Elements of A Good Bank Compensation Plan

Bank compensation programs and practices in community banks have been, and continue to be, heavily scrutinized. The economic downturn created a situation where numerous banks failed and many continue to be troubled. Regulatory bodies have reacted to the situation by placing an increased focus on corporate governance and sound compensation plan design. Regulatory guidance that was initially applicable to only TARP banks has quickly become best practice for all banks. The TARP requirements were followed by SEC reporting changes, Final Guidance on Sound Incentive Compensation Policies, and most recently the Dodd-Frank Act. Community bank directors and executives have been placed “under the microscope” and reviewing your current corporate governance situation and compensation plan designs have become increasingly necessary. Drastic changes are not always necessary, but the review and documentation process is strongly recommended. If there is one word that summarizes the regulatory bodies’ goals surrounding compensation plan design in today’s environment it is BALANCE. Compensation plans need to balance the following:

  • Shareholder needs with employee needs
  • Long-term strategic goals with short-term profitability goals 
  • Short-term cash payouts with long-term equity related payouts 
  •  Fixed compensation with performance-based compensation 
  •  Risk management with reward, retention, and attraction of high-quality management 
  •  Employee motivation and control with strong corporate governance by the Compensation Committee

Blanchard Chase (an independent third party compensation consulting firm focused exclusively on banks) recently conducted a market survey on Compensation Trends in Community Banks. A few key highlights from the survey findings are summarized below:

  • 90 banks participated in the survey with 60% being located in the Midwest
  • 80% of respondents have a formal Compensation Committee
  • 56% of respondents have a formal performance-based incentive plan 
  • 56% of respondents’ Compensation Committees have reviewed the banks incentive plans for risk
  • 50% of respondents report that their incentive plans have been reviewed by their regulator 
  • 77% of respondents plan to pay annual incentives to executives for 2010 performance 
  • 82% of respondents plan to increase executive pay in 2011

Matt Brei, A Vice President at Blanchard Chase will be providing additional information surrounding recent compensation trends at the 2011 IBA Human Resources Conference on April 19-20 in Ankeny.

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