Will Your Bank Shoot Itself With a Single Trigger?

Here at Bank Director, we encourage readers to contact us with questions about issues they face as independent board members or members of management. We seek answers from experts and publish them for others in our membership program.

Our first question comes from a director of a privately owned Georgia bank:

“I am on the board of a local bank and the discussion involving change of control came up. We currently have a ‘double trigger’ regarding . . . key executives if a bank sale occurs. We have been counseled by our attorneys to change the document to a ‘single trigger’ in order to simplify the transaction and not put our executives in a difficult position of terminating in order to collect two or three times base earnings. What is the most common ‘trigger’ in banks today?”

BrentLongnecker.pngSo let’s retrace what the difference is: A single trigger is payment upon a change in control regardless of any change in employment status. A double trigger is payment upon a change in control followed by an involuntary termination of employment. Tips: Consider what constitutes a change in control, and consider the likelihood of the executive surviving the change in control. Consider position, age and the cost of severance to the deal. The trend today is double triggers; single triggers are out of favor.

Also, if this is a private bank, a single trigger may be worth considering IF it can get sound and enforceable non-compete and non-solicitation language signed by the departing executives. There is nothing worse than to give out a nice payment to executives—on behalf of the bank and its shareholders—only to see them set up shop “across the street” and begin competing and taking your people. Change-in-control monies have seeded more competition than most people would imagine, especially with banks!

—Brent M. Longnecker, chairman and CEO, Longnecker & Associates

DoreenLilienfield.pngChange-of-control protections can both ensure that executives provide an impartial consideration of strategic alternatives for a company without focusing on their own potential job loss, and serve as an effective retention tool for executives during uncertain times surrounding a potential transaction.

Executives are often eligible to receive enhanced severance benefits (typically a multiple of base salary and bonus) if their employment is involuntarily terminated (e.g., for cause or good reason) within a specified period following a transaction. In today’s market, there is minimal use of single trigger cash change in control payments, as they can undermine rather than foster the purposes noted above. Due to shareholder and shareholder advisor pressures, the use of single triggers for most types of change-in- control benefits has become fairly uncommon; however, notwithstanding plan design, equity awards may often accelerate at the time of a transaction, particularly in cash deals.

Some companies may elect to provide cash retention bonuses in lieu of, or in addition to, change-of- control severance benefits. Retention bonuses incentivize key individuals to remain with the company through the closing date or a specified milestone thereafter, and are also typically paid out on an involuntary termination prior to the payment date. The amount of any severance and other change-in- control benefits should be taken into consideration when determining retention bonuses.

—Doreen E. Lilienfeld, partner, executive compensation and employee benefits, Shearman & Sterling LLP

The Changing Landscape for Incentive Pay

10-25-13-Blanchard.pngHistorically, bank employees have enjoyed a culture where employees had a feeling of entitlement to generous annual salary increases and profit-sharing bonuses merely for continuing to work for the bank. That is changing. Performance based cultures that reward shareholders and employees and allow transparent communication of expectations and results are becoming more prevalent.

Creating compensation plans that provide a transparent link between actual organizational performance and executive pay is now the rule rather than the exception. Several aspects of the Dodd-Frank Act encourage pay for performance, including mandatory clawbacks of unearned compensation, transparency of incentive compensation agreements and shareholder say-on-pay advisory votes. The increasing influence of shareholder advisory groups (primarily Institutional Shareholder Services and Glass-Lewis) have driven public banks to change executive compensation practices to reflect pay for performance.

Private banks also are shifting executive compensation practices as their regulators look for best practices in executive compensation. Blanchard Consulting Group’s 2012 Executive Benefits Survey showed that 59 percent of banks said regulators reviewed executive compensation plans and practices during the exam. Blanchard Consulting Group’s 2013 Compensation Trends survey found that 63 percent of banks have modified executive compensation incentive plans in at least one of the last three years based on the changing bank regulations.

Compensation transparency at the executive level as well as emphasis on cost containment (salary and benefits costs are generally the largest budget expenditure for a bank) are supporting a larger overall bank cultural shift away from “pay for loyalty.”

Creating a Performance Based Culture

What can your bank do to start to support a sales and performance based culture? Creating a bank-wide annual incentive plan (AIP) with individual employee goals that “roll-up” to the executive AIP goals is one alternative. For example, in the lending department, all the loan officers’ portfolio loan growth goals at target performance levels should add up to the overall bank target loan growth goal. Your bank can also affect change with strategic use of the annual salary increase budget. For example, your bank may target a 3 percent salary increase for all employees. Instead of just giving all employees a 3 percent increase, many banks are now using position on a salary range and performance reviews to give more of a salary increase to high performing employees or those that are meeting performance expectations and are low on the salary range. There is an opportunity for strategic salary budget use, especially with the recent economic hardship that certainly broke down employee entitlement thinking around salary increases. Many banks froze salary increases or bonuses or both during 2008 to 2010. This practice as well as bank failures, mergers and acquisition activity, reduction in force, and hiring freezes gave employees a clearer sense of how their pay and job security is affected by overall bank performance.

Impact on Executive Officer, Producer and Staff Level Incentive Plans

Both executive and non-executive incentive plans are being structured to meet several different planning objectives including the following:

  • Earning opportunities under executive officer incentive plans should be reasonable and capped, as cash incentive plans with unreasonably high payout opportunities may motivate executives to take excessive risks or manipulate earnings.
  • Incentive plans that relied historically on profitability or income goals are adding strategic and/or asset quality goals that focus on long-term viability.
  • Many banks with producer plans that pay out frequently are moving to annual payouts and considering holding back/deferring a portion of the incentive payout until it can be determined that a loan will not become problematic.
  • Mortgage lender compensation restrictions by the Federal Reserve and Dodd-Frank prohibit banks from paying mortgage lenders incentives that are based on fees.
  • Many banks are now including a long-term incentive component in executive pay-for-performance programs to help mitigate regulatory concerns that executives focus exclusively on short-term goals.
  • Today, the most common form of long-term incentive for publicly traded banks is restricted stock, which is viewed more favorably by the new regulations and guidelines. Restricted stock typically provides a stronger retention device than stock options and typically provides lower stock dilution rates.
  • Many private banks will use phantom stock and/or performance-based deferred compensation programs when real stock is not available.
  • Stock ownership guidelines and holding requirements (especially in public banks) are viewed favorably by regulators and shareholders.

Incentive compensation programs have experienced increased scrutiny in recent years. However, performance based compensation seems to be more useful than ever. Banks need to be more strategic and many are trying to drive a performance turnaround. To that end, identifying, quantifying, and driving the right performance plan can play a critical role and can differentiate your bank and your high performing employees from the competition.

How to Retain Key Employees: The Benefits of a SERP

8-16-13-Meyer-Chatfield.pngAre you better off with or without them? That is a question advice columnist Ann Landers asked her readers. The answer is even more relevant when discussing key employees of community banks. As we emerge from the Great Recession, employee retention remains a primary focus. In a recent Bank Director survey, 40 percent of bank boards identified retaining key employees as a significant challenge. In fact, 44 percent of banks nationwide lost key executives or critical employees in the past three years.

What can banks do to retain key employees? Prior to the financial crisis, conventional wisdom accepted equity grants as the best method to retain executives and tie compensation to performance. Then came the economic downturn and those same equity grants looked like a reason for the lax credit policies whose aftermath continues to bedevil banks. Remember, many executives that received those rather large equity grants were approaching retirement age as the first wave of baby boomers. Their opportunity to benefit from equity grants had to be realized in a relatively short period of time, creating pressure for ever increasing earnings and price appreciation. History shows it did not turn out as expected.

Now, let’s reconsider a popular executive compensation benefit that fell out of favor in the wake of media and shareholder outrage. Prior to the economic downturn, many banking executives benefited from a supplemental retirement plan in addition to the company pension plan or 401(k) plan. These Supplemental Executive Retirement Plans (SERPs) were intended to provide benefits to replace the limitations imposed by Internal Revenue Service regulations. As a retention tool, SERPs are extremely effective. Typically SERPs require the executive to stay until retirement age to receive the benefit. For example, a SERP may provide an annual benefit for the executive of 40 percent to 60 percent of salary for up to fifteen years after retirement. In the event the executive leaves to work for a competitor, the SERP is forfeited. The primary objective of all compensation plans—to influence the decision making of the employee—is achieved with a SERP.

Is the expense worth it? Yes. For illustration purposes, let’s assume a bank has a SERP with a benefit of $100,000 per year for 15 years. The total cost to the bank is $1.5 million. Although spread over many years, it is still perceived as expensive. The cost on an after-tax basis is about $900,000 assuming a top tax rate of 40 percent. In an environment of detailed compensation disclosure, this seems excessive. But is it really?

Let’s look at the terms SERPs impose. First, executives must be employed with the bank until retirement. The bank is the guarantor of the benefit, not a third party as in the case of a 401(k) plan or a pension plan. For rank and file employees, if the bank fails, their retirement plan is guaranteed by a third party or the Pension Benefit Guaranty Association. With a SERP, the bank is the guarantor. If the bank fails, there is no one to make the payment and the executive loses the promised retirement benefit. Similarly, if the bank fails after the executive’s retirement, there is no one to make the payments.

One of the responsibilities of any manager is to develop talent to eventually succeed him or her. In this scenario, a 50-year old executive granted a SERP must focus on protecting shareholder value until retirement (age 65) and ensure the successor is capable—and motivated—to do the same. Thirty years is not a bad deal in exchange for a cost of $900,000.

When properly designed, the benefit to the bank and shareholders is greatly in excess of the cost of a SERP. Heidrick & Struggles, an executive search firm, says an incoming executive takes up to 18 months to achieve the level of productivity he or she provided prior to accepting a new position. This cost combined with what is known as the lost opportunity cost of not having a fully effective executive in a critical position makes the cost of a SERP appear minimal.

Top executives drive shareholder performance. If retaining these key employees is important to your bank’s future, then now is the time to make sure your bank doesn’t become one of the 44 percent who lost a key employee.

The Compensation Puzzle: Results of the 2013 Compensation Survey

5-17-13_Comp_Research_Report.pngHow should bank boards properly compensate executives, under the watchful eye of regulators and the media, while still retaining key talent? That’s the question with which directors and chief executive officers continue to struggle.  Despite this, there is perhaps a touch of newfound optimism in the banking industry regarding the management and fairness of compensation programs.

Last March, more than 300 directors and senior executives of financial institutions across the U.S. responded to the 2013 Compensation Survey, conducted via email by Bank Director and sponsored by Compensation Advisors by Meyer-Chatfield. Almost half of the respondents were independent directors.  Response was almost evenly split from respondents representing privately-held and publicly-traded institutions.

Key Findings:

  • Bank boards continue to struggle with how to effectively tie compensation to performance.  Sixty-nine percent of respondents cited this as their top compensation challenge for 2013. Boards continue to struggle with regulatory compliance—41 percent indicated that this is a key concern. Rounding out the top three, retaining key people was selected by 40 percent of respondents as a top challenge.  
  • Talent retention could increasingly prove to be a concern for the industry. Forty-four percent of respondents reported the departure of a key executive within the last three years. Very few reported that these departures are due to promotional moves, for a better pay or position, or even lateral moves to other banks. Of those reporting an executive departure, 23 percent indicated that the officer left the banking industry. With increased scrutiny on the industry coupled with the departures of retiring baby boomer executives, could the banking industry find itself in the midst of a talent drain?
  • Thirty-five percent of directors expect to see a pay increase in 2014. Just two percent expect pay to decrease. Moreover, the majority, at 62 percent, believe that they are fairly compensated. Respondents also reported that the amount of time spent on bank board activities remains the same, at a median of 15 hours per month.  
  • The mood is a little lighter. Respondents indicating a positive or neutral feeling in the management of executive compensation rose 17 points from last year’s survey, to 92 percent. When it comes to management of director compensation, those indicating a positive or neutral feeling rose 10 points, to 90 percent.
  • Banks are increasingly tying executive compensation to performance metrics or strategic goals. Still, nearly one-third, or 32 percent of respondents, said they don’t tie executive pay to a strategic plan. 
  • Show me the money. Cash rules as the most valued form of compensation for executives, in the form of salary, and directors, in the form of annual retainer and meeting fees. Benefits for boards, such as retirement or health insurance plans, continue to decline, with 58 percent indicating that they receive no benefits at all as compensation for board service. This represents a drop of 19 percentage points since 2011. 

Download the summary results in PDF format.

The Future of Executive Compensation

fortune-cookie.jpgEveryone from shareholders to regulators wants a “say on pay” these days, but compensation committees must continue to ensure their programs attract, retain and motivate executive talent in a way that is aligned with the bank’s strategy and culture.

Meridian recently completed a study of CEO compensation practices at 58 publicly-traded banks with assets between $1 and $5 billion. Based on our work with clients and the results of our research, we anticipate the following will be some of the key trends in executive pay as compensation committees work to balance competing expectations.

Increase in percentage of pay delivered through incentives.  In our study, on average, base salary comprised half of CEO total direct compensation (base salary, annual incentive and long-term incentives). Incentives have become a larger component of total pay over the past few years, and we anticipate that trend will continue as shareholders expect a more direct alignment of pay and performance. The majority of this increase will likely come through equity-based long-term incentives, which defer compensation through multi-year vesting and payment schedules and help mitigate the overall compensation risk.

Broader view of performance. With the rising regulatory focus on the perceived risk of compensation programs, committees are using a variety of performance factors to determine incentive payouts. Some committees use a fully discretionary approach to determining incentive payouts, which typically involves a holistic review of performance. Banks with formulaic approaches to annual incentives are increasingly using multiple measures, and we expect the trend to continue. Almost half of the banks in our study included four or five measures in their formula, while only 20 percent rely on just a single measure. While earnings measures (e.g. earnings per share) remain prominent, banks are also including measures focused on returns, capital levels, credit quality, and growth.

Increased rigor around discretion.  Regulators have recognized that discretion can play an important role in ensuring that payouts appropriately reflect risks taken during the performance period, as well as make it less likely that executives will manipulate performance results to increase payouts.  However, they expect sufficient structure around discretion so that decisions can be justified and made consistently. Shareholders and their advisors generally prefer formulaic plans, but will accept the use of discretion if it is reasonable and well explained. More than 80 percent of the banks in our study indicated that their committees use discretion in determining incentive payouts. We anticipate committees will refine their use of discretion to include the development of scorecards that reflect a variety of measures from both an absolute and relative perspective, as well as principled guidelines that specify the types of circumstances that will trigger discretionary adjustments.

Use of multiple long term incentives, with increasing use of performance-based vesting.  Among banks in our study, the prevalence of performance-based vesting on long-term incentives doubled from 17 percent to 34 percent between 2009 and 2011. We expect this trend to continue in response to shareholder expectations and broader industry trends. While we expect the use of performance-based long-term incentives to increase, we do not anticipate the elimination of time-based awards. We expect most banks will choose to grant a combination of awards—both performance-based and time-based. Many shareholders and their advisors expect a minimum of 50 percent of long-term awards to be performance-based, but the inclusion of time-based awards can help provide balance. Additionally, many time-based awards will likely begin to include provisions that provide for reductions if poor risk outcomes occur during the vesting period. 

More transparency.  Say-on-pay has given public company shareholders an advisory vote on executive compensation, and their expectations for insight into the committee’s decision making have increased. Likewise, the Securities and Exchange Commission is expecting clear disclosure of performance targets in most circumstances. We expect proxy disclosures to increase their clarity as to how compensation decisions are made, particularly how performance criteria were established and how those performance results led to incentive payouts.   

The banking industry continues to be on the forefront of change in executive compensation due to scrutiny from both regulators and shareholders. Compensation committees must remain vigilant to ensure their executive pay programs balance the increasing expectations of regulators and shareholders while continuing to support bank objectives.

Bank Directors Weigh In on Executive Pay at Chicago Conference

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 


Not Well At All 

Spring Survey 




November Survey 





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.

meyer-chart.pngSource: 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.

Linking Long-Term Pay to Performance

applause.jpgIn an age when shareholders get an advisory vote on executive pay, there is an increased focus on pay-for-performance.  As a result, more banks are using long-term performance plans.  Unlike traditional restricted stock and stock option awards that vest solely over time, long-term performance plans also include pre-established performance goals that must be met for awards to be earned.

Meridian’s 2012 study of chief executive officer incentive plans at publicly traded banks with assets between $1 and $5 billion indicates that 34 percent include performance-based awards in their long-term incentive program, including more than half of the banks larger than $2 billion in the study. 

We anticipate the use of long-term performance plans will continue to increase. Shareholders and proxy advisors (such as Institutional Shareholder Services) typically respond positively to the implementation of long-term performance plans.  Additionally, well designed performance-based awards help provide balance and risk mitigation to incentive programs.  Many companies have used performance plans in their long-term incentive program to replace stock options, which regulators have discouraged as a riskier way to reward performance. Following are some of the key design elements to be considered in designing a long-term performance plan:

  • Award vehicle.  Banks predominately use full value shares (restricted stock or restricted stock units) in their long-term performance plans.  The number of shares ultimately awarded may vary based on different levels of achieved performance (e.g., threshold, target, and maximum).  While less common, programs can also be cash-based. 
  • Performance period.  Seventy-four percent of performance plans in Meridian’s study use three-year performance measurement periods.  Typically, three-year performance objectives are established at the beginning of the performance period, and awards are paid out based on actual performance at the end of the three-year period.  However, it can be challenging to establish appropriate three-year goals, particularly in an era of high economic uncertainty.  To avoid this challenge, some plans are structured for annual goals to be set each year of the three-year vesting period, while others only establish one-year goals but require additional service before awards are paid out.
  • Absolute and/or relative measurement.  Performance criteria can be absolute goals based on internal expectations, or they can evaluate performance relative to a peer group of companies.  Relative goals can make it easier to establish long-term performance goals, but provide less direct line-of-sight for executives and require a relevant group of companies to use for comparison.  Practices among banks in Meridian’s study are mixed—35 percent use absolute goals, 35 percent use relative goals, and 30 percent use a combination of both.
  • Performance measures.  Measures should tie to key corporate objectives that will drive long-term shareholder value.  Return measures (e.g., return on assets, return on equity) are most common among banks, followed by earnings measures such as earnings per share and net income.  Some banks measure shareholder value directly, tying payouts to the company’s total shareholder return ranking relative to a comparator group.  Most banks use two or three performance measures in their plans.
  • Mix and match.  While performance plans can be a critical part of a bank’s long-term incentive program, they may not meet all of the program’s objectives.  Performance plans are often used in combination with time-based equity grants (e.g., stock options and restricted stock) to provide a balanced program and limit compensation risk.  In most cases, the performance plans are used to deliver 50 percent or more of the target long-term incentive value for senior executives, but are often combined with other award vehicles such as time-based restricted stock.

Several other items must also be considered when designing a long-term performance plan, including: Who will be eligible, how will it be disclosed, what is the accounting expense, what are the tax consequences, and will shareholders approve of the plan? While performance-based long-term incentives require many decisions, they can enhance pay-for-performance and create a balance between short-term and long-term objectives.  Banks that do not currently have long-term performance plans should consider whether introducing one would improve the effectiveness of their executive compensation program.

Overworked, Underpaid and Unappreciated

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.

Pay at the Biggest Financial Companies: Trends, Practices and Outlook

Regulators now need to sign off on compensation program design for all covered employees among the 25 largest complex banking organizations (LCBOs). Based on client experience and a review of 2012 proxy statements for these institutions, consultants from Compensation Advisory Partners identified key themes among these largest financial companies.

Key themes found in the report:

1. Regulators are highly involved in the compensation design process at large bank holding companies for a sizeable number of employees (ranging from senior executives to employees well below that level).

2. A majority of variable executive compensation is linked to long-term performance and risk outcomes; it is now typical that more than the required 50 percent of incentive pay (annual + long-term) be deferred over at least three years.

3. Performance adjustments are now expected before and after the grant of incentive compensation, and the role of the risk function and formal risk assessments in that process has increased.

4. Long-term incentive goals must now balance business plan and shareholder goals (earnings per share, total shareholder return, etc.) with risk-based ex-post performance features (capital goals, etc.).

5. It is majority practice to have stock ownership requirements for senior executives that go beyond a more traditional guideline (multiple of base or number of shares achieved within a certain number of years).

6. Clawback provisions go beyond what is required by Sarbanes-Oxley or expected under Dodd-Frank.

For the full report, click here.

Will Citigroup Shareholders’ “No” Vote Change the Compensation Game?

monopoly.jpgIn its discussion of its pay package this year for Vikram Pandit, Citigroup’s chief executive officer, the company extolled the accomplishments of the man brought in to clean up the mess that was left in the midst of the financial crisis.

Citigroup has been profitable for eight consecutive quarters. It has repaid the government’s Troubled Asset Relief Program money. Pandit had gone two years without drawing a salary in the midst of the company’s trouble, and was rewarded in 2011 with a salary and a bonus. Plus, the company had taken steps to align its incentive pay with future performance: 60 percent of top executives’ bonuses will be deferred over a four-year period based on performance.

None of this was enough to please investors and shareholder advisory groups such as Institutional Shareholder Services (ISS). Investors voted down this week the CEO’s pay by 55 percent in an advisory vote made possible by the Dodd-Frank Act.  ISS claimed Pandit’s compensation was misaligned with total shareholder returns (Citigroup’s stock price was down 23 percent during the past 52-week period and it was down 93 percent during the past five years.) Future bonuses would be “essentially discretionary” based on a variety of factors such as execution of long-term strategic goals and return on capital, according to ISS.

Basically, the pressure is on for Citigroup and other publicly traded companies to tie incentive pay to specific metrics that benefit shareholders, rather than more vague goals that give the board wide discretion.

It didn’t help matters that Citigroup was one of few big banks to fail the federal government’s stress tests this year, meaning it won’t be able to return capital to shareholders in the form of dividends or stock buybacks.

Plus, ISS determined that Pandit would be paid more than his peers at other big financial firms. Although Citigroup reported that his total compensation for fiscal year 2011 was $15 million, ISS determined that future awards could be worth as much as $34 million. A $10 million award is tied to the company earning pre-tax income for a two-year period of at least $12 billion, which “does not appear challenging given that the company’s income from operations exceeded $15 billion in each of the last two fiscal years.”

Citigroup may be scrambling to deal with the bad publicity now from the “no” vote on pay, even if technically, the advisory vote is non-binding. But will other banks scramble to make sure they don’t suffer the same fate?

Maybe not, says Peter Miterko, a managing director in New York City for Pearl Meyers & Partners, a compensation consulting firm.

“It may be a more subtle impact, rather than everyone saying ‘Let’s redo our pay packages,’’’ he says.

Most banks already have sent out their proxy statements for the year, making it hard to revamp any pay practices. But Miterko thinks the publicity will encourage companies to communicate better in the future with shareholders about why they pay what they do.

A typical problem in proxy statements is that it’s not clear to shareholders what performance metrics must be met for an executive to get incentive pay, he says.

“The positive development [with say-on-pay] is that shareholders tend to see a lot more clear connect with how they’re better off,’’ he says. “Shareholders want to know that executives are told in the beginning of the year, ‘This is what you have to do to get your bonus.’ They want to know the goals are stretch goals and the financial improvement will warrant the incentive payment.”

Don Norman, an attorney for Barack Ferrazzano Kirschbaum & Nagelberg LLP in Chicago, who handles compensation issues for community banks, says many banks have already made changes in order to defer a portion of incentive pay for executives and many have tied it to specific performance that benefits shareholders.

Much of that was set in motion following regulatory guidance on incentive pay in the aftermath of the financial crisis and the compensation rules for banks that received Troubled Asset Relief Program money.

But tying pay almost entirely to shareholder returns can place too much emphasis on short-term performance and thereby create undue risk, he says.

“The market doesn’t have a long-term focus,’’ he says. “It’s ‘what have you done for me lately?’”

Instead, he thinks it is not unreasonable for bank boards to maintain some level of discretionary decision-making over bonuses.   This is much easier in the private bank setting.

“If there’s no discretion, why do you need a compensation committee?” he says. “You have an intelligent and educated group of board members for a reason and there should be some level of deference to their judgment. There are management efforts that should be rewarded that are not always reflected in formulas.  Good or bad, this should be part of any pay assessment.”

Banks without a lot of institutional ownership will have less reason to worry about shareholder advisory groups such as ISS. Still, no one wants to find a majority of their shareholders voting down their pay packages.

Last year, 41 firms in the Russell 3000 (or less than 2 percent of the total index) reported that they failed to win majority approval from investors on pay, according to ISS. This year, 175 companies have had proxy votes and the average shareholder vote has been 90.4 percent in favor, ISS says.

So ending up as one of the firms with a no vote doesn’t look so good.

McLagan, another compensation consulting firm, offers some advice to avoid a “no” vote:

  • Analyze the shareholder base to determine the level of ISS or other advisory firm influence.
  • Monitor changes in each of your institutional investor’s proxy voting guidelines.
  • Audit your compensation and governance plans and programs for any potential exposure to guidelines of proxy advisor groups and institutional investors.
  • Track 1-year, 3-year, and 5-year total shareholder return relative to your ISS-established peer group.
  • Use the proxy compensation discussion section to clearly tell the “story” of executive pay and explain pay and governance decisions.
  • Be prepared to engage in meaningful dialog with shareholders.