Current Trends and Issues in Banking Compensation and ... · PDF fileCurrent Trends and Issues in Banking Compensation and Benefits Programs November 18, ... Benefit Costs as a Percent

©2014 Pearl Meyer & Partners, LLC

Current Trends and Issues in Banking Compensation and

Benefits Programs

November 18, 2014

Kristine Oliver

Managing Director

[email protected]

508.630.1550

mailto:[email protected]

1 ©2014 Pearl Meyer & Partners, LLC

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



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



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


Highlights from Pearl Meyer & Partners’ 2014 Northeast Employee Benefits Survey


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%

Benefit Costs as a Percent of Payroll

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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%

Health and Wellness Plans


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%)

• Additional paid time off also commonly provided to participants


95% of participants use a 3rd 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

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)


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

Retirement – Defined Benefit Plans


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% -- -- -- --


Current Trends and Issues Impacting Executive Compensation


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


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

– Results can be used to inform future adjustments to pay / LTI mix and pay leverage


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


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


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

Practices in 2015, Banking Edition

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

Similar Tougher Unknown / NA


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


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


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?


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


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


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


Dodd-Frank Update


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


Internal Equity Ratio Disclosure • Final and Proposed Rules “pending” per SEC, but may be approved as early as September


Disclosure of Hedging • Final and Proposed Rules “pending” per SEC



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 [email protected]

http://www.pearlmeyer.com/banking





mailto:[email protected]

Documents

Current Trends and Issues in Banking Compensation and ... · PDF fileCurrent Trends and Issues in Banking Compensation and Benefits Programs November 18, ... Benefit Costs as a Percent