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PM&P On Point: Looking Ahead to Executive Pay Practices in 2015 Banking Edition Executive Summary

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Page 1: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

PM&P On Point:

Looking Ahead to Executive Pay Practices in 2015

Banking Edition

Executive Summary

Page 2: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

2

Table of Contents

Introduction………………………………………………………………………………………3

The Current Environment for Executive Pay Decision-Making.………………………..4

Report Findings

Factors in Executive Pay Decisions…………………………………………...…………..5

Top Challenges for Executive Pay Decision-Making..…………………...……………...6

Executive Base Salary Changes.…………..…………………………………………...…7

Annual Incentive Program Payout Levels...……………….…………………………...…8

Annual Incentive Program Performance Metrics…………………………………………9

Annual Incentive Program Goals…………………………………………………………10

Long-Term Incentive Programs …………….…………………………………….………11

Perquisites and Retirement/Savings…………………………………………………..…12

About Pearl Meyer & Partners………………………………………………………………13

Page 3: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Introduction

Pearl Meyer & Partners’ annual survey series “On Point: Looking Ahead to Executive Pay Practices” is designed to provide the latest information on competitive practices regarding executive compensation program design and trends. This special edition provides insight into banking industry practices.

The broad survey was conducted online between August 5, 2014 and September 22, 2014 and included input from 298 participants.

The 68 participants in the banking industry represent organizations ranging in size from less than $500 million in assets to over $50 billion in assets.

– 50% of the banks are less than $1 billion in assets and another 40% are between $1 and $10 billion in assets.

– Over 90% of the banks are publicly, closely, or privately held.

The complete survey results are available for purchase at www.pearlmeyer.com/orderlookingaheadtoexecpayin2015.

Please contact Laura Hay to discuss any aspect of these findings at [email protected] or 704-844-0437.

3

0%

5%

10%

15%

20%

25%

30%

<$500m $500m -$999m

$1b - $2.9b $3b - $9.9b $10b - $49.9b $50b or greater

Participants by Asset Size

32% 35%

21%6%

3%, 3%

0%

20%

40%

60%

80%

100%

Public Closely / Family / Privately

Held

Tax Exempt / Govt

Chartered

Participants by Ownership Structure

Under $3 billion Over $3 billion

Page 4: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

The Current Environment for Executive Pay Decision-Making

Creating alignment of compensation plans with business strategy and performance

– After years of turbulence and efforts to right size compensation plans to address regulatory mandates,

there is now renewed interest in designing pay programs that will help executives and the broader

workforce meet the bank’s objectives. As the 2015 programs are refined, there is continuing focus on

aligning compensation with actual performance, a concept that has been growing over the last several

years.

Focusing on programs that support recruitment and retention

– A continuing concern as the economy strengthens is attracting and retaining the key talent required to

deliver long-term results. The compensation package is a significant component of the overall value

proposition offered to executives. An effective package includes programs that are market competitive,

deliver rewards that differentiate for performance, and offer near- and long-term value to executives.

Developing a culture of rigorous goal setting

– Although incentive plan funding is still not back to previous levels, there is year over year improvement.

At the same time, banks are revisiting their goal setting approach and many expect more rigorous

levels of performance in 2015.

4

Page 5: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Report Findings:

Factors in Executive Pay Decisions

The top three factors used to make executive pay

decisions within the banking industry are:

Company performance

Executive compensation variance to market

Overall economic / market conditions

A typical approach for banks is to target base

salary at median, with total cash and total direct

targeted slightly higher.

– 47% of banks target base salary at the

market median.

– A smaller, yet meaningful percentage (37%)

target above median levels (between P50

and P75 and up to P75) for total target cash

and total target direct compensation.

5

1

2

3

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

0%

10%

20%

30%

40%

50%

Percentiles not targeted

~P25 P25 - P50 ~P50 P50 - P75 ~P75

Targeted Competitive Positioning (Market Percentiles)

Base Salary Target Total Cash LTI Target Total Direct

Page 6: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Top Challenges for Executive Pay Decision-Making

Participants were asked about the current

challenges facing their organization. The three

most pressing issues are:

1. Alignment of incentives with business

strategy and objectives

2. Assuring that compensation plans

ultimately result in pay and performance

alignment

3. Attraction and retention of key executives

All three issues are of significant importance to

banks of all sizes. Yet in order of magnitude,

these challenges are of greater concern among

smaller banks relative to those over $3 billion in

assets.

6

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%

Responding to shareholder requests (i.e.;

implementing performance-based equity)

Conducting shareholder engagement

Preparing for Say-on-Pay

Conducting a new share request

Managing dilution and overhang

Restructuring the organization

Significantly improving performance (i.e.;

turnaround situation)

Preparing for or responding to legislation

(i.e.; Healthcare Reform, Dodd Frank, etc.)

Attracting/retaining executives

Aligning executive pay and performance

Aligning executive incentives with business

strategy and objectives

Biggest Organizational Challenges for 2014 (Percent Responding to a Moderate or Great Extent)

$3 billion or greater <$ 3 billion All banks

Page 7: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Executive Base Salary Changes

Merit increase percentages for 2015 are

strengthening relative to 2014.

CEO Base Salary Growth

– There are signs of strengthening base

salary increases as 41% of banks anticipate

increases between 2% and 4%, up from

26% in 2014.

– It is also expected that a larger percentage

of banks will offer increases from 4% to 6%

in 2015 versus 2014.

– It should be noted that even though

improved from 2014, 13% of banks

anticipate salary freezes for the CEO.

CEO Direct Report Salary Growth

– Likewise, 59% of banks anticipate increases

of 2% to 4% for the CEO direct reports, up

from 50% in 2014.

– A relatively small percentage (6%) of banks

anticipate cuts or freezes, down from 12% in

2014.

7

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%

Page 8: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Annual Incentive Program Payout Levels

8

39% of banks anticipate that 2014 bonuses

will be about the same as 2013 payouts. Yet

another 33% expect somewhat higher

bonuses over FY13.

For many banks, incentive plan funding will fall

short of target.

64% of banks expect below-target (less

than 100%) annual incentive payouts for

FY14 performance.

32% are predicting bonuses exceeding 100%

of target. It is notable that 47% of banks over

$3 billion in assets are predicting bonuses that

exceed 100% of target.

2%

2%

2%

19%

39%

33%

4%

0% 10% 20% 30% 40% 50%

No Bonus FY 14 or

FY15

No Bonus FY14 but expect bonus FY15

Considerably Lower

Lower

Similar

Higher

Considerably Higher

FY14 Bonus Payout vs. FY13 Bonus Payout

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

Page 9: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Annual Incentive Program Performance Metrics

9

Banks utilize multiple performance measures

in their executive compensation programs.

Revenue and profit measures, as expected,

are most widely used in executive

compensation plans.

Banks also incorporate measures that are

unique to their strategy and may be non-

financial in nature and individual in orientation.

The larger banks use a greater variety of

performance metrics when compared to the

smaller organizations. Strategic and other

non-financial measures, for example, are

utilized by over 70% of large banks while in

contrast, under 40% of banks less than $3

billion in assets use a similar measure.

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

Page 10: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Annual Incentive Program Performance Goals

10

Nearly half (48%) of participants plan to

impose tougher hurdles for executive

performance in 2015. This is even more

significant (67%) among banks with over $3

billion in assets.

This suggests that as a movement toward

target and above-target payouts occurs,

companies may be recalibrating goals to

assure a proper pay and performance

alignment.

46%58%

20%

48%38%

67%

6% 4%13%

0%

20%

40%

60%

80%

100%

All banks <$ 3 billion $3 billion or greater

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

Similar Tougher Unknown / NA

Page 11: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Long-Term Incentive Programs

LTI Value Expectations

44% of banks predict the value of 2015

equity awards will be about the same as

in 2014. Among larger banks, this trend

is even more prevalent with 67%

indicating comparable value in 2015

versus 2014.

Another 38% anticipate awards that are

somewhat or considerably higher in

value than 2014.

LTI Vehicles

The mix of LTI instruments utilized in

2015 will not shift dramatically from that

utilized in the previous years.

Larger banks utilize options less than

the smaller banks.

Performance-based awards typically

make up over 40% of the mix while the

remaining continues to be time-vested

vehicles.

11

0%

20%

40%

60%

80%

100%

All banks <$ 3 billion $3 billion or greater

LTI Value Expecations for FY15

Lower Similar Higher Unknown / NA

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2013 2014 2015 2013 2014 2015 2013 2014 2015

All banks <$ 3 billion $3 billion or greater

Expected LTI Mix

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

Time-Based

Perf-Based

Page 12: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

Perquisites and Retirement/Savings

After years of intense scrutiny of executive pay

practices, limited perquisites have become the

new norm.

– The use of club memberships and car

allowances / car plans are the most

widely used perquisites among banks.

Deferred compensation arrangements are

offered by 28% of banks, as are SERPs with

targeted replacement income features.

12

0%

10%

20%

30%

40%

50%

60%

70%

Financial Planning

Services

Supplemental Executive Health

and Welfare

Protection on Sale of Home in

Relocation

Country / Private Club

Membership

Car Allowance / Car Plan

General Allowance

Car and Personal Driver

Prevalence of Perquisites

CEO Direct Reports

0%

10%

20%

30%

40%

A SERP that features

restoration of 401(k) or 403(b) benefits lost to contribution limits

A SERP with targeted

replacement of pre-retirement income

features

Restoration of

benefits lost to contribution limits on

an organization

pension plan

Voluntary deferred

compensation opportunities

Nonqualified Savings & Retirement Program Prevalence

CEO Direct Reports

Page 13: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

© 2014 Pearl Meyer & Partners, LLC

Looking Ahead to Executive Pay Practices in 2015

Banking Industry Executive Summary

13

About Pearl Meyer & Partners

For 25 years, Pearl Meyer & Partners (www.pearlmeyer.com) has served as a trusted independent advisor to Boards and their senior

management in the areas of compensation governance, strategy and program design. The firm provides comprehensive solutions to complex

compensation challenges for multinational companies ranging from the Fortune 500 to not-for-profits as well as emerging high-growth

companies. These organizations rely on Pearl Meyer & Partners to develop global programs that align rewards with long-term business goals to

create long-term value for all stakeholders: shareholders, executives and employees. The firm maintains offices in New York, Atlanta, Boston,

Charlotte, Chicago, Houston, Los Angeles, San Francisco and San Jose, as well as an office in London.

Contact Us

For other information and guidance on compensation issues, or to learn more about Pearl Meyer & Partners’ services, please feel free to

contact any of our offices by email at the addresses listed below. Full contact information is listed on the next page.

New York Houston

[email protected] [email protected]

Atlanta London

[email protected] [email protected]

Boston Los Angeles

[email protected] [email protected]

Charlotte San Francisco

[email protected] [email protected]

Chicago San Jose

[email protected] [email protected]

Page 14: PM&P On Point: Looking Ahead to Executive Pay Practices in … · 2020. 5. 5. · there is now renewed interest in designing pay programs that will help executives and the broader

www.pearlmeyer.com

NEW YORK

570 Lexington Avenue

New York, NY 10022

(212) 644-2300

[email protected]

ATLANTA

One Alliance Center

3500 Lenox Road, Suite 1708

Atlanta, GA 30326

(770) 261-4083

[email protected]

BOSTON

132 Turnpike Road, Suite 300

Southborough, MA 01772

(508) 460-9600

[email protected]

CHARLOTTE

3326 Siskey Parkway, Suite 330

Matthews, NC 28105

(704) 844-6626

[email protected]

CHICAGO

123 N. Wacker Drive, Suite 860

Chicago, IL 60606

(312) 242-3050

[email protected]

HOUSTON

Three Riverway, Suite 1575

Houston, TX 77056

(713) 568-2200

[email protected]

LONDON

Clifford House

15 Clifford Street

London W1S 4JY

+44 (0)20 3384 6711

[email protected]

LOS ANGELES

550 S. Hope Street, Suite 1600

Los Angeles, CA 90071

(213) 438-6500

[email protected]

SAN FRANCISCO

595 Market Street, Suite 1340

San Francisco, CA 94105

(415) 651-4560

[email protected]

SAN JOSE

2880 Zanker Road, Suite 203

San Jose, CA 95134

(408) 954-7399

[email protected]