executive and incentive compensation - utah bankers … conference 2015/kell… · ·...

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Attracting QualityDeveloping Loyalty

Embracing Leadership

1255 West 15th Street, Suite 830; Plano, TX 75075 / www.bcc-usa.com

Executive and Incentive Compensation

COPYRIGHT © 2015 by Bank Compensation Consulting, All Rights Reserved

Bank Compensation Consulting

Offering compensation programs that are competitive is key to attracting andretaining officers and executives. Bank Compensation Consulting (BCC) specializesin assisting banks with the evaluation of their compensation programs.

With BCC’s help, banks identify deficiencies in their current programs and createcustomized plans to fill these gaps. BCC’s team of consultants and servicepersonnel collectively have over 250 years of experience, working with more than600 banks in 40 states. They assist their clients with achieving their financialgoals and enhancing shareholder value.

BCC understands the regulatory complexity of designing and administering theseplans. In order to provide “stress free” guidance to their clients, BCC hasdeveloped strategic relationships with highly-rated insurance carriers and nationalaccounting and law firms that specialize in nonqualified benefits and BOLI forbanks.


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About Bank Compensation Consulting

Maria Kell, CFP®Sr. Consultant

Provides educational speeches and seminars nationwide

Worked for over 25 years in the financial industry, and uses her skills honed in the banking industry to provide innovative solutions for her clients


Capabilities, Products & Services

♦ Compensation Consulting

♦ Executive & Director Benefits Plans

♦ Succession Planning

♦ Benefit Expense Offset/BOLI

♦ Long-Term Care & Disability Income Planning

♦ Administrative Services

BCC’s Mission “Help community banks achieve and sustain profitable quality growth by designing and implementing compensation plans that are significant in value to executives and insignificant in cost to the shareholders.”


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Compensation Plan Guidance

♦ Recruiting Tool

♦ Incentive-Based Motivation

♦ Method to Retain

♦ Balance Risk & Financial Results

♦ Effective Controls & Risk Management

♦ Active Oversight by Board of Directors

♦ Regulatory Changes & New Compensation Rules


Compensation Rules

♦ Interagency Guidance on Sound Incentive Compensation Policies (Federal Reserve Guidance) June 25, 2010

♦ Dodd-Frank Wall Street Reform & Consumer Protection Act (Dodd-Frank) July 21, 2010

♦ Regulation Z rules for compensating mortgage loan originators (MLO)

♦ Basel III restricting discretionary bonuses


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The Key to Future Profitability andOutstanding Shareholder Value

People are the Key to Future Profitability and

Outstanding Shareholder Value


Two Fundamentals for Today

Integrating

Pay for Performance(Incentive Motivated Executives)

with

Pay for Attendance(Salary Satisfied Executives)


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Four Functions Performed by Executive Compensation

Recruit Reward Retain Retire

Key Executives


Compensation Trends

More emphasis on incentive compensation to retain & reward key personnel

More bonus deferrals in light of Fed guidance

Stock Options and Restricted Stock are still

viable

Increased interest in

Phantom Stock Plans & Stock Appreciation Rights Plans

Clawback provisions

implemented with incentive

plans

Longer term incentive plans


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Banker Requested Executive Compensation Plans

♦ Executive compensation has been driven by bankers that want sustained profitable quality growth

♦ BCC designs these plans at the request of bankers

♦ These incentive compensation plans are responsive to the changing dynamics of the market place by helping bankers who:

Wish to accomplish certain objectives

Have to respond to the job offers competitors are putting on the table for their best officers


Compensation Plans & Objectives


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Annual Cash Incentive Plan (ACIP)

Plan Highlights

♦ Employees selected by bank

♦ Discretionary or scorecards to measure performance bank wide branch wide department wide individual

♦ Design affordable plan


Incentive Compensation Enhances the Strategic Plan

Shareholders

Bank Department Individual

Communication of Goals

Bank's Strategic Plan

95% of Excess $ 5% of Excess $

Establishment ofCriteria to Achieve

PerformanceExceeds Budget

Goals Goals Goals

Executives

If Achieved

X% Y% Z%

and/or and/or


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Preliminaries About ACIP Design


Two Levels of ACIP Design Consideration

Affordable costs for the bank

Desired impact on targeted individual’s

effort and performance

An essential element of ACIP Design is to model the impact on both the individual and the bank

Incentive payments to executives must be:

Affordable for the bank;

Consistent with safe and sound banking practices

Deferred Cash Incentive Plan (DCIP)

Plan Highlights


♦ Deferral period at bank’s discretion

♦ Bonus compensation often percentage of salary

♦ Performance targets with scorecards or discretionary

♦ Interest set by bank

♦ Benefit forfeited upon early termination


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Deferred Cash Incentive Plan (DCIP)


♦ Eligibility: Available to a senior and junior officers

♦ Term: Five year deferral plan with officer receiving payment early in sixth year of each deferral (January or February)

♦ Specifics:

Additional cash compensation, often percentage of salary

Payable in short-term, five years

Deferred amounts may earn at the bank’s ROE

Forfeited if they leave the bank (“golden handcuffs”)

Plan is flexible with multiple variations

DCIP Accounting Detail - First Year

Formula gets deferred

money into the DCIP

Deferred money earns at ROE of the

bank

Payout following year five

Participant

Plan Completion Age: 65

3% Year 1 to Year 5 Years 1-5

Inflated 10%* 8%**

Year Age Salary Deferral Interest Balance Benefit

1 41 110,000 11,000 0 11,000 0

2 42 113,300 0 880 11,880 0

3 43 116,699 0 950 12,830 0

4 44 120,200 0 1,026 13,856 0

5 45 123,806 0 1,109 14,965 0

6 46 127,520 0 0 14,965 14,965*10% Deferral made at end of the plan year

**Interest credited at 8% at the end of the plan year


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DCIP Long Accounting Detail

3% Years Yr 2 to Yr 6 Yr 2-6 Yr 3 to Yr 7 Yr 3-7 Yr 4 to Yr 8 Yr 4-8

Inflated 1-5 10% 8% 10% 8% 10% 8%

Year Age Salary Benefit Deferral Int Balance Benefit Deferral Int Balance Benefit Deferral Int Balance Benefit1 41 110,000 0 0 0 0 0 0 0 0 0 0 0 0 02 42 113,300 0 11,330 11,330 0 0 0 0 0 0 0 0 03 43 116,699 0 0 906 12,236 0 11,670 0 11,670 0 0 0 0 04 44 120,200 0 0 979 13,215 0 0 934 12,603 0 12,020 0 12,020 05 45 123,806 0 0 1,057 14,273 0 0 1,008 13,612 0 0 962 12,982 06 46 127,520 14,965 0 1,142 15,414 0 0 1,089 14,701 0 0 1,039 14,020 07 47 131,346 0 0 0 0 15,414 0 1,176 15,877 0 0 1,122 15,142 0

8 48 135,286 0 0 0 0 0 0 0 0 15,877 0 1,211 16,353 09 49 139,345 0 0 0 0 0 0 0 0 0 0 0 0 16,35310 50 143,525 0 0 0 0 0 0 0 0 0 0 0 0 0

62,610

♦ $62,610 at risk if participant leaves the bank♦ Cliff vesting, 100% at risk until paid

previous slide


Long-Term WealthAccumulation

Plan Highlights


♦ Supplemental retirement income

♦ Formula driven

♦ Offsets caps on qualified plans

♦ Vesting schedules (“golden handcuffs”)

♦ Plan provisions at bank’s discretion

♦ Covered by ERISA Top-Hat rules


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Salary Continuation Plan (SCP)

Summary of Benefits

NameCurrent

AgeRetirement

AgeCurrent Salary

InflationRate

ProjectedFinal

SalaryBenefitPercent

BenefitPayment

BenefitPaymentDuration

President 54 65 195,000 3% 262,064 50% 131,032 15 YearsEVP – 1 49 65 145,000 3% 225,905 40% 90,362 10 YearsEVP – 2 47 65 132,000 3% 218,176 40% 87,270 10 YearsEVP – 3 41 65 110,000 3% 217,095 30% 65,128 10 Years


Salary Continuation Plan Accounting DetailPresident Benefit Accrual & Liability

(1) (2) (3) (4)5.00%Interest

(5) (6)Accrual

Benefit Retirement Service AnnualYear Age Payment Liability Cost Cost Accrual Cumulative

1 54 0 69,414 1,609 71,023 71,0232 55 0 71,768 5,297 77,065 148,0883 56 0 74,533 9,303 83,836 231,9244 57 0 77,822 13,668 91,490 323,4145 58 0 81,792 18,439 100,231 423,6456 59 0 86,684 23,679 110,363 534,0087 60 0 92,878 29,467 122,345 656,3538 61 0 101,040 35,912 136,952 793,3059 62 0 112,495 43,178 155,673 948,97810 63 0 130,526 51,548 182,074 1,131,05211 64 0 168,106 61,696 229,802 1,360,85412 65 120,113 1,380,805 14,282 67,758 82,040 1,322,78113 66 131,032 64,631 64,631 1,256,38014 67 131,032 61,234 61,234 1,186,58226 79 131,032 4,010 4,010 10,87427 80 10,919 45 45 028 81 0 0 0 0

1,965,480 1,965,480 1,081,340 884,138 1,965,478

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Equity Plans

Plan Highlights

♦ Restricted Stock real equity – actual certificates

♦ Stock options ISO – Incentive/Statutory Options NSO – Nonqualified/Non-Statutory Options

♦ Stock Appreciation Rights (SAR) – future appreciation

♦ Phantom Stock or Performance Stock Units (PSU) – current & future appreciation synthetic equity – no certificates more generous & costly


Stock Appreciation Rights♦ Bank grants employee a stock appreciation right (SAR)♦ SAR has initial value♦ SAR is a right to cash payment equal to the increase in FMV above the

initial value over time♦ Employee usually does not receive dividends on SAR

Example1. 1,000 SARs granted to employee2. Initial value $10.003. Bank pays $2.50 per share cash dividend on stock4. FMV at exercise $60.005. Employee receives $50,000 cash payment at exercise


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Stock Appreciation Rights Accounting DetailPresident

Cumulative BOY EOY Annual Total SAR ForecastSAR Book Book Increase in Annual Cumulative Annual

Age Allocation Value Value Bk Value SAR Gain BenefitDuration EOY Year End per Share per Share per Share Gain EOY Payment

1 54 600 49.10 53.73 4.63 2,777 2,777 02 55 1,200 53.73 58.89 5.16 6,196 8,973 03 56 1,800 58.89 64.55 5.66 10,187 19,161 04 57 2,400 64.55 70.75 6.20 14,873 34,034 05 58 3,000 70.75 77.55 6.80 20,397 54,431 06 59 3,600 77.55 85.01 7.46 26,857 81,288 07 60 4,200 85.01 93.18 8.17 34,312 115,599 08 61 4,800 93.18 102.13 8.95 42,982 158,581 09 62 5,400 102.13 111.95 9.82 53,001 211,582 010 63 6,000 111.95 122.70 10.75 64,482 276,064 011 64 6,600 122.70 134.50 11.80 77,902 353,966 012 65 340,135 37,95813 66 325,295 37,95814 67 309,382 37,95826 79 0 37,958

353,966 569,370

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Offsetting the Costs

Offsetting the Costs of Deferred Compensation and Other Executive

Nonqualified Benefit Plans


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What are the Two Most Common Ways of Paying these Executive Benefit Plan Costs?

Pay out of current increased earnings

If the bank has unutilized Bank‐Owned Life Insurance

(BOLI) capacity, use additional BOLI as a source of incremental earnings to

cover the costs


An Elusive Paradigm Shift if Required

Bank‐OwnedLife Insurance

Traditional RetailLife Insurance

Cash Surrender Value

Death Benefit

Death Benefit Cash Surrender Value


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Benefit ExpenseOffset/BOLI

Tax Results of Alternative Assets vs BOLI

(1) (2) (3)

Asset Placement: $2,750,000 Alternative First Year Gain/LossAsset BOLI Due to BOLI

Income Income First Year2.00% 3.29%

Gross Income 55,000 90,400 35,400 Load / Surrender Charges 0 0 0 Income Tax 34% 18,700 0 18,700

Net Earnings Impact 36,300 90,400 54,100


Income Statement with Employee Expenses(1) (2) (3) (4) (5) (6)

Annual Annual Annual Annual Annual CumulativeAfter-Tax BOLI Alternative Net BOLI Bank Bank

Year Expenses Gain Asset Cost Gain Impact Impact1 (62,376) 90,400 (36,300) 54,100 (8,276) (8,276)2 (64,015) 90,836 (36,779) 54,057 (9,957) (18,233)3 (67,611) 91,117 (37,265) 53,853 (13,758) (31,991)4 (71,409) 93,616 (37,757) 55,859 (15,550) (47,541)5 (75,421) 95,579 (38,255) 57,325 (18,097) (65,638)6 (79,659) 97,546 (38,760) 58,786 (20,873) (86,511)7 (84,136) 100,590 (39,272) 61,318 (22,818) (109,328)8 (88,865) 103,836 (39,790) 64,046 (24,818) (134,147)9 (78,049) 107,674 (40,315) 67,359 (10,690) (144,837)10 (66,985) 111,496 (40,847) 70,649 3,664 (141,173)11 (59,658) 118,042 (41,386) 76,656 16,998 (124,175)12 (59,967) 121,188 (41,933) 79,255 19,288 (104,887)13 (60,294) 124,042 (42,486) 81,556 21,263 (83,624)14 (60,638) 126,810 (43,047) 83,763 23,125 (60,499)31 0 54,295 (17,932) 36,363 36,363 2,290,452 32 0 54,293 (18,169) 36,124 36,124 2,326,576 33 0 54,165 (18,409) 35,756 35,756 2,362,332 34 0 54,013 (18,652) 35,361 35,361 2,397,693 35 0 609,492 (18,898) 590,594 590,594 2,988,287

(1,194,626) 4,182,913 2,988,287

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Case Study

Scenario:

Bank lost a key lender to competition

Bank desires to properly compensate all employees

Bank only has an Annual Cash Incentive Plan

Bank realizes the need to implement additional compensation plans in order to attract, retain and reward key people

Bank is looking for a vehicle to pay for the additional benefits


Case StudyCensus Data and other key factors:

Bank has 5 key officers who are part of the executive team

Bank has additional key officers in management

Bank needs several revisions to the current ACIP

Bank desires to implement a short-term DCIP

Bank wants to include a SCP for retirement

Bank desires to implement a plan for Directors

Bank considered BOLI to assist in paying for benefits


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Case Study

Step One:

Create Scorecards for CEO, and other key officers

Use the scorecard for both the ACIP and DCIP criteria


Case StudyScorecard Criteria for Executive Team:

Threshold and maximum set for all criteria

ROA (excluding MLO’s)

Weighted 45%

Efficiency Ratio (excluding MLO’s)

Weighted 25%

Overall Bank Loan Growth

Weighted 35%


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Case Study

Scorecard Criteria for Executive Team:

Takeaways cannot exceed 100%

Overall Bank Charge-offs

Weighted: minus 20%

CAMELS 3 or worse

Weighted: minus 100%

Bank Net Income must be a minimum level

Weighted: minus 100%


Case Study

Step Two:

Determine participants in the DCIP

Tier the officers into three groups

Group 1, eligible for 10% of salary

Group 2, eligible for 7.5% of salary

Group 3, eligible for 5% of salary

5 year mandatory deferral


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Case Study

Step Three:

Determine participants in the SCP

Tier the benefits

CEO: 50% of salary per year at retirement payable for 15 years

EVP’s: 40% of salary per year at retirement for 10 years

SVP’s: 30% per year at retirement for 10 years


Case StudyStep Four:

Design a plan for Directors

Options:

Director Fee Deferral Plan

Director Fee Continuation Plan

Phantom Stock Plan

Long-term Care Plan

Bank chose a traditional Director Fee Deferral Plan and Long-term Care Plan


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Case StudyStep Four (cont):

Director Fee Deferral Plan

Voluntary plan

Directors can defer all or a portion of annual fees

Fees were deferred until age 72 (mandatory retirement age)

Long-term Care Plan:

Bank provided $3000 per month in benefit

Director’s could personally pay to increase benefit


Case Study

Step Five:

Analyze the options for cost recovery

Design a BOLI Plan to assist in offsetting the costs of the nonqualified benefit plans

Include a Survivor Income Benefit Plan for officers participating in the BOLI

Bank’s budget allowed for some cost annually


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Case Study

Plan Accomplishments:

Bank had a clearly defined plan that is now aligned with the strategic plan of the bank

Bank succeeded in the retention of key officers

Bank is able to use the plan as a recruiting tool

Officers can elevate to a higher tier and receive higher benefits as they advance in their career with the bank


Thank You!

Maria Kell, BCC Consultant1‐800‐781‐2099 ext. 108maria.kell@bcc‐usa.com


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