid growth, as loans made at the top of an up cycle tend to be the first to go sour at the bottom of the next down cycle.

Moreover, while this may seem counterintuitive, there was wide agreement among attendees at the workshop that regulators aren’t currently focused on the design of compensation plans. The sole exception, according to at least one attendee, concerns how mortgage originators are being compensated, likely a reaction to the issues that surfaced two years ago at Wells Fargo & Co.

Another theme to emerge during the workshop involved diversity and inclusion initiatives, which all banks seem focused on addressing.

It’s important to distinguish between those two initiatives, observed one of the workshop’s panelists.

“Diversity is about inviting people to the party,” she noted. “Inclusion is about giving everyone an opportunity to dance.”

The challenge in banking, as in other industries, is tackling unconscious bias—social stereotypes people form outside their own conscious awareness.

No rational banker today would admit being biased against hiring or promoting women or minorities. Yet the demographic statistics in the industry speak clearly to a lack of diversity, especially at the upper levels of management.

One way to address this is simply through awareness. This was a point that Kate Quinn, the chief administrative officer of U.S. Bancorp, echoed two months ago at Bank Director’s Bank Board Training Forum in Chicago.

“Everyone has prejudices,” said Quinn at the time. “To address them, you first have to be aware they are there.”
And this isn’t just about hiring a diverse workforce; all employees must also be given an equal opportunity to excel. This is the distinction between diversity and inclusion in the corporate world.

An interesting point brought up during the workshop was that entry-level jobs throughout the financial industry tend to be fairly representative of the broader population. But as you look up the organizational chart, that diversity dissipates.

The lack of diversity at the top sends a strong signal, noted one attendee. Her point was, if, as a woman or minority, there isn’t someone like you on the board or who serves as an executive, then you are left with the impression you don’t have the same opportunity to advance.

Ultimately, though, if you listen to bankers, it’s clear that diversity and inclusion have become priorities at many institutions.
After all, to compete for talent, it’s not only how much you pay, it’s also the culture of your institution that will serve as a magnet for the next generation of employees.

Compensation Plans Should Be As Strategic As They Are Attractive


strategy-10-30-18.pngHuman capital is likely the most expensive resource a bank has, and we all know our people are important in a customer-facing business, so why not be strategic with it? Almost every business has a written strategic plan that states profitability goals, growth goals, three-year plans, etc. However, when it comes to compensation, fewer than four in 10 banks (38 percent of the 103 banks surveyed in our 2016 Compensation Trends Survey) have a formal, written compensation philosophy.

The Compensation Philosophy
Most organizations start the strategic compensation discussion with the development of a compensation philosophy. This document, often only a page or two, primarily identifies a few key items, including what the bank is trying to accomplish with its compensation programs; what compensation programs does the bank have available to our employees; who qualifies for these programs and why; and where does the bank want to position ourselves versus market? The compensation philosophy statement should be a living document that is reviewed annually and is adjusted as necessary to support business strategy changes.

Strategic Salary Planning
Banks that are strategic with compensation will also generally have a clearly defined salary grade structure, accurate and up-to-date job descriptions, utilize external market data for position benchmarking, and a salary increase matrix for annual adjustments. The annual salary increase process should be strategic, based on individual performance, foster internal equity, and fit within the overall budget of the organization. Many banks utilize a salary increase matrix to assist with determining annual raises. The matrix focuses on providing the largest increases to employees who are exceeding expectations and are positioned low in their salary grade. The days of giving everyone the same percent of salary raise are gone.

Performance-Based Incentives
Once you have the salary component figured out, the next step is incentive-based pay. This can take the form of annual cash incentives and/or equity-based incentives. The type of incentive a bank utilizes will often vary depending on the company structure—like whether it is public or private—and position level. As an example, executives may be eligible for a cash and equity incentive plan, but staff may only be eligible for cash incentives. The key to using strategic compensation is to make sure your incentive plans are based on performance and are motivating and rewarding key positions.

In today’s banking world, there is a lot of talk about incentive plans being “risky” and maybe even “evil” (example: Wells Fargo retail incentives). We disagree with this sentiment. Banks are still in the business of being profitable, and incentive plans have their place to help drive behaviors and reward performance. The key is to have a balanced approach between profitability and strategic goals.

Benefits and Perquisites
Benefits and perquisites are total compensation components that often apply primarily to executives. The broad-based benefit programs like 401(k) plans and health insurance programs have not experienced unique banking-focused changes in recent years. However, executive benefits such as salary continuation plans, change-in-control/severance plans, employment agreements and perquisites (auto allowances, country clubs, etc.) have seen reductions. These programs are still prevalent but there has been an increased focus on the business reasoning and validation behind such programs.

Executive benefits can provide some of the best retention vehicles in compensation if you have an executive leadership team you want to keep in place long-term. It is critical to ensure the benefit or perquisite is serving an appropriate business purpose.

The most successful banks are those who can appropriately balance their profitability needs with good culture, communication, and strategic compensation programs. Banks need to be financially successful to help the communities they serve. Ensuring that your compensation programs are strategically supporting the overall goals of your organization and linked to performance is essential. Make sure you are getting your “bang for the buck” with your compensation dollars being spent.

7 Things Bank Boards Should Focus on in the Year Ahead


board-9-10-18.pngThe world of corporate governance today has a brighter spotlight on boards of directors than ever before. While bank regulatory relief has provided a long-awaited respite, bank examiners seem to be zeroing in on governance, director performance and board succession. Here are 7 things directors should have on their radar screens in the year ahead:

  1. Defining Innovation. Digitization and innovation are the buzzwords, but truly embracing the transformations taking place all around us can be daunting.  Pondering how technology has altered our client relationships and acquisitions means thinking out of the box, which may be a challenge for some directors and bank executives. A refresh of the bank’s website is not an innovation—it is table stakes.  True innovative thinking requires more proactivity and planning, and likely some outside perspectives as well. Boards should encourage management to craft a plan to address to these challenges, which are key to remaining relevant.
  2. Talent Management. Historically, boards viewed talent management as the purview of executive leadership and the CEO, except when it came to CEO succession. In today’s talent-deficient environment, though, boards need to hold the CEO and senior team much more accountable for developing the next generation of leaders and revenue generators. If your bank wants to perform above the mean, then the senior team must be composed of very strong players well suited to execute your strategic plan. A true linkage between the business strategy and human capital strategy has never been more critical for success and survival.
  3. Revisiting Compensation Strategies. Balancing the tradeoffs between enhanced compensation packages and performance/accountability has become a significant challenge for compensation committees and CEOs. In this competitive talent climate, banks need to make sure that their compensation practices properly reflect the bank’s market and goals, motivate the right behaviors, and incentivize key players to both perform, and remain, with the institution. Fresh board thinking in this area may be appropriate, particularly for banks that have been less performance driven with their incentive programs, or do not have the currency of a publicly listed stock as a compensation tool.
  4. Enhanced Accountability and Self-Assessment. Just as boards need to truly hold their CEO accountable for institutional performance, boards need to hold themselves accountable as well. Governance advocates are pushing for boards to assess their own performance, both as a group and individually. Directors should have the fortitude to evaluate their peers—confidentially, of course—to identify areas for improvement. Directors should be open to this feedback, and work to improve the value they bring to the institution.
  5. Onboarding New Directors and Ongoing Training. Plenty of data reinforces that new executives as well as board members contribute more rapidly when there is a formal approach to ramping up their knowledge of the company. Expectations of new directors should be clear up front, just as any new employee. A combination of information and inculcation into the institution provides context for decision-making; clarifies the cultural norms; and often reveals the hidden power structures, including the boardroom. A strong onboarding program forms the foundation for ongoing board education. There should be an annual plan for each director’s education to maintain currency, refresh specific skills, and to stay abreast of leading governance practices.
  6. Board Refreshment. Are we truly building a board of diverse thinkers with the range of skills needed to govern appropriately today? Age and tenure have become flashpoints around continued board service, in reality they avoid dealing with declining contributions and underperforming directors. Every board seat is a rare and precious thing, and needs to be filled with someone who broadens the collective skills and perspectives around the board table. Board nominating and governance committees need to manage accountabilities for existing—and particularly for prospective—directors, and be willing to make the tough calls when needed. Underperforming directors should be encouraged to raise their game or be asked to step aside.
  7. Leading by Example. In today’s information-driven society with endless social media channels and instant visibility, C-Level leaders and board members are under the microscope. Lapses in judgment, breaches of policy or inappropriate behavior, once validated, must be dealt with quickly and decisively. The company’s brand reputation and credibility are always at risk. The board itself—along with the CEO, of course—must set the standard for ethics and compliance and lead from the front. Every day.

Bank Boards will continue to be under scrutiny no matter the environment. More importantly, a bank’s board must be a strategic asset for the institution and provide strong oversight and advice. The expectations of good governance have never been higher, and successful boards will raise their own performance to ensure success and survival.

Compensation Governance in Today’s Economy



Despite recent shifts in the economic and regulatory environment, bank boards still need to keep a close eye on many of the same issues—including risks related to your bank’s compensation practices, as McLagan Partner Gayle Appelbaum explains in this video. She also spells out how talent pressures, and the expectations of regulators and investors, will continue to keep banks on their toes.

  • Key Practices for Boards and Compensation Committees
  • Why You Can’t Relax in Today’s Strong Economy
  • The Need for Heightened Corporate Governance

What To Know About BOLI Today



Bank-owned life insurance is a common tool that helps financial institutions offset the costs of employee benefits, and boards should review the BOLI program every year. Steve Marlow and Kelly Earls of Bank Compensation Consulting explain what boards should know about BOLI, including the impact of tax reform.

  • Why Banks Purchase BOLI
  • Evaluating Existing Programs
  • Impact of Bank Size on BOLI Options
  • How Tax Reform Will Affect BOLI

Executive Compensation: Understanding the Tax Law’s Full Impact


compensation-3-12-18.pngOn December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which amended certain provisions of the Internal Revenue Code of 1986. Bank boards and management teams should take time to familiarize themselves with these changes, as several amendments to the Code relate to the payment of executive compensation.

For corporate executives and compensation committees, the change to the Code that has garnered the most attention concerns an amendment to Code Section 162(m). Prior to the Act, Section 162(m) imposed a $1 million cap per executive on the tax deduction a public company could take on compensation paid to its chief executive officer and three other highest paid executive officers, excepting the chief financial officer—generally, the “named executive officers” included in the company’s annual proxy. Historically, most companies relied on an exemption for performance-based compensation to avoid this limit, which was fully deductible even if it exceeded $1 million. The new tax law has eliminated the performance-based compensation exemption.

In addition, the tax law has expanded coverage of Section 162(m) to apply to all Securities and Exchange Commission (SEC) reporting companies (i.e., companies required to file reports under Section 15(d) of the Securities and Exchange Act of 1934, which includes many companies required to file due to public debt), rather than solely those whose common stock is registered with the SEC. It also expanded the group of executives subject to the deduction limit to include not only the named executive officers during the current taxable year—now including the CFO as a “named executive”—but also any person who was a covered executive for any prior taxable year beginning after December 31, 2016. Companies subject to Section 162(m) should review their incentive plan documents, incentive award agreements, severance agreements and employment agreements in light of the removal of the exemption for qualified performance-based compensation because these documents may have been drafted to account for the Section 162(m) performance-based compensation exemption that no longer applies.

In addition, the Act amended Code Section 83 by adding a new subsection (i) regarding deferred taxation of equity compensation. Section 83 generally governs the amount and timing of income inclusion for property, including employer stock, transferred to an employee in connection with the performance of services. Under Code Section 83(a), most individuals must recognize income for the tax year in which the employee’s right to the stock is transferable or no longer subject to a substantial risk of forfeiture. This changes for some employees with the new Section 83(i), which allows non-executive and non-highly compensated employees of privately-held corporations to elect up to a five-year deferral in the taxation of illiquid shares issued to them upon the exercise of nonqualified options or the settlement of restricted stock units (RSUs), if certain conditions are satisfied. The options or RSUs must be granted under an equity compensation plan in which at least 80 percent of a company’s full-time U.S. employees are granted awards with the same rights and privileges. The amounts of the awards may vary by employee as long as each employee receives more than a “de minimis” grant—i.e., all participating employees must be eligible to receive a legitimate economic benefit. This deferred tax election is not available to the CEO or the CFO—or to certain persons related to them—or to any person who within the past 10 years was one of the four highest paid officers of the corporation or an employee that holds 1 percent of the company’s stock. Under this new regime, eligible employees of private companies receiving stock through equity compensation arrangements may consider making an election under Section 83(i) to defer taxation on such compensation.

The IRS is expected to issue guidance on these changes, particularly the amendments to Section 162(m). Stay tuned.

How to Give Employees a Slice of the Tax Reform Pie


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.

Getting Ready for Proxy Season: Changes to Section 162(m)


proxy-2-17-18.pngThe tax law signed by the president on December 22, 2017, makes a significant change to the ability of public companies to deduct compensation paid to top executives.

Section 162(m) of the Internal Revenue Code limits a public company’s ability to deduct compensation of “covered employees” in excess of $1 million each year, but the old tax law provided a broad exception for certain types of performance-based compensation. A “covered employee” had been defined as any employee who, as of the last day of the taxable year, was the chief executive officer (or individual acting in that capacity) or an employee whose compensation is required to be reported to shareholders in the proxy statement because he or she is one of the four highest compensated officers, other than the CEO. As board members and compensation committee members of public companies are aware, the nuances and exceptions to section 162(m) limits were an important consideration in setting annual and long-term compensation for executives.

Below, we briefly explain the new limitations on the deductibility of executive compensation under Section 162(m), and offer some next steps for boards and compensation committees to consider in the first quarter of 2018. Public boards and compensation committees will need to take action on this before proxy season.

Performance-Based Compensation Exception Repealed
Historically, performance-based compensation, such as stock-option income and compensation paid only on the attainment of performance goals, was excepted from the $1 million deduction limitation. The new law repeals this exception, and may change the approach of compensation committees regarding the mix of salary, bonus, performance awards and equity grants in compensation. Also, some plans that required shareholder approval due to the performance-based compensation exception will no longer require shareholder approval for deductibility.

CFOs Again Subject to Section 162(m)
The new law amends Section 162(m) to specifically include a publicly-held corporation’s principal financial officer as a “covered employee” that is subject to Section 162(m). This corrects an unintended gap that had left CFOs excluded from Section 162(m), due to changes in 2007 to the Securities and Exchange Commission’s executive compensation disclosure rules. For companies that had already included their CFO as a “covered employee,” this will not result in a change. However, for companies which had not included the CFO as a “covered employee,” this change limits the deduction for that executive.

Once Covered, Always Covered
If an executive is a “covered employee” subject to Section 162(m) in 2017 or any later year, the new law provides that he or she remains a “covered employee” for all future periods, including after termination of employment for any reason, including death. This eliminates the ability to deduct, for example, severance payments made after termination of an executive’s employment, to the extent that the severance results in compensation in excess of the limit.

Expansion of Covered Companies
Previously, Section 162(m) applied to a company issuing any class of common equity securities required to be registered under the Securities Exchange Act of 1934. The definition of a publicly held corporation subject to Section 162(m) is expanded by the new law to include any corporation “that is required to file reports under Section 15(d) of [the Securities Exchange Act of 1934]”. This change would subject private corporations with public debt that triggers Section 15(d) reporting to the $1 million deduction limitation.

Limited Grandfathering Rule
The new law grandfathers in compensation provided pursuant to a written binding contract in effect on November 2, 2017, so long as it was not modified in any material respect on or after November 2, 2017.

Next Steps
These rules are complicated and, with the grandfather rules, will require close attention by companies in advance of preparing their 2018 proxy statement. We recommend that boards and, as appropriate, compensation committees, do the following.

  • Educate the compensation committee on changes to the tax code.
  • Review all employment agreements, change in control agreements, severance plans, equity plans and cash bonus plans to determine if they qualify for grandfathering.
  • Evaluate the impact on bonus payment decisions for 2017.
  • Evaluate the non-equity bonus plan design for 2018.
  • Begin to redraft the Compensation Discussion and Analysis (CD&A) and other relevant sections of the proxy statement.
  • Determine which plans will be subject to shareholder approval going forward.

In addition to the changes that will need to be made to proxy statements to reflect the updates to Section 162(m), the SEC’s pay ratio disclosure requirements were not modified by the new tax legislation and are in effect for the upcoming proxy season as well.

Addressing Gaps in Executive Disability Coverage


Risk continues to be an important issue for the banking industry. But what about the personal risk facing a bank’s valued executive? How should personal risks be addressed within a banker’s executive compensation plan and more specifically, what is the impact to the compensation plan if the executive becomes permanently disabled?

The Income Replacement Problem
Group long-term disability (LTD) plans provide excellent coverage for most workers, but leave gaps for highly compensated employees (HCEs). This is due to limitations on the amount of base salary covered, and the lack of coverage for bonuses, stock-based compensation and retirement plan contributions, including 401(k) plans and nonqualified plans such as supplemental executive retirement plans (SERPs). As a result, HCEs often end up with only 30 to 50 percent of their earnings protected, while most broad-based employees achieve more significant income protection. The following chart, which is an example, provides an illustration.

Title Base Salary Base Total Annual Compensation Total Monthly Compensation Monthly Group LTD* % Comp. Replaced
CEO $200,000 $150,000 $350,000 $29,167 $10,000 34%
SVP $175,000 $100,000 $275,000 $22,917 $8,750 38%
VP $100,000 $30,000 $130,000 $10,833 $5,000 46%
AVP $75,000 $15,000 $90,000 $7,500 $3,750 50%
Manager $50,000 $5,000 $55,000 $4,583 $2,500 55%

*60 percent of base salary to a maximum of $10,000 monthly benefit

Many HCEs are unaware of this potentially significant loss in earnings should they become disabled.

As another complication, retirement plans stop being funded when a disability occurs. For example, an HCE no longer contributes to the 401(k), and therefore no longer receives the matching company contribution. If the HCE has a nonqualified plan like a SERP, the plan normally provides for vesting in the accrued liability at the time of disability but does not provide additional credits to the account after the disability occurs. With a drastically reduced monthly income, it is difficult, if not impossible, to save for retirement.

While it can be an uncomfortable topic, and most people do not think it will happen to them, the fact is that disabilities do occur. But bankers are in the risk mitigation business: Once they understand this risk, they typically want to do something about it.

An Integrated Solution
Combining group LTD coverage with individual disability coverage provides the executive with a solid, well-thought out plan that can solve the gap in coverage, help attract and retain top talent, and keep the bank’s costs in check. By using company-sponsored individual policies rather than retail individual policies, the policies can be issued on a guaranteed issue basis and at a significant discount. Furthermore, the premiums are fixed, and the policies are portable and can’t be cancelled. Below is an example:

Title Total Monthly Compensation Monthly Group LTD* Individual Disability Income Total Disability Income % Comp. Replaced
CEO $29,167 $10,000 $11,875 $21,875 75%
Sr. VP $22,917 $8,750 $8,438 $17,188 75%
VP $10,833 $5,000 $3,125 $8,125 75%
AVP $7,500 $3,750 $1,875 $5,625 75%
Manager $4,583 $2,500 $938 $3,438 75%

The policies can be offered on a voluntary basis, and paid for by the employee or by the company. If company-paid, many banks invest in bank-owned life insurance (BOLI) as a way to offset and recover the cost, while others feel the expense is not that significant. In either case, it is well worth the expense as another tool to attract and retain top talent.

The shortfall in income replacement is a real problem for higher income earners should they become disabled. With the recent decrease in corporate tax rates, now would be a great time to explore solving this issue. Corporate-sponsored individual disability programs, when integrated with a group disability program, can protect HCEs from this risk in a cost-efficient manner for the employee and the company, while also providing one more important element in the ongoing desire of the bank to attract and retain key officers.