2013 Survey Findings & Current Trends / Best Practices Bank Director Compensation & Governance Practices Survey

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1 2013 Survey Findings & Current Trends / Best Practices Bank Director Compensation & Governance Practices Survey Banking gcompensation o Survey Emerging Trends and Issues Impacting Executive Compensation October 24, 2013

2 What We ll Be Covering Today Highlights from Pearl Meyer & Partners 2013 Bank Director Compensation & Governance Practices Survey Highlights from Pearl Meyer & Partners 2013 Banking Compensation Survey Emerging Trends and Issues Impacting Executive Compensation Dodd Frank Update 1

3 Highlights from Pearl Meyer & Partners 2013 Bank Director Compensation & Governance Practices Survey 2

4 Board Composition Continues to Evolve Asset Size < $400M $400M $1B > $1B BOD Term Length % with 1 year term 11% 7% 15% % with staggeredterms 86% 89% 82% Mandatory Director Retirement Age Prevalence of Policy 73% 67% 83% Median Retirement Age Board Composition Median # of Directors (1) Median # of Female Directors Median # of Minority Directors (1) Includes non employee and employee directors 3

5 Board Leadership Decision to combine or separate the Chairman & CEO role is a company specific decision but the current trend, particularly for public institutions, is moving toward separating the roles If combined COB/CEO role or if the Chairman is affiliated (i.e. former CEO of the bank), should consider appointing an independent lead director Prevalence Asset Size < $400M $400M $1B > $1B Chairman of the Board d/ CEO 17% 17% 33% Non Executive Chairman of the Board 72% 78% 67% Lead Director 0% 15% 44% 4

6 Board Member Expectations Time Commitment Average Board member is spending more time preparing for meetings Length of meetings, particularly for certain committees (i.e. Compensation), continues to increase 55% of participants i t reported that t the length of board and committee meetings has increased over the past two years and 62% are spending more time preparing for meetings than in previous years Experience / Skills / Expertise Increased expectations on skills and qualifications 73% of participants have mandatory retirement age (median 74 years old) Only 27% of reporting institutions have a formal Board succession plan but the majority of participants reported that the search time to find a qualified Board Member has not changed over the past two years 5

7 Board Member Expectations Education Not only do directors need to represent a balanced mix of skills, but they must also work to stay current through education Education enhances the Board s effectiveness! Top Three Topics in Training / Education Programs 1) Regulatory & Compliance Issues, 2) Director Roles & Responsibilities, bl 3) Banking Industry Trends (Risk Management a close 4 th ) Board Evaluation Ensures that directors are performing in line with the bank s strategic objectives 35% of reporting institutions have a formal Board evaluation process (up from 25% in 2011). Of these banks, most boards evaluate themselves (as a whole, not on an individual Director basis) every year 6

8 NACD Five Principles In Setting Director Compensation Director compensation should be determined by the board and disclosed completely to shareholders/stakeholders Director compensation should be aligned with the long term interest of shareholders/stakeholders Compensation should be used to motivate director behavior Directors should be adequately compensated for their time and effort Director compensation should be approached on an overall basis, rather than as an array of separate elements 7

9 Total Board Expense & Average Pay Per Director Total board expense and average pay per Director provides the first view into whether pay programs are competitive Asset Size Average Pay Per Director 1 Total Board Expense 1 All Banks $25,826 $266,550 < $400M $18,000 $180,250 $400M $1B $26,327 $260, > $1B $39,000 $495,000 1 Median data shown; Includes Board (retainer and meeting fees) plus Committee (retainer and meeting fees) fees for Chairs and Directors 8

10 Board Compensation Mix Similar to 2011, paying Directors a combination of retainer and meeting fees is most popular. Some movement towards retainer only approach retainer only mtg fee only combo 22% 14% 31% 59% Chair Lead 54% 20% 49% Member 38% 15% 9

11 Pay Differentiation Between Leadership Roles Current best practice is to pay premium compensation to nonaffiliated chairs and lead directors. Approximately 84% of all participants with a non executive board chairman or lead director provided premium compensation (cash) Prevalence of Premium Pay for Board Leadership Multiple of Board Total Cash (retainer + total meeting fees) Non Executive COB vs. Member Asset Size Average Median All Banks < $400M $400M $1B > $1B

12 Board Compensation Important to keep in mind that the data shown below may not be an apples to apples comparison to your own bank Boards should develop their own compensation philosophy p in order to set pay appropriately (both mix and amount of pay) Majority of participants reported that Board compensation is reviewed onanannual annual basis typically by the Compensation Committee Chairman of the Board Board Member Retainer Total lmtg Total Total lmtg Total Retainer Fees Cash Fees Cash All Banks $20,000 $9,750 $25,340 $9,600 $9,000 $14,000 < $400M $12,600 $8,928 $21,600 $7,500 $8,200 $13,200 $400M $1B $15,750 $10,000 $18,800 $7,500 $9,350 $12,100 > $1B $63,000 $15,600 $66,000 $16,250 $12,550 $22,050 Reflects median data. Total cash reflects retainer plus total meeting fees. 11

13 Committee Compensation Trends Most banks provide meeting fees for committee members Committee chair compensation is typically differentiated through an additional retainer An emerging trend dis to differentiate t pay by committee to recognize different responsibilities and time commitments Audit committee is typically highest following by the Compensation Committee and Nomination/Governance Committee Withmutual/privatebanks, the Executive Committee typically is the highest paid since it is often responsible for multiple areas (loan review, compensation, etc.) 12

14 Committee Chair Compensation Nominating/Gov Compensation Audit Executive > $1B $5,000 $5, $9,000 $16,800 $400M - $1B $1,400 $2,500 $4,700 $14,700 < $400M $1,080 $1,500 $3,000 $7,400 All Banks $2,750 $3,400 $5,000 $10,000 13

15 Committee Member Compensation Nominating/Gov Compensation Audit Executive > $1B $3,410 $4,100 $6,800 $15,600 $400M - $1B $975 $2,000 $2,500 $13,200 < $400M $1,040 $1,200 $2,000 $9,600 All Banks $1,600 $2,200 $3,200 $12,000 14

16 Board Benefits & Perquisites Use of retirement benefits for Board members continues to decrease in prevalence, particularly for publicly traded banks Retirement plans exist at 41% of mutual bank participants and 14% of stock bank participants, down from 44% and 15% in 2011 A Board deferred compensation plan is effective and an acceptable retirement benefit 41% of participants offer perquisites to their Board No / reduced fees for products and services (30%) Trade association / convention expenses (67%) Convention and/or business related expenses for spouse (46%) Deferred Comp Plan Retirement Benefits Life Insurance Health Insurance Long Term Care All Banks 26% 34% 14% 4% 6% < $400M 14% 32% 7% 0% 4% $400M $1B 29% 39% 21% 7% 14% < $1B 38% 29% 13% 4% 0% 15

17 Governance Best Practices & Expectations Board Accountability Increased disclosure and reporting (regulators and/or shareholders) Regulator and shareholder influence and demands Board/Compensation Committee Oversight Charter updates (new responsibilities; review vs. approve) Board/Committee meetings (frequency, focus) Oversight/review process Executive sessions Compliance Independence Requirements /Expectations Audit Committee Compensation Committee Committee Advisors Risk Staff Board Leadership Structure (e.g. Chair role) Disclosure for public banks Independent Chair of Board (or Lead Director) Knowledge, Skills, Experience Increased disclosure on Board member experience/skills Specialized skill/experience requirements for certain committee roles (e.g. compensation, finance, risk experts) Education on emerging and best practices Communication Management Board Regulators Shareholders 16

18 Highlights from Pearl Meyer & Partners 2013 Banking Compensation Survey MA/RI and Northeast 17

19 2014 Projected Average Salary Increase Budgets PM&P Banking Compensation Survey 2014 budgets projected between 2.8% 3.0% Merit generally around 2.5% Additional 0.5% 1% for promotion and/or market adjustments Need to ensure that dollars are being used wisely to ensure that high performers are recognized performance differentiation will be critical to ensure retention and motivation 2014 Projected (including zeros) Average 2014 Projected (excluding zeros) Average Execs Officer Exempt NE Execs Officer Exempt NE Massachusetts/RI Northeast % 3.0% 3.0% 3.1% 18

20 Salary Structure Adjustments Although competition for talent is on the rise, salary structure adjustment budgets are still conservative in the 2% range A salary structure adjustment budget is typically smaller than a merit increase budgets given that it only reflects the increase in wages and not the acquisition of skills, competencies, experiences and individual performance Planned (including zeros) Average 2014 Planned (excluding zeros) Average Execs Officer Exempt NE Execs Officer Exempt NE Massachusetts/RI Northeast % 2.1% 2.6% 2.7% 19

21 Types of Variable Pay Approaches Short Term Incentives Rewards based on the attainment t of short term t results of 12 months or less Annual Bonus Lump sum payment which is not based on predetermined performance criteria or standards VARIABLE PAY Compensation that is contingent on discretion, performance or results achieved Pay At Risk Long Term Incentives Focuses and rewards performance over a period longer than one year 20 Recognition Awards Rewards employee contributions tions after thefact, usually on a discretionary basis

22 Evolution of Variable Pay Early Stages (60s 80s) Focused primarily on executives / management At individual contributor levels» Gainsharing» Individual incentives Growing Stages (90s 00s) Increasing levels of eligibility and award levels Greater variety of plans / programs LTI is king Today (2013) Fulfilling twoprimary objectives» Managing fixed costs» Rewarding performance Greater focus on alignment and ROI 21

23 Ensuring Clarity on Objectives It s critical to gain agreement on what variable pay is intended to achieve Motivate & Reward Compensation for Goal Achievement Compensation for Extraordinary Achievements Recognition of Team Results Token Award JobWell Done 22

24 Increased Eligibility and Emphasis on Variable Pay Short Term Incentives Majority of survey participants have a formalized short term incentive plan in place and allow non officers to participate p Median budget as percent of payroll expense: 7% Median budget as percent of net income: 11.5% Long Term Incentives Eligibility: Less is more Participation: Focused / targeted Role below Executive Level: Achieving Clarity Retention Reward / Recognition Competitiveness Performance vesting equity is on the rise (approximate 25% offer) Don t forget about Spot Awards or Team Awards 23

25 Emerging Trends and Issues Impacting Executive Compensation 24

26 Current Outlook An Improving US Economy Corporate Board members and executives are starting to express confidence that the economy is recovering and the outlook is on the rise Executives are evaluating capital investments and strategic acquisitions after conservatively building cash reserves over the past few years As the US stock market improves, companies are showing signs of unfreezing hiring and adjusting pay levels However, companies dependent on the European economy are still seeing some declines Regulatory Radar Budget cuts, healthcare reform and Dodd Frank concerns continue to present headwinds Directors are voicing concern over the increase in time spent on compliance and oversight duties, rather than business strategy So far, the impact of budget sequestration has been uneven and industry specificspecific The Dodd Frank Act also continues to increase business uncertainty as regulators have missed numerous deadlines for final rulemaking Projected Pay Outcomes For public companies, as stock prices rebound, realizable pay pycould skyrocket Realizable pay, including the current value of equity awards, has appreciated above grant date values in contrast with last year Committees are starting to link decisions to realizable pay, from plan design choices to payouts, in order to avoid overshooting the pay for performance (P4P) relationship 25

27 Environment for Executive Pay Decisions Evolution has replaced Revolution Heightened disclosure requirements and increased scrutiny from shareholders and regulators in the aftermath of the Dodd Frank Act, as well as Say on Pay, drove companies to address many pay irritants in recent years (e.g. minimizing excessive perquisites, tax gross ups, high risk incentive designs, perceived pay for failure arrangements, etc.) With most of the low hanging fruit addressed, the pace of change has begun to slow and companies are wrestling with more strategic matters of executive pay (adjusted for the new realities of the post crisis regulatory environment) Executive pay decisions are becoming better documented and more disciplined Shareholders and regulators continue to treat executive pay decisions with intense scrutiny Consequently, companies are aeeecs exercising ggeate greater rigor in their pay decision processes, including cud documentation and communication to constituents The critical issue going forward aligning pay with performance Shareholder advisory services such as ISS continue to zero in on perceived disconnects between executive pay and company performance The definitions of pay and performance are not universal, contributing to further shareholder skepticism Companies have responded by revisiting both the design and communication of their executive pay arrangements 26

28 Go Beyond Best Practice Business Based Compensation Plans The plan design process is advancing toward more customized alignment with business strategy and HR/human capital objectives, rather than just following best practices and market prevalence Outcome based financial metrics are being supplemented with drivers of future value creation Companies are also investing more resources to explain the why of plan design to shareholders Balancing the P4P Equation Short and long term incentive metrics should be complementary and reflect a balance:» Between metrics focused on growth and metrics focused on profitability» Between lead and lag metrics (e.g. strategic initiatives and year end financial performance) Aligning target compensation with market median at grant is no longer enough. Committees should also review the full range of payouts at threshold target maximum to ensure market calibration Simplicity is Key A confluence of factors (regulatory, ISS/Glass Lewis and activist investor demands) have tended to result in increasingly i complex compensation programs that t obscure the P4P relationship Customize Your Risk/Reward Profile to Your Business Ensure that the compensation risk is mitigated by a good compensation program Review and update your plan to reflect changes in circumstance 27

29 Annual Incentive Plan Trends for Top Executives Conventional practices in key design areas for short term incentive plans have generally included: Targeting financial goals equal to the internal budget; Achieving budget means bonus funds at target; Setting threshold and stretch financial goals as a consistent percentage of the target goals year over year; and Having a high h probability bili that target financial i goals will be achieved PM&P conducted a pulse survey in May 2013 gathering information on annual incentive plan design practices for top executives (PM&P On Point Survey: Annual Incentive Plans for Top Corporate Officers Banking Edition) Topics covered included: How financial goals in annual incentive plans are established, including target, threshold and maximum (stretch) levels; Overall, philosophy of payout levels and the likelihood of payouts; General, program design features (funding, performance measures, maximum opportunities, and threshold h requirements) 28

30 Trends Goal Setting How are financial goals being set? Most Important Financial Goal 55% 26% 10% 10% Budget Enduring LT-Strategic Forecasts Standards Plan Above Target 16% Funding for Budget- Based Goals Below Target 21% At Target 63% When setting threshold and maximum performance goals, most participants indicated using a consistent percentage of the target goal year to year (e.g. 80% or 120% of target performance) Only 7% of respondents review goals relative to their peers or the broader industry What is the definition of a Good Year? 60% 27% 7% 3% 3% Exceeds Exceeds Banks Improvement Budget / Plan Standard Over Prior Year Exceeds Industry Peers Exceeds Analyst Expectations 29

31 Trends Probability of Bonus Payments Majority report a greater than 90% probability of a bonus payout, and 68% reported an above average (over 60%) probability of at least a target payout Likelihood of Bonus Payout Any Payout 61% 32% 7% At Least Target 36% 32% 32% Near Maximum 10% 19% 26% 19% 26% >90% 60-90% 40-60% 25-40% <25% How are programs working relativetoto their desired designs? 20% 31% Average Payouts as a Percentage of Target Over 5 Years 36% 24% 23% 16% 15% 15% 12% 4% 0% 4% <50% 50-75% 74-89% % % % Should be Actual 64% stated payouts should be between 74% and 124% of target, which compares to 50% of respondents who are actually paying bonuses in that range 30

32 Trends Program Design Individual performance is assessed (74%) when determining annual incentive payouts for the top executives Individual performance typically triggers a payout modifier to increase or decrease the earned incentive i amount, as opposed to the individual id lbonus bi being determined d independently A target based approach (47%) is used more frequently than a formula based pool (30%). Only 23% maintain discretionary plans for their top executives Programs typically include a performance threshold or performance level which, if not achieved, would result in no payout Incentive programs generally provide for bonus payouts that exceed target maximumincentives incentives typically range between 100% and 150% of target 19% 33% 30% 11% 7% 100% % % % 200% 31

33 Dodd Frank Update 32

34 Dodd Frank Update Provision Current Status / Scheduled Action Eff Proxy? Say on Pay, Say on Frequency, Say on Golden Parachutes Financial Institution Excessive Compensation Rules Compensation Committee & Advisor Independence; Committee s Oversight Authority Disclosure of Compensation Consultant Conflict of Interest SEC issued final rules Jan. 25, 2011 Proposed rules issued April 2011 Final rules pending SEC issued Final Rules Jan. 2013; Exchanges issued proposed listing requirements in Sept Final rules issued June 20, 2012 Yes? Yes Yes Clawback Policy Proposed and final rules pending? Pay-For-Performance Disclosure Internal Equity Ratio Disclosure Proposed and final rules pending On September 18th, 2013, the SEC held an open meeting to discuss (requiring companies to disclose total annual median employee pay, CEO total annual compensation, and the ratio between the two). The proposal was adopted. The good news is that the SEC has adopted a flexible approach that will allow all companies to establish the most appropriate means for determining median employee pay. The bad news is that no accommodation/exclusion was offered for those companies with international, seasonal or part-time employees? Depending on the speed of the rulemaking process, pay ratio disclosure will be effective no earlier than the 2015 proxy season Disclosure of Hedging Proposed and final rules pending? Disclosure of Chair of Board / CEO Roles SEC has not committed to dates for guidance; most comply Yes 33

35 About PM&P Kristine Oliver is a Vice President in the banking industry practice at Pearl Meyer & Partners which has a significant focus on the Northeast/Mid Atlantic community banking industry. For more information about regarding banking compensation consulting services, please visit Kristine Oliver Vice President Kiti Kristine.oliver@pearlmeyer.com l For twenty five years Pearl Meyer & Partners ( has served as a trusted independent advisor to Boards and their senior management in the areas of compensation strategy and program design, compliance and reporting, and committee structure, policies and procedures. The firm provides comprehensive solutions to complex compensation challenges for companies across all industries ranging from the Fortune 500 to smaller private companies and not for profits, as well as emerging high growth companies. These organizations rely on Pearl Meyer & Partners to develop programs that align rewards with long term business goals to create value for all stakeholders: shareholders, executives, and employees. The firm maintains offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, San Francisco, San Jose, Los Angeles and London. 34