Hot “Banking” Jobs: As Banking Changes, So Are the Job Titles


banking-jobs-5-16-16.pngBanks today must adapt to a world where “digital”, “cyber risk” and “fintech” are the new business lexicon. As the bulk of the workforce shifts from baby boomer to millennial, there is an increased need to attract talent from outside traditional financial services. Below we highlight some changing and emerging roles and a few strategies banks can use to attract top talent.

Emerging Skills and Roles

Chief Technology Officer/Chief Digital Officer
Banks today are pressured to enhance mobile capabilities and compete with fintech companies such as Lending Club, Square and Circle. These new competitors have disrupted traditional financial services offerings, which is forcing banks to adapt their product offering and service platforms to remain competitive. This new competition and technology focus have also led banks to reach outside their typical talent pool to attract candidates with new skills.

Chief Risk Officer/Chief Compliance Officer
Since the financial crisis, regulators have significantly increased the requirements for banks to manage and mitigate risk practices. Add to that the increased threats of cyber risk and it is clear that risk and compliance officers are critical members of the senior leadership team.

Chief People Officer/Chief Culture Officer
As a service related industry, people are a critical asset. And as more millennials enter the workforce, traditional banking environments may need to change. Talent development, succession planning and even culture will be differentiators and expand the traditional role of human resources.

Chief Strategy Officer/Chief Innovation Officer
Part of the transition in the banking industry involves shifts in customer profile, competitors and new products. As banks emerge from the financial crisis and focus on growth and profitability, many are turning to innovators from outside the banking industry to help find creative M&A opportunities, new products and a new customer base.

Do’s and Don’ts

Attracting and retaining non-traditional banking talent can create both challenges and opportunities.

Do:

  • Think strategically: Assess the talent, skills and capabilities you need to execute your strategic plan (new regions, new products, new capabilities). What skill “gaps” need to be filled? Do you need to go outside or can you offer nontraditional career paths and transition current leadership into different roles? How should the leadership structure and team evolve? Create a leadership strategy that supports your business strategy.
  • Think outside the industry: Many of the roles discussed above are outside the norm for the traditional banking industry. Technology roles may be filled from start-ups or Silicon Valley firms and culture or innovation roles may be filled by ex-consultants or top talent from other industries. If you do recruit from outside of banking, you may need to access different sources of talent (e.g. recruiters) and different benchmark data than you typically use.
  • Be creative: If you fear you can’t “afford” talent from other industries, think beyond traditional compensation solutions. Compensation is only a part of a total rewards package and there are other important factors such as development and growth opportunities, as well as company culture and lifestyle. Be open to new work environments and career opportunities that will appeal to new (and current) staff.
  • Reward and retain: In the race to attract the “best” it can be tempting to offer large up-front compensation packages and buyouts of existing unvested awards to acknowledge that the executive is taking a risk to change jobs. While there are reasons to provide these usual pay components, if not designed right, they can be short-lived. A well-designed new hire package and ongoing compensation program should allow the bank to attract top talent, reward performance and create powerful retention.

Don’t:

  • Rely on compensation surveys: Many banks rely on established compensation surveys and/or peer group data to benchmark roles. However, such data for “hot jobs” is rare or far from perfect. Sample sizes may be small and data is often over a year old. Use multiple data perspectives/views and “triangulate” the information to determine fair and appropriate pay.
  • Over-focus on internal pay relationship: Respect and align with internal relationships but be flexible. In order to attract an executive in one of these “hot” areas, a bank may need to pay outside of the current compensation structure, but there should be a clear path to pay equity among the executive team over time.
  • Rush the process: It is important to undertake a thoughtful process when hiring a new executive, particularly those from other industries or non-traditional areas. The compensation committee should receive background information on the candidate(s) as well as detailed information on the compensation package, contractual arrangements and performance expectations.

What Are the Best Ways to Fund Your Retirement Plans for Executives and Directors?


retirement-plan-4-20-16.pngNonqualified deferred compensation (NQDC) plans continue to be important tools to help banks attract, reward and retain top talent in key leadership positions. In order to retain their critical tax deferral benefits, such plans must remain unfunded. For tax purposes, a plan is “funded” when assets have been unconditionally and irrevocably transferred for the sole benefit of plan participants. Formal funding of qualified plans, such as a 401(k), does not subject the participants to immediate taxation—participants can defer taxes until they actually receive such income. However, qualified plans have limitations on the level of benefits that can be provided and these limits can lead to substantial shortfalls in expected retirement income for executives and other highly compensated persons. NQDC plans came about specifically to help offset those shortfalls.

The restrictions on funding NQDC plans leads plan sponsors to search for solutions to finance or economically offset the costs of providing enhanced benefits to NQDC plan participants. When you hear someone refer to “funding a NQDC plan,” this is what they mean. Economic, or informal, funding means that the bank acquires and owns the particular asset of that funding method and that at all times such assets are subject to the claims of the bank’s creditors. Our objective for this article is to review and compare the financial statement impact of various methods for economically funding such plans. In our examples we use a Supplemental Executive Retirement Plan (SERP) and the following funding methods: 1) unfunded; 2) bank-owned annuity contract; 3) bank-owned life insurance (BOLI); 4) a 30-year, A-rated corporate bond; and 5) a 30-year, bank-qualified municipal bond. The same investment allocation and same cost of money were used in scenarios two through five.

  1. Unfunded
    A benefit plan is implemented and no specific assets are earmarked to generate income to offset the expenses. The bank accrues an accounting reserve for the benefit liability as required under GAAP and makes payments out of general cash flows. This method is simple and has often been used when the bank does not have additional BOLI capacity.
  2. Bank-Owned Annuity Contract
    The bank purchases a fixed annuity contract (variable annuities are not a permissible purchase for banks) on the lives of the plan participants. While the primary advantage of purchasing an annuity is that the cash inflows from annuity payments can be set to match the cash outflows for benefit payments, because corporate-owned annuities do not enjoy the tax deferral benefits of individually owned annuities, there is a mismatch of income taxation (annuity) with income tax deductions (benefit payments). Fixed annuity contracts with a guaranteed lifetime withdrawal benefit provide a specified annual payment amount commencing when the executive reaches a certain age (usually tied to retirement). Payments are made for the life of the annuitant. Fixed annuity contracts generally do not respond to movements in interest rates.
  3. Bank-Owned Life Insurance (BOLI)
    The bank purchases institutionally priced life insurance policies on eligible insureds to generate tax-effective, non-interest income to offset and recover the cost of the benefit plan. When properly structured and held to maturity, earnings on BOLI policies remain tax-free, eliminating the tax mismatch issue. The tax-free nature of BOLI earnings often allows the bank to exceed the yields on taxable investments on a tax-equivalent basis. Top BOLI carriers structure their products so that they do respond to market rate movements, albeit on a lagging basis.
  4. 30-Year, A-Rated Corporate Bond
    A 30-year, A-rated corporate bond is a simple and transparent investment vehicle. Because investment earnings are taxable as earned, and benefit payments are not deductible until paid, the tax mismatch is the primary disadvantage. Corporate bonds do respond to market rate movements, leading to potential volatility in market values.
  5. 30-Year, Bank-Qualified Municipal Bond
    A 30-year, bank-qualified municipal bond is similar to a 30-year corporate bond except the earnings are tax free.

In summary, key to the funding analysis is evaluating the best investment for the bank that will mitigate the impact of the plan expenses and liabilities on the bank’s financial statements with bank-eligible investments. The following table summarizes the projected net financial statement impact of the five methods discussed above in both today’s interest rate environment as well as the projected impact in a rising rate environment. As you can see, BOLI and a 30-year bank-qualified municipal bond offer some of the better ways of funding the plan over time.

Funding Your NonQualifed Deferred Compensation Plan

  Projected Life of Plan Net Income(Expense)*
Method of Funding Today’s Rate Environment Rising Rate Environment
Unfunded $(772,439) $(772,439)
Bank-Owned Annuity Contract $(164,229) $(439,597)
Bank-Owned Life Insurance (BOLI) $190,369 $1,598,371
30-Year A Rated Corporate Bond $(114,989) $(235,872)
30-Year Bank-Qualified Municipal Bond $221,007 $701,441

*Based on $500,000 single premium investment. Current rates are as of March 2016. For more detailed information as well as the relevant assumptions used, please contact David Shoemaker at dshoemaker@equiasalliance.com or 901-754-4924.

Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc.

Mitigating Risk When Choosing a BOLI Carrier for Your Community Bank


BOLI-3-9-16.pngIf your community bank is considering revamping your benefits offerings, you’ve probably thought about Bank-Owned Life Insurance (BOLI). Purchasing BOLI is one of the lowest risk ways for banks to fund the cost of their benefits, and for a community bank struggling to compete with commercial banks for top talent, this may be a strategic financial decision. While BOLI is a long-term investment, it generates tax-free interest, making it extremely appealing to community banks. As with any investment, the decision to purchase a BOLI portfolio must be carefully considered so you can get the most return with as little risk as possible. Here are some ways to ensure you choose the right BOLI carrier and get the most out of your policy.

  1. Document every part of the process to ensure compliance. Regulations require careful attention, and national bank regulators provide a roadmap for the pre-purchase due diligence and ongoing risk management of BOLI. Before beginning the process of selecting a BOLI carrier, keep in mind that every step your community bank takes needs to be documented. From when you first purchase BOLI and throughout the life of your policy, documentation is absolutely critical for regulatory compliance, so you should frequently review reports of the performance of your BOLI assets. If any process isn’t documented, then in the eyes of regulators, it doesn’t exist. If you’re unsure of the proper protocol, working with a consultant who understands the regulatory process can help you with any issues that arise.
  2. Conduct a financial analysis of BOLI carriers. When choosing between BOLI carriers, you need to look at a variety of metrics to make the best decision. In the past, some banks’ decision making was reliant on ratings from independent agencies, and while ratings are still important, they are not the only thing you need to consider. By conducting a financial analysis of the carrier, you can get a clearer picture of whether the purchase will keep risk low while providing the yield your bank needs to fund competitive benefits. Here are financial metrics that can help you narrow down your options to a shortlist of low-risk choices:

    • Financial strength: Looking at the carrier’s balance sheet and income statement can help you determine the company’s financial strength, as can ratings from outside agencies.
    • Asset quality: By reviewing publicly available information about the carrier’s assets, you can identify any unusual trends and verify the carrier’s claims paying ability.
    • Risk-Based Capital: Review the carrier’s level of capital over time, compared to the regulatory required amount.
    • Investment philosophy: How does the carrier approach their investment portfolio; what techniques do they use for asset liability matching?
    • Experience in the BOLI market: How long has the carrier been active in the BOLI industry, and have they built a reputation for success in that time?
    • Ownership structure: Is there a parent company that could provide support in time of distress? Does the carrier have a stock or mutual ownership structure?
  3. If you need help, work with an executive benefits consultant. Choosing the right BOLI package for your community bank is an important decision and there are many compliance and regulatory issues that some banks just don’t feel comfortable navigating on their own. Working with an expert is the best way to make the most profitable, lowest-risk decision and to ensure regulatory compliance. Your consultant must understand the operating environment of your bank and your strategic interests in order to help you reach your financial goals and fund your benefits package. While selecting a BOLI carrier and deciding how to fund your purchase is complicated and may require outside help, it is an option that has enabled many community banks to offer more competitive benefits to employees.

Zions Bank Grapples with Regulation



In the wake of the financial crisis, all the big banks had to change executive compensation plans to reduce risks. Regulators are keeping a close eye on these plans and sometimes requiring a mountain of paperwork to document them. Here, Scott Law, the executive vice president and director of compensation at $58 billion asset Zions Bancorporation, talks about how the changes have impacted his company.

Do You Have the Right Incentive Goals?


The first quarter of every fiscal year finds compensation committees and management teams wrestling with setting performance goals for the coming year’s incentive arrangements. What does that process look like for your institution?  If your company hasn’t conducted a ground-up assessment of the goal setting process in recent years, consider taking a fresh look at your approach this year.

How does your institution select the performance measures?
In Pearl Meyer’s recent survey, Looking Ahead to Executive Pay Practices in 2016 – Banking Edition, respondents indicated the following three factors as having the greatest influence on performance measure selection:

We would argue that the “long-range or strategic plan” should carry substantially more influence in the selection of performance measures than the other two factors–doing so also takes substantially more effort and intentionality. In contrast to plucking some high profile measures from the approved budget, copying what peers are doing, or appeasing institutional investors or their advisors, selecting measures that effectively support the long-range or strategic plan requires a multi-step line of thinking that starts with the end goal in mind (long-term growth in enterprise value) and drills down to very specific actions that need to occur now in order to achieve the end goal.

Some practical steps in the process include the following:

  • Outline the company’s business objectives and strategy and the drivers of long-term value creation. Then select short- and long-term incentive performance measures that directly tie to the achievement of milestones toward these goals.
  • Identify and focus on the centerpiece financial metrics that will signal success within your company, your industry and the global economic environment.
  • Incorporate both “lag” metrics (that reward achievement) and “lead” metrics (that spur desired new actions and behaviors).

Once the measures are selected, how does your institution set performance expectations?
Respondents to our survey identified the following five factors as having the greatest influence on their performance goal setting process:

For performance measures that can tie directly back to the annual budget, the budget is a very common way to establish “target” performance expectations. This can be effective and appropriate, so long as there is high confidence among the board and management team that the annual budget represents the proper amount of rigor deserving of target incentive payouts. But the budget is not terribly helpful at setting performance expectations appropriate for “threshold” or “stretch/maximum” payouts. This is where observations regarding historical performance, both for your institution and your peers, can be extremely helpful.

Evaluating actual performance against the selected measures over the last several years (preferably five or more) can provide excellent information about the likelihood of achieving specific performance outcomes and can help you to be confident that the appropriate rigor is represented at all payout opportunity levels (i.e., threshold, target and maximum). A rule of thumb for the rigor of performance expectations is as follows:

  • Threshold performance/payout should be achievable about 80 percent of the time
  • Target achievable 50 percent to 60 percent of the time
  • Stretch/Maximum achievable only 10 percent to 20 percent of the time

Observing historical performance is an excellent way to calibrate the performance expectations with the respective payout opportunities and to understand directional trending on specific measures.

Most of the attention and speculation by investor groups surrounds the potential for insufficient rigor in the performance expectations, relative to the payout opportunities. This is a valid concern. It’s also a valid concern when performance expectations are unreasonably high, relative to payout opportunities, because that could discourage employees or potentially encourage them to expose the bank to excessive risks in pursuit of otherwise unattainable levels of performance. A little effort and historical data can go a long way toward addressing both concerns.

Selecting incentive performance measures and establishing the performance expectations are not routine, one-meeting-per-year exercises. If conducted in a thoughtful, intentional manner, your incentive plan design in the first quarter of 2016 can truly support your business strategy and drive behaviors that lead to growth in the value of your company. Make 2016 the year that you challenge—and improve—your incentive goal-setting process.

Incentive Plans: Who Makes the Cut?


incentive-pay-1-11-16.pngBanks frequently ask the question: Who should be included in their various performance-based incentive plans? Of course the answer to this question isn’t clear cut. This article attempts to put some clarity—and statistics—behind this decision for both cash-based and equity-based incentive plans.

Cash-Based Incentive Plans
The eligibility for performance-based annual cash incentive plans ranges from zero employees to all employees. Yes, some banks still use a completely discretionary cash incentive or bonus program. The discretionary approach is not best practice, but is still prevalent. Today’s employees want to know what they need to do in order to receive a bonus, and companies are better served by giving these employees some clarity.

Budgeting for performance-based cash incentives can be relatively easy. Start by determining how much you are willing to share and what you can afford to share. It is recommended that you establish a minimum profit amount, or income trigger, that must be achieved before any cash incentive is paid. This gives you some cushion and protects your company and shareholders from paying bonuses it can’t afford. Once you have built in the cushion, run some cost estimates based on your eligible employees and their potential incentive awards.

The truly difficult part for performance-based cash incentive plans is the goal setting. Identifying overall company goals should not be complicated (lean on your strategic plan), but the individual and department goals may be challenging. It’s easiest to establish goals and track performance for production-focused positions. However, for operations-focused positions, companies sometimes decide to either base these positions’ annual incentive solely on corporate goals or “throw their hands up” and move to discretionary goals. It’s not easy, but banks should work to establish objective goals. You may not get it perfect the first time, but keep working on it. Goal setting is a process that you get better at over time.

So who should participate? Our Blanchard Consulting Group 2015 Bank Compensation Survey (which included 124 public and private banks and 140 positions) gathered data on bonus payments, incentive award opportunity levels, and the prevalence of performance-based incentive plans. The survey showed that the use of performance-based incentive plans increases with the size of the organization (from 41 percent prevalence in banks below $500 million in assets to 72 percent prevalence in banks above $1 billion in assets). The target award opportunity levels generally ranged from approximately 30 percent of salary for executives down to 2 percent of salary for entry level positions. One interesting finding from the survey was that every position had cash bonus/incentive amounts being paid. This doesn’t mean every bank paid bonuses to everyone, or that they were all based on performance, but it does mean there were at least a number of banks that paid bonuses all the way throughout the organization. Ultimately, the decision is up to each bank, but it is recommended that all full-time positions be eligible to participate in the cash incentive plan.

Equity-Based Incentive Plans
The days of having stock-option plans that include all employees in the bank are long gone. Equity-based plans are far more prevalent in the executive and officer group than other employees. However, some banks are still using equity at lower levels in the organization. The Blanchard Consulting Group 2015 Bank Compensation Survey gathered data on equity plan prevalence, employee eligibility in banks with a plan, and grant prevalence over a multi-year period, from 2012 to 2015.

The findings showed that much like cash incentive plans, the prevalence of equity-based plans increases with the size of the organization: 26 percent of banks below $500 million in assets have equity-based plans and 55 percent of banks above $1 billion in assets have them. The most interesting findings from our equity review surrounded the eligibility data. Not surprisingly, 70 percent of executive level positions had equity plans. These numbers dropped to below 10 percent for some entry level positions, but surprisingly, the mid-level positions showed eligibility in the 20 percent to 40 percent range. The actual grant prevalence data over a multi-year period was generally above 75 percent for executives and stayed above 40 percent for many mid-level positions. This shows that banks with an equity plan are using it well below the executive level.

In summary, it seems clear that banks are leaning towards including more of their employee base in their cash and equity-based incentive plans when they have these programs. This requires extra work in administration and communication, but hopefully is creating an engaged staff that is driving towards the success of the bank in a unified way.

Are Your Retirement Vesting Provisions Motivating the Wrong Behaviors?


incentive-1-4-16.pngAs more executives near retirement age, many banks are realizing their equity vesting provisions may be motivating unintended behaviors. Do your bank’s retirement provisions encourage executives to:

  1. Provide advance notice of retirement to facilitate planned succession?
  2. Assist in their transition?
  3. Remain engaged and motivated through the last day on the job?
  4. Remain interested in the bank’s success following retirement?

Unfortunately, many retirement provisions don’t consider these important objectives and in some cases motivate the opposite behaviors.

Current and Emerging Retirement Provisions

Forfeit
Forfeiting all unvested equity may be used as a means to retain executives, but this practice can unintentionally encourage executives to wait around for equity to vest when the executive is no longer fully engaged.

Fully Accelerate
Accelerating unvested equity upon retirement allows executives to announce and retire whenever they want without losing any equity. However, if an executive communicates an intention to retire two months before an equity award, does the company make the award? Not doing so could impede the executive’s motivation to provide advance notice of pending retirement. However, full acceleration can limit the retention value of awards once the executive reaches (early) retirement eligibility.

Prorate
Proration provides executives with a portion of unvested equity based on the amount of time the executive has worked during the vesting period, regardless of when the grant was made. The bank may be uncomfortable with executives receiving value from recent grants, while executives may feel that they are forfeiting earned compensation. Below are three potential solutions to this concern which combine proration with acceleration:

  1. Holding Period. Participant must have received the grant at least 6-12 months prior to retirement in order for vesting to accelerate or performance awards to vest.
  2. Prorated 12 Month Period. The amount of award that accelerates or vests is based on the portion of time worked during the first year after grant. If a participant works for six months following a grant, he/she would receive value of half the award. This alternative is more generous and does not create as much of a cliff timeline.
  3. Most Recent Grant Pro Rata. Equity accelerates in full except for the most recent grant (made in the last 12 months) which would vest pro rata based on the full vesting period of the award (e.g., if stock options vest ratably over 4 years, a participant who works for six months during year one would receive one-eighth of the award).

Continue Vesting
Continued vesting is an emerging practice with benefits for the executive and the bank. Continued vesting allows the executive to retire without forfeiting all or a portion of outstanding awards. Instead, the awards continue to vest on the original schedule. This also encourages the executive to leave the bank in sound condition and facilitate transition. Another benefit for the bank is that continued vesting helps reinforce non-compete or non-solicit agreements because the bank can cease vesting if the executive violates the restrictive covenant.

Committee Discretion
Some committees want the discretion to determine retirement treatment on a case by case base. This treatment acknowledges that each executive is different and each retirement situation is unique. However, this approach puts a significant pressure on the committee and may be perceived unfair by executives if the discretion is not applied consistently.

Other Considerations

Retirement Definition
Banks should also review the retirement definition to ensure it remains appropriate. If a bank’s retirement age is 65, what is the treatment if an executive is hired at age 64? Some banks define an age plus service definition such as age 65 and 5 years’ service or an age and service definition to recognize early retirement (e.g. 55 age plus 10 years’ service or age plus service equals 75). For these definitions, banks may want to consider including a “retire from the industry” requirement in their retirement definition.

Performance Awards
Should performance award payout be based on target or actual performance? Awards paid based on actual performance at the end of the performance period could encourage the retiring executive to leave the bank in sound condition.

Vesting Schedule
Finally, the vesting schedule may also impact which type of retirement provision a bank chooses. For example, if time-vested restricted stock vests ratably over three years (i.e. 1/3 per year), a forfeiture provision would not be as detrimental to the executive as if the award was cliff vested.

Choosing the right retirement treatment is a more strategic decision than ever before. Banks should review their long-term incentive plans to ensure they are meeting desired objectives.

Talent Management at the Top


U.S. Bancorp emerged from the financial crisis as a desirable workplace for talented employees, enabling the bank to better attract and retain talented employees. In this presentation, Jennie Carlson, executive vice president of human resources, outlines U.S. Bancorp’s transparent and analytical process to identify, reward and engage top employees. Millennials are changing how banks groom the next level of executive talent, which includes an increased commitment to diversity. 


Avoiding the Excess Parachute Payments Trap in M&A Deals


parachute-payment-11-27-15.pngIn the normal course of M&A events, compliance with Section 280G of the Internal Revenue Code to be an eleventh hour thing. In very general terms, 280G applies to compensation paid to an employee in connection with the employer’s change in control. It’s not that the merger partners don’t care at all about this provision in the tax code, it’s just that there are a lot of other issues—like the merger agreement itself—that need to be settled first. However, waiting until the last minute can have adverse financial implications for the selling bank and its employees, so here are a few ideas for 280G planning.

Specifically, 280G makes “excess parachute payments” nondeductible to the employer and subject to a 20 percent excise tax payable by the employee if the aggregate payments equal or exceed three times the employee’s base compensation. An employee’s “base amount” is the average of W-2 compensation for the five years before the year of the transaction. To avoid 280G’s negative consequences, an employee’s change in control payments must be no more than one dollar less than three times the base amount.

For example, if we assume Employee A has a base amount (i.e., five-year average) of $200,000, the maximum change in control payment she could receive without triggering 280G is $599,999 (i.e., $1 less than $200,000 times three. If payments to Employee A equal or exceed $600,000, then any amount in excess of $200,000 (i.e., the base amount) will be nondeductible and subject to the excise tax.

Cutbacks and gross ups are the most common form of 280G planning. A cutback provision in a contract ensures that no amount will be paid in excess of the 280G threshold. In contrast, a gross up provision ensures that the employee will be made whole for any excise tax.

Another 280G planning method is managing the base amount. The more advance managing that can be done, the better. Still, some planning can be done even in the calendar year prior to a transaction. Any increase in the base amount will serve to also increase the threshold amount. As such, employers can consider (1) increasing base salary payable in the year (or years) preceding the year of a transaction; (2) accelerating calendar year bonuses, which are typically paid in the spring of the following calendar year, to December of the current calendar year; or (3) encouraging an employee to exercise vested stock options in the year prior to the transaction. Any of these three could have an impact on the base amount.

A little more complex approach would be an employer’s affirmative action to accelerate the vesting of restricted stock or accelerate the settlement of restricted stock units to the year before the year of a transaction. Also, keep in mind that payments with respect to certain restrictive covenants can have value that is not counted as a change in control payment.

Finally, employers should note that in certain circumstances, 280G provides for a “cleansing” shareholder vote. If at least 75 percent of shareholders agree to the change in control payments, regardless of amount, they will not be subject to 280G’s bad consequences.

If selling the bank is one of the strategic options you are considering, you should give some thought to these planning opportunities in an effort to avoid 280G problems.

Compensation and Governance Committees: Sharing the Hot Seat in 2016


hot-seat-11-19-15.pngThe compensation committee has been on the hot seat for several years. Outrage regarding executive pay and its perceived role in the financial crisis has put the spotlight on the board members who serve on this committee. Say-on-pay, the non-binding shareholder vote on executive compensation practices, was one of the first new Securities and Exchange Commission (SEC) requirements implemented as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010. Since that time, public companies have responded to shareholder feedback and changed compensation programs and policies to garner support from shareholders and advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co. In recent years, only 2 percent of public companies have “failed” their say-on-pay vote. The significant majority of public companies (approximately 75 percent of Russell 3000 companies) received shareholder support of 90 percent or greater during the 2015 proxy season. Today, companies with less than 90 percent should increase their shareholder outreach, as a dip below that level is often an indicator of emerging concerns.

Compensation committees can’t sit back and relax on these results. The SEC’s proposed rule for pay versus performance disclosure (published in April) and the final rule for the CEO pay ratio (published in August) will further intensify the focus on executive pay and require compensation committees to dedicate much more time and energy to evaluate and explain their pay decisions in light of these new disclosures. Fortunately, implementation of the CEO pay ratio is delayed until the 2018 proxy season while the SEC has not yet adopted final rules for the pay versus performance disclosure (as of September). It is hard to predict what influence these additional disclosures will have on shareholders’ say-on-pay votes. What is clear is that boards will need to monitor these and other pending Dodd-Frank Act rules (i.e. mandatory clawback, disclosure on hedging policies, incentive risk management) in the coming year.  

In the meantime, however, boards may face increased shareholder scrutiny in key governance areas.

Proxy access, the ability of significant shareholders to nominate board members on the company’s proxy ballot, achieved momentum in 2015 when New York City Comptroller Scott Singer submitted proxy access proposals at 75 public companies as part of his 2015 Boardroom Accountability Project. We expect proxy access proposals will remain a focus among activist shareholders during the 2016 proxy season. Dissatisfaction with executive compensation and board governance are often the reasons cited by shareholders seeking proxy access.

Institutional shareholders and governance groups have also started to focus on board independence, tenure and diversity. Institutional investors such as Vanguard and State Street Global Advisors consider director tenure as part of their voting process and ISS includes director tenure as part of their governance review process. This could lead to a push for term and/or age limits for directors in the near future. While many companies use retirement age policies as a means to force board refreshment, it is unclear if that will be enough. Boards would be wise to start reviewing their board composition and succession processes in light of their specific business strategies but also in consideration of these emerging governance and shareholder perspectives.

The intense scrutiny by investors and proxy advisors of public companies’ compensation and governance practices shows no signs of abating. Bank boards will need to develop their philosophies, programs and policies with an acknowledgement of emerging regulations and perspectives. Board composition and processes such as member education, evaluation, nomination and independence will gain focus. Executive pay levels and performance alignment will continue to be scrutinized based on new disclosures mandated by Dodd-Frank. The spotlight on pay and governance is not winding down, but rather widening and both the compensation and governance committees will need to spend more time addressing these issues in the years to come.