Upload
sheena-anderson
View
216
Download
0
Tags:
Embed Size (px)
Citation preview
©2009 Pearl Meyer & Partners, LLC
113th Annual Convention
Executive Compensation: Best Practices for Today’s Environment and Beyond
Laura Hanf, Vice President
2©2009 Pearl Meyer & Partners, LLC
The Challenging Environment
Banks are suffering… 37 banks have failed in 2009, including one North Carolina bank
• Current failure rate is higher than the past six years combined• At the end of 2008, the FDIC had a list of 252 troubled institutions
As of the end of May, 594 banks have received TARP capital infusions totaling approximately $199.2 billion• 27 institutions in North Carolina (4.6%)• $29.7 billion received by North Carolina banks, roughly 15% of
total ($3.7 billion excluding Bank of America)
…but the worst may be over… The economy is “clearly stabilizing” – Geithner, Newsweek 5/18/2009
Banks are starting to repay TARP funds • Approximately $1.7 billion repaid as of the end of May• Treasury approved repayment from 10 banks - $68 billion
3©2009 Pearl Meyer & Partners, LLC
The Challenging Environment
Lawmakers are introducing additional legislation … Three noteworthy events last week
• New TARP oversight program and final interim rules• Treasury statement setting forth five compensation principles
1. Compensation should properly measure and reward performance
2. Compensation should be structured to account for the time horizon of risks
3. Compensation should be aligned with sound risk management
4. Reexamination is needed as to the necessity of golden parachutes and SERPs
5. Transparency and accountability should be promoted
º Say on Pay
º Independent compensation committee
4©2009 Pearl Meyer & Partners, LLC
The Challenging Environment
Lawmakers are introducing additional legislation …
Three noteworthy events last week (continued)
• SEC proposed updated "proxy access" rules that would give large shareholders the ability to nominate as many as 25% of all directors
SEC also expects to publish proposed amendments to the existing compensation disclosure rules• Disclosure of compensation for non-NEOs revisited • Discussion regarding risk in compensation programs may be
required of all public companies
…but not all banks can be painted with a broad brush “Without community banks, the current financial crisis would be a lot
worse.” – “Are Small Banks the Future?,” New York Times Magazine, May 17, 2009
5©2009 Pearl Meyer & Partners, LLC
The Challenging Environment
Intense scrutiny of executive compensation practices
Community banks painted with same brush as the “troubled” Wall Street Banks
Changing (radical) landscape of compensation best practices – impacting all banks (and all companies)
Continuing need to attract, motivate and retain top talent
Pending shortage of executive talent as boomers retire; most banks have limited executive “bench strength”
Generational view/differences – what motivates, attracts and retains new leaders?
Financial crisis
Global economic recession
Government intervention
FDIC assessment
Bank regulator concerns (consolidation, pressure)
Bank failures
Earnings pressures
Credit risk
Housing slump
Plunging stock prices
Mergers & Acquisitions
Amidst unprecedented financial, economic and
business turmoil …
…community banks need to address critical issues ...
6©2009 Pearl Meyer & Partners, LLC
…Where do we go from here?
7©2009 Pearl Meyer & Partners, LLC
From Here to There…
Consider the optics
Make the most out of disclosure
Support your compensation committee in moving from competence to excellence
Address “risky business” in your incentive plans
Think long-term
Pay for performance
Think holistically about compensation
8©2009 Pearl Meyer & Partners, LLC
Consider the Optics
Compensation has become increasingly a populist issue• “Make no mistake about it: the taxpayer dollars are being used for
that golf…That is not what most people thought was going to happen with our money."– Michael Q. Sullivan, President of Texans for Fiscal
Responsibility
Increased scrutiny is coming from a number of constituencies • Public and media • Politicians and government• Shareholders• Shareholder advisory firms (e.g., RiskMetrics)
Say on Pay likely to become a reality for all public companies • Required for TARP participants; current administration pushing for
similar requirement for all public companies• Non binding shareholder vote on executive compensation • Currently no specific format but “evolving; RiskMetrics “Against”
votes will drive significantly lower shareholder support
9©2009 Pearl Meyer & Partners, LLC
Consider the Optics
“Hotbeds” for scrutiny • Perquisites• Business and entertainment expenses• Gross-ups• Employment and severance agreements • Supplemental retirement programs • Supersized incentive awards (short- and long-term)
10©2009 Pearl Meyer & Partners, LLC
Make the Most out of Disclosure
Proxy disclosure is required for public companies but a clear and concise rationale for compensation decisions should be an expectation for all institutions• Not just the “what” but also the “why” – documents philosophy,
decision making process and outcomes• It’s an opportunity to tell your story – good (or bad) disclosure could
have an effect on shareholder votes for stock plans, say on pay and directors
Make the right decision first then consider how to disclose
Strengthen areas dealing with “glossed over” requirements • Explain decision making process not just outcomes• Clarify roles of committee, management and consultant in decision
making process; identify consultant’s independence • Discuss internal pay relationships and differences in pay decisions• Disclose specific performance metrics and results (competitive harm
is a tough hurdle)• Consider format; supplemental information can be beneficial
11©2009 Pearl Meyer & Partners, LLC
Compensation Committee – from Competence to Excellence
An excellent committee…
Is proactive, not reactive • Annual calendar and sample agendas• Materials provided in advance • Major and/or complex decisions spread over more than one
meeting
Looks beyond the market-data
Thinks about succession planning
Has developed techniques to assess performance goals and performance relationships• May seek input from audit committee or other sources to assess
difficulty of performance goals• Use dynamic modeling • Compare institution to peers
12©2009 Pearl Meyer & Partners, LLC
Compensation Committee – from Competence to Excellence
An excellent committee…
Doesn’t negotiate in a piecemeal fashion• Tally sheets• Wealth analyses
Can disagree without damaging its relationship with management• Discussions happen along the way• Time with management outside of boardroom
Never surprises the Board
Continually strives to improve • Annual committee evaluations and planning
13©2009 Pearl Meyer & Partners, LLC
Address “Risky Business”
Highly leveraged incentive plans are partially to blame for the financial crisis but not a common structure in community banks
TARP participants must conduct a risk assessment semi-annually; the assessment is for all compensation plans• Likely that all public and all financial institutions (private and
public) will be expected to perform assessment in the future Process
Use a team approach – risk officer, internal audit, human resources, legal, etc.
All plans have risk – make sure the focus is on “excessive” and/or “unnecessary” risk
Potentially risky measures could be counterbalanced by internal processes or other incentive plan measures
Business Risk
Assessment
Identify Practices that Drive “Risky”
Behaviors
Linkage to Compensation
Programs
Change Programs (as appropriate)
14©2009 Pearl Meyer & Partners, LLC
Questions to ask:
Do incentive plan metrics reflect the company’s business strategy?
What incentive measures are tied to potentially “risky” behaviors?
Is there an appropriate balance and mix of performance metrics?
Is the leverage (upside and downside) appropriate?
Is there appropriate focus on long-term/sustained performance?
Are there protections/controls in place to avoid excessive payouts?
Do the payouts align with shareholder interests?
Does performance and resulting rewards align with market practice?
Address “Risky Business”
15©2009 Pearl Meyer & Partners, LLC
Think Long-term
Along with highly leveraged incentives, the focus on short-term results are much to blame for the financial crisis
Compensation practices should be adjusted to:• Place more focus on sustainable performance • Ensure reward periods match the timeframe required to determine
whether a decision/action was successful• Hold back a portion of compensation which is at risk if
performance is not sustained in future years
Short-term incentive techniques • Implement a rolling incentive plan• Paying incentive awards above a certain level in restricted stock
or unvested deferred compensation
Long-term incentive techniques • Stock ownership and retention guidelines• Hold until or past retirement requirements
16©2009 Pearl Meyer & Partners, LLC
Pay for Performance
For TARP participants, compensation restrictions limit pay for performance – base salary and restricted stock are guarantees
Balance is the key to effective pay for performance • Short-term and long-term• Absolute and relative• Bank, team and individual• Formula and discretionary
Performance measures should:• Link to business strategy and goals• Include complementary measures • Motivate the right behaviors/results• Focus on more than one but a small number of critical measures
Example “unacceptable” practice: do not use a single (or the same) measure(s) in both short and long-term plan.
17©2009 Pearl Meyer & Partners, LLC
Pay for Performance
Target performance goals should raise the bar, but be realistic• Minimum – lowest level of acceptable performance – guideline 80%
of time• Target – reflects budget/expectations – guideline 60-70% of time• Stretch – stars are in alignment – guideline 60-70% of time
If the Bank’s ability to predict is limited, consider:• Relative measures• Widening the range of performance between minimum and stretch
while also lowering the incentive opportunity • Providing the Committee with some discretion but define
expectations upfront
Remember incentives are not guaranteed payments• Results aren’t there – don’t pay out• Committee should have negative discretion• Good things not captured by short-term incentive plan measures are
likely to make their way into long-term incentive plan payouts
18©2009 Pearl Meyer & Partners, LLC
Pay for Performance
CEO total direct compensation relative to 3-Year TSRAn Illustration of banks between $1b - $15b Assets
CompensationRanking
PerformanceRanking
High performer &Low compensation
Low performer &Low compensation
High performer & High compensation
Low performer &High compensation
19©2009 Pearl Meyer & Partners, LLC
Compensation – Thinking Holistically
Focus on the total package and mix• Different components focus on different needs
» Fixed vs. variable» Annual vs. long-term» Reward vs. benefit
• Take a holistic view of compensation » What is overall “message” of the compensation package? Is it the
right message? Tally it up
• What does it look like when all the components are added up together?
• How does total compensation vary under different termination scenarios?» Change in Control» Termination (voluntary and involuntary)» Retirement» Disability
20©2009 Pearl Meyer & Partners, LLC
Compensation – Thinking Holistically
Conduct Scenarios• How does total compensation vary under different performance
scenarios? (dynamic pay modeling)» What is the total potential upside/downside rewards of all
elements of performance-based compensation?» What is the executive’s payouts (and the company's actual
total exposure) at the extremes of performance?
21©2009 Pearl Meyer & Partners, LLC
In Summary
Executive compensation is under increased scrutiny
Expectations about executive pay are high
Issues are complex
The world as we know it IS changing
At minimum, all banks should:• Conduct a risk assessment• Ensure incentives support business goals and are structured for
sustainable performance• Balance short- and long-term incentives and use a portfolio of
performance measures• Ensure total compensation is clearly aligned with both company
performance and interests of shareholders
Public banks should:• Tell their story and make the most out of proxy/CD&A disclosure • Be prepared for changes as various constituencies develop a
greater voice in executive compensation
22©2009 Pearl Meyer & Partners, LLC
Contact Information & Additional Resources
Contact Information Laura Hanf
• [email protected]• (704) 844-0437
Additional Resources www.pearlmeyer.com/banking
• Trends and Issues• Client Alerts • Research Reports