Ceo Compensation


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executive compensation trends in the banking industry to prepare for.

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  • REFER TO PERFORMANCE PLAN AND REVIEW Typical performance objectives; ROA Growth in members, loans, shares, capital, etc. Efficiency ratios – Members per employee Assets per employee Operating Expenses/Income Return to Member Return to saver Return to borrower Member utilization Quality Member Satisfaction Survey Growth in utilization of serves Resources to establish objectives
  • The mix is often dictated by size.
  • Ceo Compensation

    1. 1. Executive Compensation 2010 Christie M. Summervill, MBA, SPHR VP & Practice Leader K G & Associates Compensation Consultants for financial institutions
    2. 2. Koker Goodwin & Associates 800-897-3308 <ul><li>Compensation Consultants for 900 financial institutions nationwide. </li></ul><ul><ul><li>Typically assets are $50M - $5 billion </li></ul></ul><ul><ul><li>Develop and maintain salary ranges </li></ul></ul><ul><ul><ul><li>Automated system, Compease </li></ul></ul></ul><ul><ul><li>CEO and executive incentive plans </li></ul></ul><ul><ul><ul><li>Web-based incentive planning tool, Incentive Pro </li></ul></ul></ul><ul><ul><li>Create performance plans at all levels </li></ul></ul><ul><ul><ul><li>Web-based performance management system, iPerformease </li></ul></ul></ul>
    3. 3. ’ 09 Elsewhere in the bank …. <ul><li>Hiring Freeze 37.8% </li></ul><ul><li>Pay Freeze 13%% </li></ul><ul><li>Restructuring jobs 51.1% </li></ul><ul><li>Cut Staff 51.1% </li></ul><ul><li>Scale back salary increases 51.1% </li></ul><ul><li>(2009 salary budget increase was 2.2%, down from 3.9% in 2008; a 36 year low, 2010 – 2.8% </li></ul><ul><li>Increased focus on performance metrics to document results. </li></ul><ul><li>A much larger percent of compensation is going towards incentive pay for all levels. </li></ul>
    4. 4. Compensable Results <ul><li>CEO’s primary responsibility is to facilitate the design and accomplishment of the mission, vision and goals of the organization through effective leadership. </li></ul><ul><li>Equity Theory </li></ul><ul><ul><li>Contributions equal rewards, compared to others in comparable jobs. </li></ul></ul>
    5. 5. Does Pay for Performance Means Not Paying For Underperformance? <ul><li>Shareholders who have experienced losses don’t expect to see the compensation increase for the execs responsible. </li></ul><ul><li>Taxpayers feel the same way. </li></ul><ul><li>Employees whose salary increases are smaller, whose benefits are, whose coworkers are downsized and who are taking on more responsibilities feel the same way. </li></ul><ul><li>Long-standing criticisms of excessive pay have suddenly acquired new life. </li></ul>
    6. 6. Compensation Committees pay CEOs independent of performance <ul><li>In a study by Presidio Pay Advisors, which evaluated the relationship between changes in executive comp and financial performance at 115 TARP banks that received $50M or greater, there was no relationship between the Total Cash Comp of the CEO or CFO between 2006 – 2008 and the ROA, ROE, Net Income growth for the bank. </li></ul><ul><li>During the same period, 90% of these banks reported negative shareholder return. </li></ul>
    7. 7. What about the Connection between Stockholder Wealth and Compensation? <ul><li>As stock prices fell, compensation committees offset the lower value of equity-based long-term incentive by increasing the number of shares awarded to the CEOs. </li></ul><ul><li>While shares of restricted stock granted to the CEOs in the study group fell from 2.6M in 2006 to 1.8M in 2008, the number of options granted increased from 6.5M in 2006 to 11.1M in 2008. </li></ul><ul><li>While the combined market capitalization of these banks decreased by 57%, the value of long-term incentives granted fell by only 32%. </li></ul>
    8. 8. Restrictions on TARP bank may soon apply to Non TARP banks. <ul><li>Some requirements make sense </li></ul><ul><ul><li>Increased Board Governance </li></ul></ul><ul><ul><li>More methodology and transparency in salary philosophy and decision </li></ul></ul><ul><ul><li>Address why compensation arrangements don’t encourage excessive risk taking. </li></ul></ul><ul><ul><li>a compensation committee composed entirely of independent directors who must meet at least semiannually to evaluate employee compensation plans. Who does the compensation consultant report to for executive comp? </li></ul></ul>
    9. 9. Restrictions on TARP bank may soon apply to Non TARP banks. <ul><li>A policy on any expenditures related to aviation services, office renovations, entertainment / holiday parties, and conferences and events which fall outside the scope of normal business operations. </li></ul><ul><li>Clawback of bonuses for the executives if found to have knowingly engaged in providing inaccurate financial information or performance metrics were used to calculate bonuses. HR 1257 “Protection against Executive Compensation Abuse” B. Frank </li></ul>
    10. 10. Another Call for Transparency H.R 3269 Currently with the Committee on Banking, Housing, and Urban Affairs <ul><li>The Corporate and Financial Institution Compensation Fairness Act of 2009 calls for an annual nonbinding vote on executive compensation, (so-called “say on pay”). </li></ul><ul><li>Would mandate a shareholder vote on golden parachutes, require regulators to conduct an examination of risk-taking at public companies, create standards for strengthening the independence of compensation committees, and establish new compensation standards and disclosure requirements applicable only to financial institutions, whether or not they are covered by the Troubled Asset Relief Program (TARP). </li></ul>
    11. 11. Tarp Funds Employees (Subject to Bonus Restriction) <ul><li>Less than $25 million – </li></ul><ul><li>Single highest paid CEO </li></ul><ul><li>$25M - $250 million - </li></ul><ul><li>Top five most highly compensated employees </li></ul><ul><li>$250M - $500M – </li></ul><ul><li>SEOS and the 15 most highly compensated employees </li></ul><ul><li>$500 million or more </li></ul><ul><li>SEOS and t he 25 most highly compensated employees </li></ul>
    12. 12. New Responsible Pay Process <ul><li>The transparency and accountability necessary to create an above-reproach practices can be accomplished by an annual performance evaluation for the CEO that goes beyond meeting financial goals and addresses qualitative matters, such as leadership, relationships with customers, investors, and the board and employee engagement. </li></ul><ul><li>An eye to relative performance against appropriate external benchmarks, perhaps averaging historical data. </li></ul><ul><li>In the 90’s, the SEC gave a strong signal that TSR was the primary measure of company success. As markets soared, LTI made up 75% of CEO pay. </li></ul><ul><li>Appropriate tools and documentation must be in place. </li></ul>
    13. 13. Selecting Measures Isn’t Enough <ul><li>Ensure that the targets are appropriate, that the amount of pay delivered for attaining goals is calibrated to the performance level, and that goals are not reset midway through the performance cycle to reward effort rather than results. </li></ul><ul><li>This ensures poor performers will not be rewarded even in a rising market and strong performers will be, even if the sector is suffering. </li></ul>
    14. 14. Should your performance metric change to reflect your changing balance sheet structure? <ul><li>Increased Focus on asset mix </li></ul><ul><ul><li>Investment, loan and Non-earning asset mix </li></ul></ul><ul><li>Increased Focus on funding mix. Loans have outgrown deposits over the past 2 decades. </li></ul><ul><li>Efficiency ratio </li></ul><ul><li>Higher Capital requirements </li></ul><ul><ul><li>FDIC – Forever Demanding Increased Capital </li></ul></ul><ul><li>Are there any compliance measures? </li></ul><ul><ul><li>Internal controls and audit requirements </li></ul></ul>
    15. 15. Compensation plan built around established performance results. <ul><li>Define performance objectives and goals </li></ul><ul><ul><li>Loan growth </li></ul></ul><ul><ul><li>Core Funding growth rate </li></ul></ul><ul><ul><li>ROA/ROE </li></ul></ul><ul><ul><li>Capital/Asset </li></ul></ul><ul><ul><li>Dividends/Income </li></ul></ul><ul><ul><li>Core Funding Mix </li></ul></ul><ul><ul><li>Non Core Funding/Asset </li></ul></ul><ul><ul><li>Liquidity Position </li></ul></ul><ul><ul><li>Investments/Assets </li></ul></ul><ul><ul><li>Non-financial measures can be key indicators of long term success </li></ul></ul><ul><ul><li>Employee engagement measures </li></ul></ul><ul><ul><li>Customer measures </li></ul></ul><ul><ul><li>Innovation measures </li></ul></ul>
    16. 16. Projects that need to be on performance plan <ul><li>Written core deposit growth and retention strategy </li></ul><ul><li>Contingency funding plans, integration with A/L </li></ul><ul><li>Disaster recovery plans </li></ul><ul><li>Process assessment </li></ul><ul><ul><li>Risk/Risk Trade offs </li></ul></ul><ul><ul><li>Risk/Return Trade offs </li></ul></ul>
    17. 17. ROE = ROA/Capital /Assets Rising Capital requirement reduces ROA – all things equal 8.33% 12.00% 1.00% 10.00% 10.00% 1.00% 12.50% 8.00% 1.00% 16.67% 6.00% 1.00% 20.00% 5.00% 1.00% ROE Capital/Assets ROA
    18. 18. What is the Right Compensation Mix? <ul><ul><li>Base Pay </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>Variable Pay </li></ul></ul><ul><ul><ul><li>Short-term Incentives </li></ul></ul></ul><ul><ul><ul><li>Long-term Incentives </li></ul></ul></ul><ul><ul><li>Benefits </li></ul></ul><ul><ul><li>Perks </li></ul></ul><ul><ul><li>Banks are now facing the painful process of cutting back their equity programs, often at the same time that salaries are frozen and incentive plans are not paying out because of weak performance. How will this effect attracting/retaining the leadership necessary? </li></ul></ul>
    19. 19. Top Down Problem <ul><li>Too often HR Directors from a generalists background are looking at the one or two surveys to slot salary ranges from top to bottom. Too few respondents in data. </li></ul><ul><li>Typically, banks have not prioritized performance management through out the bank, except specific product sales or referral bonuses. </li></ul><ul><li>HR is often not in the executive group. </li></ul><ul><li>No line of sight between individual jobs expectations and corporate goals. </li></ul>
    20. 20. Common Errors <ul><li>Boards Members often approach compensation from their own experience. </li></ul><ul><li>No compensation philosophy established. </li></ul><ul><li>Makes decisions on pay based on personal feelings. </li></ul><ul><li>May not seek out expertise to equip them in decision making. </li></ul><ul><li>Manage to the midpoint of the salary range </li></ul><ul><li>Disconnect core values from compensation philosophies. </li></ul><ul><ul><li>Compensation is a business solution, not just an expense. </li></ul></ul><ul><ul><li>Allows headlines to dictate decisions rather than </li></ul></ul>
    21. 21. Common Errors <ul><li>See CEO Compensation as removed from executive, exempt and non-exempt comp. </li></ul><ul><li>Relying on “their just lucky to have a job” as rationale for the increase. You absolutely need the best talent to be engaged during this trying time. </li></ul>