Current Trends and Issues in Banking Compensation and Benefits Programs

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Current Trends and Issues in Banking Compensation and

Benefits Programs

November 18, 2014 Kristine Oliver Managing Director [email protected]

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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

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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

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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 ‘long-term’ 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

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Highlights from Pearl Meyer & Partners’ 2014

Northeast Employee Benefits Survey

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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

Cost as a Percent of Payroll (Median) Total Benefits

Total Medical

Total Other Group

Benefits Retirement Plan 2014 2012 2014 2012 2014 2012 2014 2012 < $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%

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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 $1,380 ---- ---- ---- 67% 63%

Vision 66% $111 $271 ---- ---- ---- 12% 10%

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Wellness Benefits

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%

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%)

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95% of participants use a 3

rd

_{party vendor to administer these plans versus}

administering on their own

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)

Section 125 Plans

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Majority of institutions indicated that they offer a Section 125 Plan

Top 10 Vendors (in order of prevalence)

HR Concepts (29 banks) Choice Strategies (3 banks)

Advanced Benefits Strategies (4 banks) Northeast Retirement Services (3 banks) EBS RMSCO (4 banks) Sentinel Benefits (3 banks)

Group Dynamics (4 banks) Wageworks (3 banks) ADP (3 banks)

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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

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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)

Retirement – Defined Contribution Plans (401K)

Employer matches the employee’s contribution, up to the employee’s contribution of… Match Percent 0 – 49% (8 banks) 50% (30 banks) 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% -- -- -- --

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Current Trends and Issues Impacting Executive

Compensation

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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

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Top 5 Trends in Executive Compensation

#1: Pay for Performance

Historical Realizable Pay Target Pay Analysis Prospective Pay Leverage

 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

 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

 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

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Top 5 Trends in Executive Compensation

#2: Base Salary Increases

Executive Base Salary Increases

Merit increase percentages for 2015 are strengthening relative to 2014

Source: PM&P On Point Survey – Looking Ahead to Executive Pay Practices in 2015, Banking Edition 26% 13% 12% 6% 26% 41% 50% 59% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

FY14 FY15 FY14 FY15

CEO CEO Direct Reports

Expected FY15 Base Salary Changes vs. FY14

Not Sure Cut or Freeze 0% - 2% 2% - 4% 4% - 6% Above 6%

 The top three factors for executive pay

decisions within the banking industry include:

Company performance

Executive compensation variance to market Overall economic / market conditions

0 1 2 3 4 5 6 7

Projected cost of living increase Regional/local conditions Industry conditions Projected merit rate increase Overall economic/market

conditions Executive position (variance) to

market

Company conditions (performance)

Factors Influencing Merit Budget

Over $3 billion Under $3 billion All Banks

Most Important………...Least Important

1 2 3

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Top 5 Trends in Executive Compensation

#3: Annual Incentives

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. 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% No Payout 0% - 50% 50% - 75% 75% - 100% 100% - 150%

Expected FY14 Annual Incentive Payout as a % of Target

All banks <$ 3 billion $3 billion or greater

Annual Incentive Program Payout Levels

Source: PM&P On Point Survey – Looking Ahead to Executive Pay Practices in 2015, Banking Edition

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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

0% 20% 40% 60% 80% 100% 120%

Individual Effort Strategic and Other Non-Financial …

Profitability Returns and Balance

Sheet Measures Asset Quality / Capital

Adequacy Top Line / Revenue

Profits

Performance Metric Prevalence

$3 billion or greater <$ 3 billion All banks

 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

Source: PM&P On Point Survey – Looking Ahead to Executive Pay

46% 58% 20% 48% 38% 67% 6% 4% _13% 0% 20% 40% 60% 80% 100%

Perceived Difficulty of FY15 Target Performance Goals vs. FY14 Target Performance Goals

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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 2014

 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

Source: PM&P On Point Survey – Looking Ahead to Executive Pay Practices in 2015, Banking Edition

0% 20% 40% 60% 80% 100%

LTI Value Expecations for FY15

Lower Similar Higher Unknown / NA

LTI Vehicles 14% 21% _3% 45% 38% 54% 27% _25% 37% 14% _17% 6% 0% 20% 40% 60% 80% 100%

Expected Mix of 2014 LTI Mix

Options Time-Vested Restricted Stock Performance Shares / Units / Options Cash LTIP

Time-Based Perf-Based

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Top 5 Trends in Executive Compensation

#5: Employment / Change-in-Control Agreements

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All of the M&A activity has unearthed many surprises related to inadequate

planning in this area (especially if there’s a SERP involved)

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Employment contracts limited to CEO and select direct reports

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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

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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?

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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

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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

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A Balanced Executive Compensation Program

Base Salary _{Incentive Plan}Annual

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

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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

Comp. Committee & Advisor

independence; Committee’s Oversight Authority

• SEC issued Final Rules in June 2012

• Exchanges issued proposed rules in Sept. 2012

• SEC finalized the NYSE & NASDAQ listing standards related to compensation committees and their advisors in Jan. 2013

• 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 • Final and Proposed Rules “pending” per SEC

• Likely not effective until fiscal 2015 or later

Pay-for-Performance Disclosure • Final and Proposed Rules “pending” per SEC

• Likely not effective until fiscal 2015 or later

Internal Equity Ratio Disclosure

• Final and Proposed Rules “pending” per SEC, but may be approved as early as September • Likely not effective until fiscal 2015 or later

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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

www.pearlmeyer.com/banking.

Kristine Oliver

Managing Director – Boston (508) 630-1550