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PM&P On Point:
Looking Ahead to Executive Pay Practices in 2015
Banking Edition
Executive Summary
© 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
© 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.
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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
© 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.
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© 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.
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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
© 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.
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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
© 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.
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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%
© 2014 Pearl Meyer & Partners, LLC
Looking Ahead to Executive Pay Practices in 2015
Banking Industry Executive Summary
Annual Incentive Program Payout Levels
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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
© 2014 Pearl Meyer & Partners, LLC
Looking Ahead to Executive Pay Practices in 2015
Banking Industry Executive Summary
Annual Incentive Program Performance Metrics
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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
© 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 $3 billion or greater
Perceived Difficulty of FY15 Target Performance Goals vs. FY14 Target Performance Goals
Similar Tougher Unknown / NA
© 2014 Pearl Meyer & Partners, LLC
Looking Ahead to Executive Pay Practices in 2015
Banking Industry Executive Summary
Long-Term Incentive Programs
LTI Value Expectations
44% of banks predict the value of 2015
equity awards will be about the same as
in 2014. Among larger banks, this trend
is even more prevalent with 67%
indicating comparable value in 2015
versus 2014.
Another 38% anticipate awards that are
somewhat or considerably higher in
value than 2014.
LTI Vehicles
The mix of LTI instruments utilized in
2015 will not shift dramatically from that
utilized in the previous years.
Larger banks utilize options less than
the smaller banks.
Performance-based awards typically
make up over 40% of the mix while the
remaining continues to be time-vested
vehicles.
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0%
20%
40%
60%
80%
100%
All banks <$ 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
© 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
© 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.
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