Evaluating Executives’ 2020 Performance

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Bank boards know that the world has shifted dramatically since January, when they drafted  individual executives’ performance expectations. Using those outdated evaluations now may be a fruitless exercise.

As the impact of the pandemic and the social justice movements continue to unfold across the United States, boards may not feel that they have much more clarity on performance expectations currently than they did back in March. At many banks, credit quality has replaced loan volume as the key operating priority. Unprecedented interest rate cuts have further deteriorated earnings power.

Many boards of directors are revisiting how to evaluate the executive team’s individual performance for fiscal year 2020, considering these new realities for their businesses. Individual performance evaluations are a tool for evaluating leadership behaviors and abilities; as such, it sends a clear indication of what the board values from their leaders. After a year like this, all stakeholders will be interested to know what the board prioritized for their bank’s leadership. 

Considerations for Updated Individual Performance Evaluations
This year has been defined by unprecedented developments that broadly and deeply impact all stakeholders. More than any other industry, banks have been called on to support the country using every tool in their toolkit. Reflecting this broad impact, bank boards may find it useful to establish a revised framework for evaluating leadership performance using six “Critical Cs” for 2020:

  • Continuity of Business: How quickly and effectively was the bank able to transition to a new operating model (including remote work arrangements, staffing essential workers in office or branch, etc.) and minimize business disruption?
  • Customer Satisfaction: How were customers impacted by the change in the operating model? If measured, how did the scores vary from a normal year?
  • Credit Quality: Where are the trends moving and how are executives responding? Did the institution face legacy issues that took some time to address and may be compounding current issues?
  • Capital Management: What balance sheet actions did executives take to strengthen the bank’s position for the future?
  • Coworker Wellbeing: What was the “tone at the top”? How did executives respond to the needs of employees? If measured, how did the bank’s engagement scores vary from other years?
  • Community Support: What did the bank do to lead in our communities? How effective was the bank in delivering government stimulus programs like the Small Business Administration’s Paycheck Protection Program?

For publicly-traded banks, the compensation discussion and analysis section of the proxy statement should provide a thorough description of the rationale and process used for realigning these criteria and the evaluation approach used to assess performance. Operating results are likely to be well below early-year expectations for most banks; as a result, shareholders will be keenly interested in how leadership responded to the current environment and how that informed pay decisions by the board.

This year has created an unprecedented opportunity to test the leadership abilities of the executive team. Using the six “Critical Cs” will help boards assess the performance of their leadership teams in crises, craft a descriptive rationale for compensation decisions for fiscal year 2020, as well as evaluate leadership abilities for the future.

What Your Compensation Committee Calendar Should Look Like

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compensation-3-12-19.pngA goal-oriented calendar can be the difference between a productive year and a nonproductive one for compensation committees.

Planning for the year goes beyond scheduling meetings. Compensation committee chairs should have a thoughtful plan that encompasses the goals of the committee for the year. A detailed and in-depth calendar can help both new chairs and experienced chairs craft a plan for the year that considers the short- and long-term needs of the bank.

This article provides planning tips and a cheat sheet for the core topics that should be on the committee’s annual schedule. Though the cheat sheet is specific to public banks, private banks can use the list as well.

What’s on The Agenda
The old saying goes “what gets written down, gets done.” Having a written document sets a roadmap for the year and provides your committee a timeline to stay on track. You don’t need to reinvent the wheel.

Start with the committee charter, which provides a job description for the committee’s responsibilities. Review the past year’s calendar, agendas and meeting minutes for a head start in creating your annual agenda and stick to it throughout the year.

Identifying key topics at the beginning of the year allows for communication across all stakeholders: members of the committee, your management team, and outside legal and compensation advisors.

Topics should cover both short-term and long-term items. For example, if you are looking to request more shares for your equity plan, this process should start well in advance, and may include updating your equity plan document, modeling ISS and Glass Lewis share guidelines, and redesigning your grant methodology.

Getting your outside advisors involved early can help you avoid last-minute surprises.

Frequency of Meetings
Typically, public banks hold four to six meetings in a year. This allows the committee sufficient time to cover key topics and to review the goals of the committee. In any given year, the agenda may require additional meetings for special events including merger and acquisition activity, creation of new incentive plans and other events.

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What (And When) Should Be on The Calendar
Below are key topics that should be on the regular calendar for public banks as well as additional items for consideration any time during the year. The sample covers a typical schedule, however, there is flexibility depending on the subject.

In any given year, items should be evaluated both in terms of the current short-term and the longer term needs of the bank 24 months or more from now.

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Compensation Plans Should Be As Strategic As They Are Attractive

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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.

How to Get the Most out of Your Annual Reviews

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annual-review-12-14-15.pngThere has never been a more challenging time to be a bank director. The combination of today’s hugely competitive banking market, increased regulatory burden and rapid technological developments have raised the bar for director oversight and performance. In response, an increasing number of community banks have begun to assess the performance of directors on an annual basis.

Evaluation of board performance is done in many ways, and ranges from an assessment by the board of its performance as a whole to peer-to-peer evaluation of individual directors. Public company boards are increasingly being encouraged by institutional investors and proxy advisory firms to conduct meaningful assessments of individual director performance. The pace of turnover and change on most bank boards is slow, and more often the result of mandatory retirement age limits than focus by the board on individual director performance. This may be untenable, however, as the pace of external change affecting financial institutions often greatly exceeds the pace of changes on the bank’s board.

While some institutions prefer a more ad hoc approach to assessing the strengths and weaknesses of the board and its directors, we suggest that a more formal approach, perhaps in advance of your board’s annual strategic planning sessions, can be a powerful tool. These assessments can improve communication between management and the board, identify new skills that may not be possessed by the current directors, and encourage engagement by all directors. If used correctly, these assessments often provide valuable information that can focus the board’s strategic plan and help shape future conversations on board and management succession.

So what are the key considerations in designing an effective board evaluation process? Let’s look at some points of emphasis:

  • Think big picture. Ask the board as a whole to consider the skill sets needed for the board to be effective in today’s environment. For example, does the board have a director with a solid understanding of technology and its impact on the financial services industry? Are there any board members with compliance experience in a regulated industry? Does the board have depth in any areas such as financial literacy, in order to provide successors to committee chairs when needed? Do you have any directors who graduated from high school after 1985?
  • Develop a matrix. Determine the gaps in your board’s needs by first writing down all of the skill sets required for an effective board, and then chart which of those needs are filled by current directors. Then discuss which of the missing attributes are most important to fill first. In particular, consider whether demographic changes in your market will make recruiting a diverse and/or female candidate a priority.
  • Determine the best approach to assessment. Engaging in an exercise of skills assessment will often focus a board on which gaps must be filled. It can also focus a board on the need to assess individual board member performance. Many boards are not prepared to launch into a full peer evaluation process, and a self-assessment approach can be a good initial step. Prepare a self-assessment form that touches upon the aspects of being an effective director, such as engagement, preparedness, level of contribution and knowledge of the bank’s business and industry. Then, have each director complete the self-assessment, with a follow-up meeting scheduled with the chair of the governance committee and lead independent director for a conversation about board performance. These conversations are often the most impactful part of the assessment process.

In addition to assessing the human capital needs of the board, several other topics should be raised in most board assessments.

  • Communication between management and the board: As demands on the board change, providing directors with the same board packets and agenda as ten years ago may not make sense. Soliciting thoughts on how the content and presentation of board materials could be more helpful and whether the board’s agenda should change is a good exercise for any institution.
  • Buy, sell or hold? While strategic matters are best addressed through group discussion, gauging directors’ views on the strategic direction of the institution can also help shape the tenor of the board’s future discussions. Understanding individual directors’ justifications for a potential sale as part of the assessment process may allow for solutions short of a sale of the bank.

Board assessments are a key component of a healthy board environment, as they can provide management and the board with insight into the true feelings of the board of directors on a variety of issues. Careful evaluation of which assessments to utilize and the timing in doing so can allow a board to better adapt to a rapidly changing marketplace.

Keeping Your Compensation Committee On Track During the Busy Winter Season

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executive-compensation-11-11-15.pngThe Dodd-Frank Act, regulatory guidelines on compensation risk and shareholder advisory votes on executive compensation have all contributed to an increase in the compensation committee’s responsibilities and time requirements. That pressure is compounded this time of year as committees enter their “busy season.” The fourth quarter is the start of many critical and often scrutinized committee activities: reviewing performance, approving 2015 incentive awards and developing 2016 performance incentive plans.  This article provides a sample full year committee calendar and a checklist of activities and actions compensation committees should be focusing on during Q4 2015 and Q1 2016.

It is best practice for compensation committees to define and schedule their annual activities for the year in advance. A well-defined calendar helps members better plan and prepare for the critical, and often timely, decisions that are required. There are three key cycles to the annual calendar: Assessment, Program Design and Pay Decisions.

Assessment occurs during the more “quiet” months following the prior year’s performance cycle where pay decisions are made, but before the start of the next performance cycle when a new program starts. For companies whose fiscal year follows the calendar year, this typically occurs between June and October (following most public company annual meetings). While there may be less pressure to approve and take action during this time, the analysis conducted during this phase will be critical for decisions made later in the year. Compensation committees should use this time to reflect on the pay program and decisions of the prior year and assess peer, market and regulatory trends that might influence programs in the coming year. This is a perfect time to conduct robust tally sheets, assess the pay and performance of your company relative to peers, conduct peer/competitive benchmarking, and if you are a public company, review say-on-pay results and conduct shareholder outreach. Information reviewed during this phase provides the foundational knowledge needed for the upcoming design and decision cycles.

Program Design typically occurs in the late fall and early winter (e.g. November–January), when compensation committees review the assessment phase results and begin defining total pay opportunities and programs for the upcoming year (i.e. base salary, annual and long-term incentive opportunities and performance goals). Compensation committees should pay careful attention to performance metric selection and goal setting to ensure proper pay-performance alignment. It is also critical to ensure the incentive plans support sound risk management practices. Many banks will complete their annual incentive risk review at this time. This is also an opportune time to consider implementing or revising compensation policies or practices, perhaps in light of shareholder feedback.

Pay Decisions occur in the late winter (e.g. January–April). During this phase, performance evaluations are conducted and decisions are made related to incentive payouts. Pay opportunities for the new year are also set, including annual incentive opportunities and long-term incentive grants. All banks should have conducted their risk assessment review by this time as well. Once Section 956 of the Dodd-Frank Act is finalized, banks will be required to provide documentation of their risk review to regulators. For companies whose fiscal year ends at the end of the year, this will occur during the same timeframe, in the late winter or early spring. This is also a very busy time for public companies that are required to document the prior year’s pay decisions in the proxy in preparation for shareholder review. Many committees spend several meetings discussing these issues.

Periodic activities include, but are not limited to: executive and board succession planning, incentive risk assessment, board and committee evaluations, consultant evaluations, benefit plan review, employment agreement/severance arrangement review and shareholder engagement.

Ongoing updates throughout the year include incentive payout projections and regulatory updates.

Below is an illustration of a typical compensation committee annual cycle with a check list of key activities for Q4 and Q1:

Today’s environment of increased scrutiny on executive compensation and governance requires compensation committees to spend more time fulfilling their responsibilities. Having a well-planned calendar, with a heightened focus on the “off season” assessment activities, can help committees be better prepared for the many critical year-end decisions.

*Section 162(m) of the Internal Revenue Code allows public companies to deduct performance-based compensation above $1 million if it meets specific requirements.

The Hidden Value in Performance Evaluations

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10-22-14-meyer-chatfield.pngI am not sure when performance evaluations became standard practice in business, but I can say with confidence I have never met one executive, director, manager or employee who relishes the process. It is laborious, and in many circumstances, antiquated. The reason is pretty simple: It is often a cold, process-driven meeting, with little intellectual or emotional investment beyond checking off a few boxes on a performance evaluation software application and giving a rah-rah speech to the employee. In other words, it’s something you just have to do.

There is no question that performance evaluations have a role to play within organizations. However, employees who are performing tangible, quantifiable tasks will be more suited to a traditional evaluation than more relationship driven, strategically focused employees—but a company still needs to know how these individuals are performing in respect to their job duties. I am not suggesting that performance evaluations should be abolished, but at the very least, they should be complimented with a different approach to achieve maximum value from the process no matter the level of responsibility of the employee in the organization.

The suggestions that follow are not solely my own, but rather blended insights from our experience in the banking industry and the experience of other successful business leaders, such as Andy Stanley, founder of North Point Ministries in Alpharetta, Georgia, who uses a similar approach in his organization.

Some employers, such as North Point Ministries, have developed questions that replace the standard evaluation for senior level managers who typically interact on a daily basis, may know each other well and have a high degree of accountability to other members of the team. What is the true purpose of an evaluation where the executives know how they are performing and the board of directors knows how they are performing? To formalize what is already known? Shouldn’t we want to accomplish more?

That brings us to the Employee Evaluated Experience. As opposed to checking a few boxes in a standard evaluation form, try developing a set of questions that drills down into the employee’s experience. Below are few examples—there is no right or wrong here.

 

  1. What are you most excited about right now?
  2. What do you want to spend more time on?
  3. What’s most challenging?
  4. Anything bugging you?
  5. What can I do to help?

These are designed to be permission giving questions, providing the opportunity for the employees to share experiences with the company through his or her manager in a safe environment. The importance of safeness cannot be overstated. If employees don’t trust the process and fear that candor could put their jobs at risk, they will be very reluctant to express their true feelings. As you begin to ask employees these questions, patterns will emerge that will provide tangible insights into the organization. And if acted on, this insight will begin to fundamentally strengthen the organization.

A word of caution: These questions are not meant to be answered all in one sitting during a two-hour timed session, in a group setting or in a hurried, ‘let’s-get-this-over-with’ manner.

The intent behind these questions is to integrate them into natural conversations—perhaps over an evening cocktail or a morning cup of Joe. But even in a slightly more formal setting, the employee is still engaged and is typically excited to share their experiences. Leaders, be ready for what you may hear and do not take the conversation lightly because that will only undermine the authenticity of the conversation.

No matter what your set of questions, always end the conversation with question number five. The role of a leader within any organization should be to remove obstacles that infringe upon the ability of people to do their job. Take this role seriously and help your associates, team members and colleagues accomplish more.

As an experiment, try asking these questions informally of your executive team members, managers and line employees. Perhaps even board members should be asked these questions. Why would you not want to know what excites your board members about the company you’re leading? Start with those trusted confidants. See what answers begin to pop up. You may learn something you did not know, or confirm something you already did. Regardless, the exercise of giving your employees permission to provide their Evaluated Experience will only provide added value to you and your organization.