QUALITY
INDEPENDENT
VALUE
RELATIONSHIP
EXPERTISE
April 2013
Trends and Best Practices with Non-Executive Pay
MBA BEST
Bankers Education Summit and Trade Show
April 24-26, 2013
Michael Blanchard CEO
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Qualified Plans Equity Plans Cash Compensation Annual Salary Hourly Wages Pension 401(k) ESOP Profit Sharing Supplemental Executive Retirement Plans (SERPs) Salary Continuation Plans (SCPs) Deferred Compensation Plans (DCPs) Stock Options Restricted Stock Phantom Stock Stock Appreciation Rights (SARs) Performance Units Supplemental Disability
Long Term Care
Employment Agreements Control (CIC) Country Clubs, Auto Allowances, etc.
Elements of Total Compensation
Total Compensation Salary Compensation Qualified Plans Non-Qualified Plans
Equity Plans Other Benefits & Perks Cash Compensation Annual Bonus Annual Incentive Plan
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General Industry Salary Increase Data – 2012
Historical Environment
Annual salary increases of 4%-5% were very common
Economic Downturn (‘08, ‘09, ‘10)
Many banks froze salary increases entirely or limited increases
Today’s Salary Increase Environment
Salary increases have become common again in 2011, 2012, & 2013
General industry surveys 3%
2013 – Blanchard Preliminary Results
Blanchard Survey ‘12 – 89% provided increases / 3% Median Increase Moss Adams/WIB Survey ‘12 – Avg. 7.2% executive, 3.7% non-executive
Market research being utilized
Proxy Data From Public Peer Groups, National Industry Surveys, State/Regional Surveys, Internal & Consultant Data
Salary grades and administration policies being reviewed and adjusted
Strategic use of salary budgets (not everyone is the same)
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Salary Grade Design Best Practices
Salary Grade Design Best Practices:
• Market benchmarking salary levels for at least 50% of positions at the Bank every two-three years; the rest can generally be “slotted” using internal equity considerations.
• Assessing the grades and possibly making minor adjustments on an annual basis.
• Standardizing and defining the levels of positions – Employees should know what skills and/or experience are required to move up a level in a given role.
• Separating supervisors from the staff they supervise by at least one salary grade.
• Using standard grade widths and midpoint differentials throughout the system. Widths and midpoint differentials may increase in the higher grades allowing for growth within a grade for “career level” positions.
• Using broadband grade(s) for the senior executive team and benchmarking those salaries and cash compensation levels to the market at least every two years.
Driven by both the Pay Transparency and the Strategic Salary Increase System
trends, is an increase in using well designed salary grade systems in community
banks. Banks are now recognizing the efficiency associated with market based
grades (rather than individual position ranges).
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Salary Increase Matrix
Baseline/Target Percentage Increase = X%
Employee Salary as a Percent of Grade Midpoint
Minimum - 95% of Midpoint 95.1% to 105% 105.1% to Maximum
Low in Salary Range Middle of Range High in Range
Employee Performance Rating Salary Increase Percentages
Far Exceeds Expectations X% X% X% Exceeds Expectations X% X% X% Meets Expectations X% X% X% Does not Meet All Expectations X% X% X% Fails to Meet Expectations X% X% X%
This table shows an example of a performance-based salary increase matrix. The
percentages will vary based on the bank’s budget, the employee’s performance, and
the employee’s positioning within their salary range.
PERFORMANCE
MEASUREMENT
MAJOR ACCOUNTABILITES Achievement of end results measured against pre-determined standards. Emphasis on what is achieved. COMPETENCIES Critical behaviors, processes, skills, andabilities measured against expected and established standards.
Emphasis on how things are done.
Performance Appraisal Components
A current trend is for Banks to update their performance appraisal forms to include job tasks and behaviors with measurable or quantifiable performance criteria. The key to the design of a successful appraisal form is to limit the number of measures and focus on the critical success factors of the position.
Accountabilities Measures Standards Results Reviewed Results Achieved Rating Weight Score
(1) Responsible for the design, implementation, and support of network hardware, software, connectivity and expense control.
Quality, Timeliness
Systems available 90% of the time. Address issues within 2 business days and resolve 90% of the issues. Complete events and updates on schedule >90% of the time.
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(2) Support the needs of other employees and departments relative to issues and assistance that they need and provide updates of network, devices, and software.
Responsiveness, Timeliness, Customer
Satisfaction
Issues addressed within 2 business days and 90% of issues are resolved. Keep Manager informed of issues on a monthly basis.
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(3) Maintain, clean, and contact for assistance on network equipment including servers, computers, hubs and printers.
Performance
Perform Quarterly review of all network equipment for patches, error logs, and file space issues. Contact Third party vendor for assistance within 8 business hours of awareness of any issues.
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(4) Ensure compliance with all Technology Policies and Procedures. Revises and maintains procedures.
Technology, Compliance
Satisfactory rating from
External Auditor. 1
(5) Responsible for the bank's systems security. That includes firewall, virus protection,
assignment of passwords, system user authorities and other system related oversight.
Performance, Quality
Perform, resolve, and document the quarterly vulnerability test. Review weekly firewall reports for any issues to resolve. Resolve issues on firewall reports within 5 business days.
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Annual Incentive Plan Purpose and Prevalence
Objectives
Motivate and reward achievement of pre-defined goals and metrics
Reward employees for performance that is within their control
Align employee behaviors with the Bank and shareholders
Position total compensation at a market competitive position to encourage
retention
Provide “upside” and an ability to differentiate “superstars”
Prevalence Results – Blanchard Surveys
80% of Banks in 2012 Survey had cash incentive plan (9% developing)
63% of Banks in 2012 have Compensation Committees that have reviewed
plans for risk
54% of Banks have modified plans in last three years based on changing
bank regulations
79% of Banks paid bonuses in 2012 based on 2011 performance
Over 50% of Banks have an equity plan in place as of 2012
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Regulatory Impact on Incentives
BANKS CANNOT TALK INCENTIVES WITHOUT ACKNOWLEDGING THE REGULATORY IMPACT
Regulators Joint Guidelines on Sound Incentive Compensation (June 2010)
• Impacts all banks through the regulatory review process.
• Supports pay-for-performance programs, as long as they are designed appropriately and are not viewed as excessive and do not encourage unnecessary and excessive risk.
• Recommends that incentive compensation programs utilize a combination of both profitability goals and strategic goals that are linked to the Bank’s long-term viability.
• Incorporates a review of compensation programs as part of the regulatory review process.
• Recommends that the board of directors/compensation committee should directly approve compensation arrangements involving senior executives and closely monitor such payments.
Other Governmental Regulations and Guidelines
• TARP regulations impact the type and amount of incentive compensation given to top executives. • SEC Proxy Guidelines now require more disclosure for SEC Banks in the CD&A.
• Dodd-Frank Act ensures that compensation programs aren’t excessive and don’t encourage unnecessary risk. Recommendations are similar to the Regulators Joint Guidelines on Sound Incentive Compensation.
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Regulation Z – Loan Originator Compensation Rules
Final Rule Effective January 20, 2013
• Rules enacted to protect mortgage borrowers from unfair, abusive, or deceptive lending practices
• Rules apply to all persons classified as a Mortgage Loan Originator (MLO)
• MLO Definition: Person who, for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. Includes: Mortgage brokers, both companies and their employees who engage in originations (loan officers); and loan officers employed by creditors.
Key Provisions
• Prohibits payments to a loan originator based on the loan’s terms and conditions (such as interest rate, annual percentage rate (APR), loan to value rate (LVR)) .
• Terms or conditions do not include: overall loan volume, long-term loan performance, hourly basis, existing/new customer, flat fee, quality of loan files, etc.
• Prohibits MLO’s from receiving payments directly from a consumer while also receiving compensation from the creditor or another person.
• Prohibits MLO’s from “steering” a consumer to a loan offering less favorable terms in order to increase the MLO’s compensation.
• Provides a safe harbor to assist with the anti-steering rule – to count the originator must provide the consumer with multiple loan type offers that include the lowest rates, fees, etc. for which they qualify.
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Regulation Z – Loan Originator Compensation Rules
Mortgage Lenders Can Now Participate in Bank-Wide Incentive/Profit Sharing Plans
A significant change in the final rules is the ability for mortgage loan officers to participate in bank-wide incentive plans that are based on company profits. Under the original rules, mortgage lenders were prohibited from participating in any compensation plan that was based on profits from the terms of their transactions, from the mortgage department, or on overall bank profitability. These lenders can now participate in bank-wide incentive plans as long as contributions are made to a qualified retirement plan or the lender meets either of the other two qualifiers below:
1. Profit-Sharing Through a 401(k) Plan (or other qualified retirement plan): Mortgage-related
business profits can be used to make contributions to certain tax-advantaged retirement plans, such as a 401(k) plan.
2. Lender Originates 10 Or Fewer Loans: The individual loan originator originated ten or fewer
mortgage transactions during the preceding 12 months.
3. Incentive Payout Is Less Than 10 Percent of Total Compensation: The Company
profit-sharing bonus payout amount does not exceed 10 percent of the individual loan originator’s total compensation.
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Types of Annual Incentive Plans
Other We do not have an annual incentive plan Currently Designing an Annual Incentive Plan Discretionary Incentive Plan Pooled Approach/Profit Sharing Based on Profits at the End of
the Year
Formal Performance-Based Plan
3% 11% 10% 21% 13% 42%
• 42% of the participating banks have a performance-based plan.
• 53% of the banks reported having a formal and central document that lists out the various incentive plan(s) and describes how each of the incentive plan(s) work.
• 67% of banks (up from 56% reported in our 2011 survey) reported their compensation committee has reviewed their incentive plans for risk and 10% stated they planned to do so in 2012.
• 58% of the banks reported that they have modified (within the past 3 years) their incentive plan(s) due to the changing bank regulations. Eleven percent of respondents are currently working on modifications.
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Annual Incentive Plan Payouts
• 83% of banks intend to/or have paid incentives in 2012 for 2011 performance (in our 2011 compensation trends survey 77% of respondents intended to (or already had) pay incentives in 2011 for 2010 performance).
• The most prevalent profitability and/or strategic incentive criteria used are:
Net income (66%)
Board discretion (38%)
Deposit growth (32%)
Loan growth (31%)
ROA (31%)
Strategic planning goals (30%)
83%
13% 4% Incentive payouts
No incentive payouts
No payouts for executives; however, will have some payout for staff
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Evolution of Officer Level Annual Incentive Plans
Based on overall bank profitability or profitability of a business unit
Problem:
- No differentiation for high and low performers - Focus on profit and not strategic goals
- Motivation issues for producers and lower level officers
Historical Profit-Sharing Plans
Recommended
Performance-Based Plan
Based on a combination of overall bank, strategic, and individual goals
Solution:
- Provides reward based on individual/department performance
- Includes strategic goals linked to long-term success - Includes criteria that is within the control of lower
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Performance Goals Examples How/When Will Specific Goals Be Determined
Bank Performance Net Income ROAA / ROAE Earnings Per Share Efficiency Ratio Asset Quality
Core Deposit Growth Raising Capital
Strategic Planning/Budgeting Process?
Department Performance
Varies by Function
Lending (lending growth, quality, profitability, yield, cross-selling)
Retail (deposit growth, cross-selling, non-interest income)
Operations (productivity, service quality, turnaround time)
Executives Develop Goals with Function/Department Managers?
Individual Performance Varies by Role/Job
Portfolio growth/quality
Fee Income (except Mortgage lenders) Cross-Selling/Referrals
Project deliverables Performance evaluation
Managers Develop Goals with Employees?
For the first plan year, consider using annual performance review ratings as the basis for the individual level award criteria, unless other individual goals can be clearly defined and accurately tracked.
Page 18 Payout $40,000 Maximum 40% $20,000 TARGET 20% $10,000 Threshold 10%
Threshold TARGET Maximum
Factor Weight Indiv. Weight 25.0% 75.0% Notes:
A) Incentive predicated on satisfactory portfolio asset quality and individual performance evaluation.
B) The Bank will use a proportional approach to calculate incentive payouts for performance that falls in-between levels.
Summary of Criteria Threshold Target Maximum
100%
Overall Bank Goal
(ROAA) 0.80% 1.00% 1.20% ABC Bank Loan Officer Salary = $100,000 Individual Goal (Portfolio Profitability) $400,000 $500,000 $700,000
Sample Incentive Plan Worksheet
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Bonus Bank Concept
Incentive Incentive Bonus Bank Account EOY Earnings Bonus Bank Bonus Bank Base Award Bonus Cash Deferral Crediting Credited Deferral Deferral Year Salary Percent Award Payment Amount Rate to Account Payout* Balance 1 100,000 20.00% 20,000 13,400 6,600 7.50% 495 0 7,095 2 104,000 20.00% 20,800 13,936 6,864 7.50% 1,047 0 15,006 3 108,160 20.00% 21,632 14,493 7,139 7.50% 1,661 0 23,805 4 112,486 20.00% 22,497 15,073 7,424 7.50% 1,747 7,935 25,041 5 116,986 20.00% 23,397 15,676 7,721 7.50% 1,831 8,347 26,246 6 121,665 20.00% 24,333 16,303 8,030 7.50% 1,915 8,749 27,442 7 126,532 20.00% 25,306 16,955 8,351 7.50% 1,998 9,147 28,644 8 131,593 20.00% 26,319 17,633 8,685 7.50% 2,084 9,548 29,865 9 136,857 20.00% 27,371 18,339 9,033 7.50% 2,171 9,955 31,113 10 142,331 20.00% 28,466 19,072 9,394 7.50% 2,260 10,371 32,396
EXAMPLE OF A MANDATORY “BONUS BANK” DEFERRAL
The purpose of a mandatory deferral is to ensure long-term performance (i.e., credit quality) and to build a retention device into an annual incentive program. In the following example, one-third of each annual incentive is placed into the mandatory deferral account (Bonus Bank) each year. During this time, the deferral account earns interest at a rate based upon a formula equal to 75% of the Bank’s ROE, further aligning the interests of the officer to those of the bank. Starting at the beginning of the fourth year, one-third of the bonus bank account is paid to the officer, if he/she meets long-term performance qualifiers.
Example Assumptions:
• Annual incentive: 20% annual incentive at targeted performance • Salary: $100,000, salary increased by 4.0% per year
• Deferral percent: 33%
• Deferral period: Three year vesting with one-third of the deferral account paid out at the beginning of year four • Interest earnings: 75% of ROE, assuming 10.0% ROE (7.5% effective APR)
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Long-Term/Equity Incentives*
The table below shows the prevalence of long-term & deferred compensation programs offered at each of the participating banks.
We do not currently have any equity, "synthetic equity", or deferred compensation program(s) in place
Deferred compensation Supplemental retirement program (SERP, Salary Continuation, etc.) Phantom or synthetic stock Stock appreciation rights (cash-settled) Stock appreciation rights (stock-settled) Restricted stock Stock options 24% 32% 22% 9% 5% 4% 30% 39%
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Different Types of Long-Term Incentives
Option Equity
– Value only with appreciation over time.– Real equity: Incentive stock options (ISOs) and Nonqualified stock options (NSOs) – Synthetic equity: Stock/Book Value appreciation rights plans (SARs)
Stock Equity
– Value in basis plus appreciation over time.– Real equity: restricted stock, performance shares – Synthetic equity: Phantom Stock
Performance-Based Deferred Compensation
– Value of deferred compensation plan or retirement benefit is linked to the achievement of annual performance goals.
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•
Historical Environment
Stock options were the preferred equity vehicle (no initial cost to company) Most equity related grants were purely discretionary grants
•
2008 & 2009
Almost 90% of all stock option grants in public banks became significantly Underwater Regulation started to impact equity grants – TARP prohibited stock option grants for
certain officers
Restricted stock and salary stock became preferred vehicles
•
Current Environment
Omnibus plans are becoming prevalent
Long-term incentives have become favorable in the eyes of regulators
A performance-based methodology for granting equity (similar to an annual incentive) Restricted stock has become the recommended award type
Vesting provisions are typically 3-5 years
Private banks should be discussing the usefulness of long-term awards
Phantom stock, cash-settled stock/book value appreciation rights, performance units
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Historical Environment
Supplemental Retirement Plans (SERPs or SCPs) and Non-Qualified Deferred Compensation Plans (DCPs) were prevalent amongst executive ranks in community banks
BOLI often funded these non-qualified benefit plans
Change-in-Control (CIC) severance payment programs prevalent and often included gross-up clauses for 280G
2008 & 2009
Regulation starts to impact executive benefits
TARP - prohibits gross-ups and severance payments for certain officers and prohibits the modification or addition of supplemental retirement plans for certain officers
Perquisite policies and disclosures become common
Current Environment
Continued scrutiny being placed on executive benefits and perquisites
SERPs, SCPs, DCPs – usefulness and appropriateness being questioned and some plans are being cancelled as the need for capital rises
Employment Agreements & CIC payouts – usefulness and appropriateness being questioned (does an executive with large equity holdings really need an additional CIC severance payout?) Perquisites being reviewed and need justification – auto allowances, country clubs, etc.
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COMPENSATION COMMITTEE ROLE
IN NON-EXECUTIVE PAY
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Compensation Committee Responsibilities
Compensation Committee Roles and Responsibilities for Non-Executive Pay
• Base Salary
The committee does not typically determine salaries outside for the senior management team; however, the committee sets and approves bank-wide salary administration policies, often times using salary grades and/or individual position ranges.
The committee will also typically review and approve the average bank-wide salary increase percentage or budget that is used to make salary decisions throughout the Bank on an annual basis.
• Annual and Long-Term Incentives
As required under the Sound Incentive Compensation Guidelines released in 2010 and Dodd-Frank, the Compensation Committee should review all incentive plans (both executive and non-executive) to ensure they don’t encourage any unnecessary risk.
The Committee will also typically review producer programs to ensure that the earning opportunities in these plans are reasonable and include risk mitigators such as deferrals. A trend is to include a “bonus bank deferral” in producer plans which requires a portion of the payout be deferred until any performance risks can be realized (i.e., typically a 1-3 year period of time).
The Committee will often determine how far down in the Bank that long-term incentives or equity is utilized. The Committee may authorize a set amount or pool of shares for non-executives to receive these types of grants on a discretionary basis as determined by the CEO or department head.
• Benefits
The Committee will typically approve the type of benefit programs that are utilized for all employees including health and welfare benefits and retirement programs. Qualified retirement/benefit programs such as a 401(k) plan, profit sharing plans, and Employee Stock Purchase Plans are commonly utilized in the banking industry for non-executive employees. Directors will often times review the costs of these programs to ensure they are reasonable as compared to market.
Consultant Biography
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Mr. Michael Blanchard – CEO 678-461-9016 direct
mike@blanchardc.com
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.
Why Blanchard Consulting Group?
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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.
