It wasn’t that long ago that a bank’s CEO proposed his own pay and the board of directors for the bank approved it with few questions asked.
That practice continues at many small, privately owned banks. But increasingly, boards are the drivers of the bank’s executive compensation, including the CEO’s. They are asking difficult questions, getting pressure from proxy firms and regulators to adjust pay, and positioning themselves not only as the decision makers, but crafting the bank’s executive pay plan from day one.
Attending Bank Director’s Bank Executive and Board Compensation conference in Chicago this year, which was held Nov. 4-5, I was struck by how the job of the board in setting pay has changed.
The increasingly powerful proxy firms, such as Institutional Shareholder Services (ISS) and Glass Lewis, are making a difference in the pay practices not only of big, publicly traded banks, but smaller banks as well. One key emphasis of these firms is to tie executive pay with shareholder returns.
Although many banks don’t have much institutional ownership of their stock, and therefore don’t necessarily need to worry about ISS’ view of their pay plan, many of them do want to implement pay practices that will balance the need to recruit and retain great talent, as well meet the demands of shareholders and regulators. Banks increasingly give restricted stock to executives that vests when multiple performance measures for the bank and the individual are met.
In addition to the proxy firms, regulators are putting pressure on boards to assess the risk in all their incentive programs, including loan officer pay, in keeping with the 2010 joint regulatory guidance on incentive pay. Boards seem to be increasingly involved in the minutiae of pay structures for all levels of staff, a job that was previously left up to management. Boards are simplifying and cutting the number of pay plans at their banks, which sometimes run to 20 or 30 different bonus programs.
Another change noted in the conference was the increasing use of deferrals of executive bonuses over a three or five-year period, even for banks below $50 billion in assets, as a way to mitigate risk, an awfully interesting development since only those above $50 billion in assets will be required to defer pay under the 2010 Dodd-Frank Act.
The fact that regulators haven’t finalized many pay rules under Dodd-Frank, including the deferral rule, is making the job of the board harder. Attendees at the conference told me they want to design a program that will last three or five years down the road without having to be revamped every time a new rule comes out. Michele Meyer, legal counsel for the Office of the Comptroller of the Currency’s Central District, explained during a panel discussion that multiple regulatory agencies, each with a different mission statement, have to sign off on the new rules, which has delayed the process.
All these headaches combined might be a reason why directors are getting paid more for the work they do for the bank—director pay increases at public banks below $15 billion in assets varied from 8 percent to 15 percent in 2012, as reported in 2013 proxy statements and analyzed by compensation consulting firm McLagan. As an example, the average total director compensation in cash and stock was $43,946 in 2012 for publicly traded banks between $1 billion and $5 billion in assets, an 8 percent increase from the year before. Many banks had frozen pay during the financial crisis, and now directors want to get paid in line with increasing shareholder value, said McLagan principal Gayle Appelbaum, a presenter at the conference.
The conference didn’t focus only on executive and director pay. Steve Steinour, the chairman, president and chief executive officer of $56-billion asset Huntington Bancshares in Columbus, Ohio, was the keynote speaker and didn’t talk about the frustrating issues of proxy advisor firms and regulatory guidance. Instead, he urged the audience to think about what kind of bank they wanted to run, and how to attract young people to work in banking. “There are fewer people seeking careers in banking than there were years ago,’’ he said, noting that the industry has been pilloried, sometimes deservedly. (Huntington Bank’s recruitment and training video features images taken of Occupy Wall Street demonstrations and pledges the bank will operate on the simple principle of doing the right thing.)
Steinour offered a different perspective on the issue of pay and retention: How do you make sure you have the staff you need so you can excel in the coming years? It was a question very much on the minds of some of the more than 250 attendees of the conference.
It’s tough to please both regulators and shareholders these days, especially when they want contradictory things. Take the case of executive compensation.
Starting with the 2011 proxy season, public companies were required to conduct a non-binding shareholder advisory vote on executive compensation practices at least every three years. Of the more than 3,000 companies disclosing their say-on-pay votes in 2011, only 40 (including one bank) failed to receive majority shareholder support. While the percentage of failures was not high, we expect that number to increase in 2012 as investors (and advisory firms) have more time and resources to assess pay programs, and in 2013 when smaller reporting companies are required to hold their shareholder vote.