Executive and Director Compensation Trends and Best Practices

Transcription

1 QUALITY INDEPENDENT VALUE RELATIONSHIP EXPERTISE Executive and Director Compensation Trends and Best Practices MBA Annual Convention June 16-19, 2015 Grand Hotel, Mackinac Island Mr. Michael Blanchard Blanchard Consulting Group CEO June 2015

2 Elements of Total Compensation Total Compensation Cash Salary Compensation Compensation Qualified Cash Plans Compensation Equity Plans Non-Qualified Equity Plans Plans Qualified Plans Other Benefits & Perks Annual Salary Hourly Wages Annual Bonus Annual Incentive Plan Stock Options Restricted Stock Phantom Stock Stock Appreciation Rights (SARs) Performance Units Supplemental Executive Retirement Plans (SERPs) Salary Continuation Plans (SCPs) Deferred Compensation Plans (DCPs) Pension 401(k) ESOP Profit Sharing Supplemental Disability Long Term Care Employment Agreements Change-in- Control (CIC) Country Clubs, Auto Allowances, etc. Page 2

3 Total Comp Mix Blanchard Database Highest Paid Executive Compensation Mix Public Banks (2013 Data) Page 3

4 Compensation Trends Survey Demographics Blanchard Consulting Group conducted a survey of 2014 compensation trends during the first quarter of A total of 231 banks completed the survey. The respondents included 84 public and 147 private banks. The asset size and regions of the respondent banks are summarized below. 23% Asset Size Breakdown 20% 33% 24% <$250M $250M-$499M $500M-$999M $1B and above Region Breakout Northeast 7% Southeast 13% Southwest 6% West 25% Midwest 49% 4

5 BASE COMPENSATION TRENDS Page 5

6 Salary Trends 93% Plan/Implemented Increases in 2014 (Blanchard 2014 Compensation Trends Survey) 7% 93% 2014 Salary Increases Planned No 2014 Salary Increases The median expected increase is 3% Two-thirds (62%) have a salary grade/range system. 6

7 Annual Incentives 7

8 Types of Annual Incentive Plans Blanchard Survey Formal Performance-Based Plan 42% Pooled Approach/Profit Sharing Based on Profits at the End of the Year Discretionary Incentive Plan 13% 26% Currently Designing an Annual Incentive Plan 3% We Do Not Have an Annual Incentive Plan 12% Other 4% Plan Document: (57%) have a formal document that describes how their incentive plan(s) work. Risk Assessment: (74%) had their plan reviewed by the compensation committee for risk. 8

9 Annual Incentive Plan Payouts Blanchard Survey Absolute Goals: 62% set incentive goals based on the bank s budget. Relative Goals: One-third use a combination of budget and comparisons to a peer group 9

10 Incentive Plan Goals Blanchard Survey The most prevalent profitability and/or strategic incentive criteria used: CEO Incentive Criteria: Sr. Management Criteria: - Net Income (63%) - Net Income (63%) - ROA (42%) - Loan Growth (52%) - ROE (35%) - Deposit Growth (45%) - Strategic Planning Goals (34%) - ROA (40%) - Loan Growth (33%) - Strategic Planning Goals (38%) - NPAs & Board Discretion (both 31%) - NPAs & Efficiency Ratio (both 33%) - ROE (32%) 10

11 Annual Incentive Plan Payout Amounts The following table shows annual incentives as a percentage of salary for banks with assets between $250M to $5B. The data is based on market research and Blanchard Consulting Group s experience in the banking industry. Typical Annual Cash Incentive Payouts as a Percentage of Base Salary Industry Data Assets $250M-$1B and $1B-$5B Typical Allocation of Goals & Annual Award as a % of Salary Objectives (Assets $250M-$1B) (Assets $1B-$5B) Executive Target Maximum Target Maximum Company Dept./Individual CEO 20% - 30% 40% - 60% 30% - 50% 60% - 100% 90% 10% EVP 15% - 25% 30% - 50% 20% - 40% 40% - 80% 50%-75% 50%-25% SVP 12.5% - 20% 25% - 40% 15% - 30% 30% - 60% 40%-60% 60%-40% VP/Producer 10% - 15% 20% - 30% 12.5% - 25% 25% - 50% 25%-50% 75%-50% Page 11

12 Regulatory and Government Impact on Incentives CANNOT TALK INCENTIVES WITHOUT ACKNOWLEDGING REGULATIONS & THEIR IMPACT Regulators Joint Guidelines on Sound Incentive Compensation (June 2010) All Banks Impacts all banks (safety and soundness exams / CAMELS ratings). Supports pay-for-performance programs, as long as they do not encourage risk. Recommends a combination of both profitability goals and strategic goals. Incorporates a Risk Review as part of the regulatory review process. Encourages the use of stock grants or deferred compensation. Other Rules/Guidelines Dodd-Frank Clawbacks, Pay Disparity Ratio, Pay for Performance, Risk Reviews SEC Recently provided proposed guidelines on a required pay-for-performance analysis. Shareholder Interest Groups Say-on-Pay and Equity Plan Votes. Reg Z (Mortgage Lenders) Cannot pay incentives based on profitability, interest rate, or loan terms. Page 12

13 Clawbacks As of 2014 only 27% of Respondents Have a Clawback Policy Blanchard Survey 6% 67% 27% Clawback Policy No Clawback Policy We are working on implementing one Example Clawback Provision: The Bank may recoup incentive compensation paid to covered executives (or some other identified employees) in instances where: (i) the Bank issues a material restatement of its financial statements; (ii) a subsequent finding that the financial information or performance metrics used to determine the amount of the incentive compensation are materially inaccurate, in each case regardless of individual fault; (iii) a covered executive or lending officer engages in intentional misconduct; or (iv) the covered executive has committed ethical or criminal violations. In addition, the Bank may recover any incentive compensation awarded or paid based on a covered executive s conduct which is not in good faith and which materially disrupts, damages, impairs or interferes with the business of the Bank and its affiliates. The purpose of this policy is to help ensure executives act in the best interest of the Bank. The Compensation Committee will consider all relevant factors and exercise business judgment in determining appropriate amounts to recoup as well as the timing and form of recoupment. 13

14 Pay-For-Performance Analysis Prevalence of Pay-For-Performance Analysis* 6% Yes 42% 52% No We are planning to do this in 2014 Dodd-Frank Act required the say-on-pay performance analysis in SEC proposed guidelines for the pay-for-performance analysis in May * The above chart is from the 2014 Blanchard Consulting Group Compensation Trends Survey and is based on the responses of public banks only (n=84). 14

15 How to Reduce Risk in Annual Incentive Plans 1. Avoid excessive incentive payout opportunity levels and/or uncapped plans Ensure award opportunities are reasonable and appropriate 2. Review Performance Measures Variety of internal and external performance measures Ensure an appropriate number of measures (not one & not too many) Do not focus solely on single short-term financial metrics (i.e., ROA and ROE) Incorporate asset and credit quality metrics Include some level of discretionary adjustment Ensure a link to the Bank s strategic plan and long-term goals 3. Ensure performance targets are not set too high or too low Use historical bank and peer group information to ensure goals are appropriate 4. Use annual or multi-year performance payout periods Remove quarterly payments and short turnarounds on awards 5. Ensure appropriate plan approval, governance, documentation, and communication 6. Consider implementation of a Clawback policy 7. Consider deferring a portion of incentives in cash or stock Page 15

16 Scoring Questions ** If you answer yes, give yourself a point #1) We have compared our base salary for our executive to industry market data #2) We have a documented performance-based cash incentive/bonus plan #3) We utilize more than one lone financial goal in our cash bonus/incentive plan #4) Our plan has both company and department/individual performance metrics #5) We have documentation that discusses how our incentive plan/s work #6) We have reviewed the riskiness of our incentive plan design and goals #7) We have reviewed regulations and discussed their impact on our incentive plans #8) We have a clawback policy in place that covers our incentive plans #9) We have compared our incentive design and payouts to industry market data Page 16

17 Long-Term Incentives and Executive Benefits 17

18 Equity Incentives & Longer-Term Compensation The table below from the 2014 Blanchard Consulting Group Compensation Trends Survey shows the prevalence of equity-based compensation programs/plans.* Stock options 41% Restricted stock 30% Stock appreciation rights (stock-settled) Stock appreciation rights (cash-settled) 3% 5% Phantom or synthetic stock 8% Supplemental retirement program (SERP, Salary Deferred compensation plan (with both a company match or 31% 31% Deferred compensation plan (with no company match or We do not currently have any equity, "synthetic equity", or 17% 20% * Respondents were allowed to choose more than one option; therefore, the percentages will not sum to 100%. 18

19 Long-Term Incentives Top Executive Increasing Use of Equity The portion of long-term incentives as a percent of total compensation has increased 2X to 3X from 2009 to Asset Size 2009 Proportion of LTI to Total Compensation 2013 Proportion of LTI to Total Compensation Over $1B 15% 26% $500M to $1B 4% 12% Under $500M 4% 7% 1 Based on proxy data from the Blanchard Consulting Database of public banks Page 19

20 Common Types of Equity-Based Incentives Real Equity - Actual shares of stock, which create real equity holdings and shareholder dilution Incentive stock options (ISOs) Nonqualified stock options (NSOs) Stock appreciation rights (SARs) stock settled Restricted stock Synthetic Equity - Value is tied to share price, but no real stock is transferred (cash payments) Stock appreciation rights (SARs) cash settled Phantom stock Performance shares Restricted stock units cash settled Reminders: ** Appreciation-based vehicles (example: stock options) - value is only created with appreciation ** Full-value vehicles (example: restricted stock) - value is immediate so long as share has value Page 20

21 Equity Incentive Plans Current Trends Full value shares are more prevalent than stock options The table below shows the prevalence of restricted stock vs. stock options in the Blanchard Consulting Group database of public banks. Prevalence Equity Prevalence in Public Banks Restricted Stock Stock Options Blend 2 All Banks (n=177) 47% 21% 14% Banks that Granted Equity in 2013 (n=98) 86% 39% 24% 1 Represents publicly traded banks in Blanchard Consulting Group's internal database 2 Blend indicates grants of both restricted stock and stock options Page 21

22 Equity Incentive Plans Vesting Executive Officers: Most Vesting Provisions in Executive Officer LTI Plans are 3-5 years. Stock Options: Typically a 3-5 Year Vesting 92% of stock options in Fortune 500 companies use Ratable Vesting 1 Ratable Vesting: Awards vest in tranches over the vesting period Restricted Stock: Typically a 3-5 Year Vest 40% of Restricted Shares use a cliff vesting 1 Cliff Vesting: Awards vest entirely at the end of the vesting period Most grants are based on the achievement of performance goals 1 The ClearBridge Report (January 2014) Page 22

23 Performance-Based Grants vs. Performance-Based Vesting 1. Performance-Vesting Methodology: Grants are made at the beginning of a performance period and vesting only occurs when pre-defined performance metrics are met. 2. Performance-Granting Methodology: Grants are made at the end of a performance-period (typically one year) with an additional 3-5 year service/time vesting after the grant. Page 23

24 Long-Term Incentive Plan Goals General Industry **An examination of three studies of Fortune 500 Companies found the following performance criteria most commonly used in LTI Plans 1 1 From the Equilar Journal of Compensation and Benefits and ClearBridge studies of Fortune 500 Companies. Page 24

25 Equity Incentive Plans Current Trends (Continued) Equity Ownership Guidelines Beginning to gain traction in the industry and considered best practice by shareholder advisory groups (ISS, Glass-Lewis, etc.) Charts below show how they are starting to be adopted in the banking industry 1 Executive Ownership Guidelines 4% 14% Yes 82% No We are in the process of adopting/exploring such a policy 1 From the Blanchard Consulting Group 2014 Compensation Trends Survey. Page 25

26 Executive Non-Qualified Benefit Programs If you hear Think of Prevalence SERP or SCP Executive Retirement/Pension 47% of public banks Blanchard database Voluntary Deferred Compensation Executive 401(k) 38% of public banks Blanchard database Supplemental Disability Executive LTD 36% and growing Towers Wyatt Supplemental Life Insurance Executive Life Insurance 18% Towers Wyatt Plans Are Often Tiered SERPS for Key Executives Deferred compensation for highly compensated Supplemental disability for highly compensated Page 26

27 Employment/CIC Agreement Issues These agreements are being reviewed for appropriateness and usefulness A current trend is to reduce the term of these agreements to one year Quantifying the potential total cost of CIC severance payments is becoming very common and required in certain situations Modifications are being made to ensure executives are not rewarded through a CIC or merger if the Bank is not performing Tiered amounts of severance benefits for officers are still appropriate 409A Compliance is required All executives are no longer entitled to these agreements in today s environment Page 27

28 Scoring Questions ** If you answer yes, give yourself a point #10) We have compared our incentive design and payouts to industry market data #11) We have explored/discussed the usefulness of (or are using) equity-based compensation (includes real equity or synthetic equity) #12) We have talked about the need to link our executive compensation program to our shareholders through our incentive compensation plan designs #13) We have explored/discussed (or are using) some form of deferred compensation #14) We have discussed employment agreements #15) We have executive officer stock ownership guidelines Page 28

29 Director Compensation Page 29

30 Director Compensation Director Total Compensation Cash Cash Compensation Retainers Qualified Equity Plans Retainers Per Meeting Fees Committee Equity Plans Chair Fees Meeting Fees Other Compensation Page 30

31 Director Compensation (Continued) Basic Director Compensation Trends Total compensation per average director was generally flat during the credit crisis ( 09 12) Director compensation has started to increase in 2013 & 2014 Director compensation should have a different philosophy from executive compensation. Pay for time and expertise Director annual incentives based on bank results are frowned upon by regulators. Focus should be on long-term results and sustainability Use of equity as a component of director compensation is considered a best practice. Typically an equity retainer and restricted stock (vs. stock options) Shorter vesting for director equity grants Increased focus on retainers and a decreased focus on per meeting fees Director compensation differentiation for chairs versus non-chairs Page 31

32 Blanchard Director Compensation Survey Blanchard Consulting Group conducted a survey of director trends and 2014 director compensation during the spring of A total of 130* banks completed the survey. The respondents included 53 public and 77 private banks. The asset size and regions of the participants are summarized below. Region Breakout Northeast 8% Southeast 23% Southwest 9% Midwest 46% West 14% * One participant did not provide the breakdown of board/committee meetings and fees. Therefore, their data is not included where applicable. 32

33 Increase Director Compensation? The median increase for the banks that increased director compensation in 2014 was 10%. More than 90% believe directors are fairly compensated for their time spent on board activities. Directors, on average, spend 8 hours per month on board activities; ranging from 2 to 30 hours. 33

34 2014 Director Compensation (Avg. Director)* Total compensation consists of fees earned or paid in cash, stock awards, option awards, non-equity incentive plan compensation, change in pension and non-qualified deferred compensation earnings, and all other compensation. The tables below and on the following slides show the total compensation paid to an average director. An average director excludes the board chair, employee directors, and any directors with extraordinary events in 2014 (i.e. retirement or partial year board service). All Banks, Med=$448M n=130 Fees Earned or Paid in Cash ($) Stock Awards ($) Option Awards ($) Total Granted Equity ($) Non-Equity Incentive Plan Comp** ($) Change in Retirement Benefits ($) All Other Comp ($) Total Comp Per Average Director ($) Average 20,133 13,512 20,493 17,528 1,546 6,906 3,475 24,270 25th Percentile 11,413 3,876 3,835 4,859 n/a 1, ,000 50th Percentile 16,888 12,497 10,721 13,074 1,546 4,405 2,500 18,102 75th Percentile 26,069 19,622 21,570 22,075 n/a 7,225 5,455 30,729 * Each column represents the summary statistics for the banks that have this form of compensation (0 s are excluded); therefore, total compensation per average director is not a sum of the previous columns. ** When fewer than three banks reported an amount (i.e. stock awards, option awards, etc.) we do not report data at the 25 th and 75 th percentiles. 34

35 2014 Director Compensation* (All Directors) The tables on the following slides show the sum of fees paid to all directors (excluding employee directors and directors with extraordinary events). All Banks, Med=$448M n=130 Fees Earned or Paid in Cash ($) Stock Awards ($) Option Awards ($) Total Granted Equity ($) Non-Equity Incentive Plan Comp** ($) Change in Retirement Benefits ($) Average 173, , , ,952 9,277 52,546 34, ,570 All Other Comp ($) Total Comp ($) 25th Percentile 74,790 59,952 33,271 58,122 n/a 14,496 4,439 84,000 50th Percentile 121, ,473 73, ,637 9,277 39,851 23, ,000 75th Percentile 231, , , ,345 n/a 64,431 42, ,260 * Each column represents the summary statistics for the banks that have this form of compensation (0 s are excluded); therefore, total compensation is not a sum of the previous columns. ** When fewer than three banks reported an amount (i.e. stock awards, option awards, etc.) we do not report data at the 25 th and 75 th percentiles. 35

36 Director Benefits The table shows the prevalence of benefits offered to directors at each of the participating banks.* * Respondents were asked to indicate all benefits that are offered to their directors; therefore, the percentages will not sum to 100%. 36

37 Director Equity Compensation Blanchard Consulting Database of 138 public banks findings Equity grants typically compose 20% to 50% of a director s total compensation 49% of the banks granted equity to directors in 2013 (67 of 138) 75% of the banks have an equity plan for directors and 67% have a restricted stock plan Larger asset size banks tend to have a higher proportion of equity Equity as % of Total Director Compensation Average 39% 25th Percentile 22% 50th Percentile 38% 75th Percentile 48% Page 37

38 Director Ownership Guidelines 60% 59% 57% 50% 40% 45% 40% 30% 25% 32% 29% 20% 10% 0% Forty percent (40%) have equity ownership guidelines in place for their directors. The basis of the ownership requirements for directors had the following prevalence: Fixed dollar amount (35%) Defined number of shares (33%) Multiple of cash fees/retainer (11%) No minimum set (directors just expected to own Bank stock) (21%) 38

39 Scoring Questions ** If you answer yes, give yourself a point #16) We have compared our director compensation to industry market data #17) Our director compensation is NOT based on an annual incentive plan #18) We pay addition compensation to the chairperson of our board and committees #19) We have granted equity or a cash-based long-term incentive to our directors #20) We have Director stock ownership guidelines Page 39

40 Consultant Biography Mr. Michael Blanchard CEO direct Mr. Michael Blanchard is the CEO of Blanchard Consulting Group. He has extensive experience in the human resources field and has conducted or supported over 500 compensation planning, market research, and organizational development projects over the past fifteen years, with over twelve years specific to the banking industry. Before founding Blanchard Consulting Group, Mr. Blanchard was a Founder and Partner for Blanchard Chase, Managing Director with Amalfi Consulting, a Vice President for Clark Consulting, and worked for two national firms, both specializing in decision support consultation for management and board clients. With graduate studies in advanced industrial and organizational psychology, Mr. Blanchard s experience includes advising clients on compensation planning, performance appraisals, and management development. 40

41 Why Blanchard Consulting Group? Blanchard Consulting Group is a national compensation consulting company with offices in Atlanta, GA and Minneapolis, MN. Our mission is to deliver independent compensation guidance to Community Banks to help them attract, motivate and retain their key employees. With an exclusive focus on the banking marketplace over the past twelve years, our lead consultants have a unique industry perspective and expertise to offer our clients. Why choose Blanchard Consulting Group? Exclusive and extensive experience in the banking industry helps us understand the market and the unique challenges facing banks in today s environment. We pride ourselves on our relationship and accessibility with our clients. We are a truly independent compensation consulting firm. We do not market any other services or products to our clients. With an exclusive focus on the banking marketplace over the past twelve years; our staff has worked with over 400 community banks. Our CEO has a graduate degree in Industrial/Organizational Psychology which directly deals with workplace motivation and reward strategies. Our Lead Consultants are published authors in Bank Director, Ohio Record (Ohio Bankers League Journal), ABA, and WIB. Multiple speaking engagements at Bank Director Conference, ABA, Bank CEO Network, Southeast Bank Management and Director Conference, and several state or regional banking associations. Blanchard Consulting Group is a Gold level sponsor for the Annual Bank Director Compensation Conference that was held in Chicago, IL this past November. 41

42 INDEPENDENT BANK COMPENSATION CONSULTANTS

43 MBA Annual Conference Executive and Director Compensation Trends and Best Practices SCORE SHEET Question Answer 1) We have compared our base salary for our executive to industry market data 2) We have a documented performance based cash incentive/bonus plan 3) We utilize more than "one lone" financial goal in our cash bonus/incentive plan 4) Our plan has both company and department/individual performance metrics 5) We have documentation that discusses how our incentive plan/s work 6) We have reviewed the riskiness of our incentive plan design and goals 7) We have reviewed regulations and discussed their impact on our incentive plans 8) We have a "clawback" policy in place that covers our incentive plans 9) We have compared our incentive design and payouts to industry market data 10) We have compared our incentive design and payouts to industry market data 11) We have explored/discussed the usefulness of (or are using) equity based compensation (includes real equity or synthetic equity) 12) We have talked about the need to link our executive compensation to our shareholders through our incentive compensation plan 13) We have explored/discussed (or are using) some form of deferred compensation 14) We have reviewed and/or discussed employment agreements for the top executive officers 15) We have executive officer stock ownership requirements 16) We have compared our director compensation to industry market data 17) Our director compensation is NOT based on performance or an incentive plan 18) We pay addition compensation to the chairperson of our board and committees 19) We have granted equity or a cash based long term incentive to our directors 20) We have Director stock ownership guidelines TOTAL SCORE