Current Trends and Issues in Banking Compensation and Benefits Programs

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1 Current Trends and Issues in Banking Compensation and Benefits Programs November 18, 2014 Kristine Oliver Managing Director

2 What We ll Be Covering Today Compensation & Benefits Today s Reality Highlights from Pearl Meyer & Partners 2014 Employee Benefits Survey Current Trends and Issues Impacting Executive Compensation Highlights from Pearl Meyer & Partners On Point Executive Compensation Planning Survey Banking Edition Dodd Frank Update 1

3 Compensation & Benefits Today s Reality Merit increase budgets provide limited means for rewarding high performers Merit increase budgets are holding steady at 3% Salary structure adjustment budgets remain in the 2% - 2.2% range Increased competition for certain positions within the credit, compliance, and commercial lending functions Annual / Short-term Incentives Majority of survey participants have a formalized short-term incentive plan in place and allow non-officers to participate Median budget as percent of payroll expense: 8% Median budget as percent of net income: 12.8% Banks are re-evaluating metrics and rigor of goal setting Need to refresh line of business incentive plans (i.e. commercial lending, mortgage lending, retail, business banking) in order to remain competitive in market Ensuring compliance with regulations including the CFPB s Mortgage Loan Originator Rule 2

4 Compensation & Benefits Today s Reality Long-Term Incentives Prevalence of long-term incentives has remain constant over past three years (approximately 30%) Less than 20% of mutual bank participants have an LTI plan Holdbacks / deferrals can be utilized within short-term plan in order to have longterm feel and enhance retention With public banks, majority are using mix of time-vested restricted stock and performance shares stock options are dropping in prevalence Eligibility extending past executive team Stock ownership guidelines / holding requirements Employee Benefits Controlling health care costs and improving workforce health continues to be key initiative Need to maintain key benefits where costs are rising rapidly may mean fewer resources are left available to invest in other kinds of benefits that are less in demand 3

5 Highlights from Pearl Meyer & Partners 2014 Northeast Employee Benefits Survey 4

6 Benefit Costs as a Percent of Payroll Across Northeast, total benefits costs are nearly 1/3 of payroll 34% of participants offer health insurance to part-time employees must work over 25 hours per week Asset Size Total Benefits Cost as a Percent of Payroll (Median) Total Medical Total Other Group Benefits Retirement Plan < $250m 29% 29% 12% 11% 2% 3% 8% 9% $250m - $500m 29% 31% 13% 14% 1% 1% 9% 9% $500m - $750m 27% 32% 12% 11% 1% 4% 8% 8% $750m - $1.5b 33% 31% 12% 13% 7% 1% 12% 12% > $1.5b 30% 31% 11% 10% 1% 3% 10% 8% All Northeast 30% 31% 12% 12% 1% 1% 9% 9% 5

7 Health and Wellness Plans 60% of participants offer only 1 plan, 37% offer 2 plans, 3% offer 3 plans HMO continue to be the most prevalent type of health plan offered by participants followed by PPO 12% offer opt-out incentive for employees who decline health coverage; average payout = $1,433; lump-sum payout most prevalent Standard Plan High Deductible % of Premium Paid by Employer (for full-time ee) Prevalence Individual Annual Premium Family Annual Premium Prevalence Individual Annual Premium Family Annual Premium Individual Family HMO 72% $6,056 $16,490 79% $5,721 $15,419 73% 72% PPO 46% $6,788 $18,053 70% $5,875 $16,025 74% 72% POS 16% $7,371 $20,495 47% $6,625 $18,583 75% 74% Dental 98% $461 $1, % 63% Vision 66% $111 $ % 10% 6

8 Wellness Benefits Boosting employee health through preventive wellness benefits is key strategy Many ways to reward employees for participating in these programs Gift / rewards cards are most popular (61%) Additional paid time off also commonly provided to participants Wellness Benefit Currently Have New for 2014 Considering for Future Weight management program / initiative 59% 4% 18% Personal health risk or screening assessments 56% 6% 20% Exercise & nutrition program 50% 8% 18% Smoking cessation program or initiative 40% 4% 28% Disease management program 40% 2% 25% Health fairs and/or seminars 36% 4% 26% Stress management program 31% 10% 26% Alcohol and substance abuse program 31% 2% 26% 7

9 Section 125 Plans Majority of institutions indicated that they offer a Section 125 Plan Prevalence Debit Card Feature Median Annual Maximum Contribution Medical FSA 82% 90% $2,502 (employee) Dependent Care FSA 80% --- $4,782 (employee) Health Reimbursement Account 38% 29% $1,748 (bank) 95% of participants use a 3 rd party vendor to administer these plans versus administering on their own Top 10 Vendors (in order of prevalence) HR Concepts (29 banks) Advanced Benefits Strategies (4 banks) EBS RMSCO (4 banks) Group Dynamics (4 banks) ADP (3 banks) Choice Strategies (3 banks) Northeast Retirement Services (3 banks) Sentinel Benefits (3 banks) Wageworks (3 banks) 8

10 Retirement Defined Benefit Plans 51% of participants offer a defined benefit pension plan Type of Plan» Fixed dollar amount: 90%» Income Replacement percentage: 10% Of those with a DB pension plan. 65% allow new employees to enter the plan 21% have frozen the benefit amounts (or credited service) for existing participants in the plan Most banks allow employees to enter plan after 1 year of service Majority have provision for reduced payouts with early retirement Earliest retirement age at which no reduction in benefits occurs: 63 to 65 years old 9

11 Retirement Defined Contribution Plans (401K) 97% of participants offer a defined contribution (401k) retirement plan On average, 87% of employees participate in the 401k plan 13% offer a second tier match as well» 50% of the next 2-4% contributed by employee 94% allow part-time employees to participate based upon a minimum number of hours worked per week (20 hours) or per year (961 hours) Employer matches the employee s contribution, up to the employee s contribution of 0 49% (8 banks) 50% (30 banks) Match Percent 75% (3 banks) 100% (68 banks) 200% (1 bank) 3% or less 13% 8% -- 38% -- 4% - 5% 38% 8% 33% 37% 100% 6% - 7% 38% 36% 67% 19% -- 8% - 9% -- 6% -- 3% -- 10% -- 2% -- 3% -- 15% 13%

12 Current Trends and Issues Impacting Executive Compensation 11

13 Top 5 Trends in Executive Compensation #1: Pay for Performance Shareholders / stakeholders are demanding that banks demonstrate the relationship between executive pay and performance Comparisons both internally and externally are helpful such as comparisons to: Historical performance Budget Peer group performance ISS peer group performance (public banks) One, three and five-year comparisons may be helpful The definition of compensation matters in the analysis Pay opportunity Realized pay 12

14 Top 5 Trends in Executive Compensation #1: Pay for Performance Historical Realizable Pay Has realizable pay and performance been aligned? Retrospective view Pay for performance alignment analysis helps us see if we get actual alignment between relative pay and relative performance Results can be used to inform future adjustments to target pay opportunities, pay/lti mix, goal-setting Target Pay Analysis Are pay opportunities competitive? Current view Helps us determine if the target pay levels are appropriate Results can be used to inform future adjustments to target pay opportunities Prospective Pay Leverage Does pay mix and plan leverage provide the opportunity for pay and performance alignment across the performance spectrum? Prospective view Isolation of leverage helps us understand if realizable pay analysis results are due to target pay or the upside/downside leverage of the pay mix and plan mechanics Does not consider pay levels Results can be used to inform future adjustments to pay / LTI mix and pay leverage 13

15 Top 5 Trends in Executive Compensation #2: Base Salary Increases The top three factors for executive pay decisions within the banking industry include: 1 Company performance Company conditions (performance) Executive position (variance) to market Overall economic/market conditions Projected merit rate increase Factors Influencing Merit Budget Over $3 billion Under $3 billion All Banks 2 3 Executive compensation variance to market Overall economic / market conditions Industry conditions Regional/local conditions Projected cost of living increase Most Important...Least Important Expected FY15 Base Salary Changes vs. FY14 Executive Base Salary Increases Merit increase percentages for 2015 are strengthening relative to % 80.0% 60.0% 40.0% 26% 41% 50% 59% Source: PM&P On Point Survey Looking Ahead to Executive Pay Practices in 2015, Banking Edition 20.0% 0.0% 13% 26% 6% 12% FY14 FY15 FY14 FY15 CEO CEO Direct Reports Not Sure Cut or Freeze 0% - 2% 2% - 4% 4% - 6% Above 6% 14

16 Top 5 Trends in Executive Compensation #3: Annual Incentives Annual Incentive Program Payout Levels Overall, bonus payouts are trending about the same level as or slightly higher than last fiscal year For many banks, incentive plan funding will fall short of target 64% of banks expect below-target (less than 100%) annual payouts for FY14 performance 47% of banks over $3 billion in assets are predicting bonuses over 100% of target. 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Expected FY14 Annual Incentive Payout as a % of Target No Payout 0% - 50% 50% - 75% 75% - 100% 100% - 150% All banks <$ 3 billion $3 billion or greater Source: PM&P On Point Survey Looking Ahead to Executive Pay Practices in 2015, Banking Edition 15

17 Top 5 Trends in Executive Compensation #3: Annual Incentives Performance Metrics and Goals Revenue and profit measures are most prevalent (as expected) Yet, many are incorporating measures unique to their strategy Non-financial in nature Individual in orientation Profits Top Line / Revenue Asset Quality / Capital Adequacy Returns and Balance Sheet Measures Profitability Strategic and Other Non-Financial Individual Effort Performance Metric Prevalence 0% 20% 40% 60% 80% 100% 120% $3 billion or greater <$ 3 billion All banks 100% 80% 60% 40% 20% 0% Perceived Difficulty of FY15 Target Performance Goals vs. FY14 Target Performance Goals 6% 4% 48% 46% 38% 58% 13% 67% 20% All banks <$ 3 billion $3 billion or greater Nearly half (48%) of participants plan to impose tougher hurdles for executive performance in 2015 May suggest that as movement toward target and above-target payouts occurs, banks may be recalibrating goals to ensure a proper pay and performance alignment Similar Tougher Unknown / NA 16 Source: PM&P On Point Survey Looking Ahead to Executive Pay Practices in 2015, Banking Edition

18 Top 5 Trends in Executive Compensation #4: Long-Term Incentives LTI Value Expectations 44% of banks predict the value of 2015 equity awards will be about the same as in 2014 Another 38% anticipate awards that are somewhat or considerably higher in value than % 80% 60% 40% 20% 0% LTI Value Expecations for FY15 All banks <$ 3 billion $3 billion or greater Lower Similar Higher Unknown / NA 100% 80% 60% 40% 20% 0% Expected Mix of 2014 LTI Mix 14% 17% 6% 27% 25% 37% 45% 38% 54% 14% 21% 3% All banks <$ 3 billion $3 billion or greater Options Time-Vested Restricted Stock Performance Shares / Units / Options Cash LTIP Perf- Based Time- Based LTI Vehicles Mix of LTI instruments utilized in 2015 will not shift dramatically from those used in 2014 Performance-based awards typically make up over 40% of the mix while remaining continues to be time-vesting vehicles 17 Source: PM&P On Point Survey Looking Ahead to Executive Pay Practices in 2015, Banking Edition

19 Top 5 Trends in Executive Compensation #5: Employment / Change-in-Control Agreements All of the M&A activity has unearthed many surprises related to inadequate planning in this area (especially if there s a SERP involved) Employment contracts limited to CEO and select direct reports Change-in-control agreements can reach further down in organization Protection period: 3 months prior CIC and up to 24 months following Multiple of total cash compensation (0.5x 3x) Double trigger CIC occurs and termination Equity vesting acceleration double trigger best practice Excise tax treatment - Current trend: Best net benefit - No tax gross ups 18

20 Top 5 Fundamentals of Executive Compensation Business and People Strategy #1: Business Strategy Does your pay program align with business value drivers? Understand what drives value creation Develop a strategy-incentive map Give equal weight to lead/driver metrics in relation to lag/outcome metrics #2: People Strategy Does your pay program support your talent management strategy? What competencies and experience do you need? How will managers acquire the experience they need to become future leaders? What opportunities will managers have to practice their leadership skills? What attributes of the culture do you want to create and maintain? What unique attributes are integral to your business strategy? 19

21 Top 5 Fundamentals of Executive Compensation Performance Measurement & Good Governance #3: Performance Measurement Does your Pay program reward the right performance? Validate the measures Calibrate the goals Analyze the actual results #4: Good Governance Is your pay program informed or dictated by external pressures? Allow external viewpoints and market practices to inform, not drive, pay program design Exercise business judgment Be transparent 20

22 Top 5 Fundamentals of Executive Compensation Clear Communication #5: Clear Communication Does your pay program resonate with executives and shareholders/stakeholders/regulators? Investor outreach Clear Compensation Discussion & Analysis disclosure Clear explanations and line of sight 21

23 A Balanced Executive Compensation Program Base Salary Annual Incentive Plan Long-Term Incentives Performance-Based Service-Based Stock Ownership / Holding Requirements Retirement Plans, SERPs, Deferred Comp Board / Committee Oversight, Clawback Policy, Anti-Hedging & Anti-Pledging Policies, CIC/Severance Plan, Employment Agreements Short-Term Mid-Term Long-Term 22

24 Dodd-Frank Update 23

25 Status of Dodd Frank Provision Implementation The SEC has issued final rules and effective dates for three (highlighted in gray) of the seven provisions Provision Current Known Status or Scheduled Action SEC issued Final Rules in June 2012 Exchanges issued proposed rules in Sept Comp. Committee & Advisor independence; Committee s Oversight Authority SEC finalized the NYSE & NASDAQ listing standards related to compensation committees and their advisors in Jan Advisor independence & charter: Effective July 1, 2013 Committee independence: Effective earlier of (a) first annual meeting after 01/15/14, or (b) 10/31/14 Disclosure of Compensation Consultant Conflict of Interest SEC issued Final Rules in June 2012 Effective for 2013 proxy season Disclosure of COB/CEO Roles Effective for 2011 proxy season Clawback Policy Pay-for-Performance Disclosure Internal Equity Ratio Disclosure Final and Proposed Rules pending per SEC Likely not effective until fiscal 2015 or later Final and Proposed Rules pending per SEC Likely not effective until fiscal 2015 or later Final and Proposed Rules pending per SEC, but may be approved as early as September Likely not effective until fiscal 2015 or later Disclosure of Hedging Final and Proposed Rules pending per SEC Likely not effective until fiscal 2015 or later 24

26 About PM&P s Banking Practice PM&P serves hundreds of bank clients annually through a national team of consultants exclusively dedicated to serving the banking industry. These consultants work closely with a wide range of banking organizations, from de novo banks, mutuals and credit unions to super regional and international financial institutions. Our services include compensation and governance advisory services to Compensation Committees and Boards, the development of executive and employee compensation programs tailored to the business needs of each client, and the administration of compensation surveys for bank executives, employees, and Board of Directors (including PM&P s National Banking Compensation Survey). The firm maintains offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, San Francisco, San Jose, Los Angeles, and London. For more information on our bank consulting services visit Kristine Oliver Managing Director Boston (508) kristine.oliver@pearlmeyer.com 25