California Bankers Association 126 th Annual Convention

Transcription

1 California Bankers Association 126 th Annual Convention Compensation Strategies in an Evolving Environment May 4, 2017 Dan Wetzel Managing Director Pearl Meyer Bob Gotelli SVP, Director Human Resources Bank of Marin

2 Discussion Items Market Trends Base Salaries Annual Incentives Long-term Incentives Goal Setting Change-in-Control Benefits Regulatory Environment 2

3 Current state Strong market performance, declining unemployment, rising rates Salary budget increases remain flat 3% per year Change through March 2017 One Year Three-Year 300% 43% 27% 41% 21% 3% 3% 33% -13% KBW Index NASDAQ Salary Budget Increase -38% CA Unemployment Rate Fed Discount Rate 3

4 Compensation Expense - CA Banks Compensation expense per assets declining Expense per FTE increasing 4% per year Salary + Benefits Expense 1.75% 1.70% 1.65% 1.60% 1.55% 1.50% 1.45% 1.40% 1.35% $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Compensation Expense / Assets Compensation Expense / FTE * Source: SNL Financial 4

5 Base Salaries Looking Ahead Proactively evaluate base salaries 50%* evaluate salary bands annually 27%* evaluate as needed Adjusting at-risk positions (biggest salary movements*) Loan Servicing Officer Product Managers Mortgage Loan Officers (commissioned) Controller (assistant controller) Commercial Loan Officers Benefit Specialists MIS Manager * Source: 2016 CBA Compensation & Benefits Survey 5

6 2017 Anticipated Executive Salary Increases Executive salaries at larger banks are expected to increase 3-5% 2017 Anticipated Salary Increases Assets <$3B Assets >$3B 3.5% 5.0% 3.0% 4.0% CEO Direct Reports Source: Pearl Meyer 2017 Looking Ahead to Executive Pay Practices Survey 6

7 Annual Incentives 7

8 Annual Incentives Market Perspective Most employees with base salaries over $100K are eligible for incentives Annual Incentives* Top Executives Salary $100K-$150K Salary $50K-$99K Salary <$50K 24% 14% 8% 4% % Eligible Target % of Salary 73% 78% 64% 55% Source: 2016 CBA Compensation & Benefits Survey 8

9 Annual Incentives By Employee Group 5% 76% Formal Plans 3% 15% 3% 18% 54% 45% 100% 90 to < 100% 80 to < 90% 3% 8% 49% 3% 22% 64% Receiving Incentives 8% 11% 37% 42% 42% 29% 8% 32% 34% Executive Management Exempt Non-Exempt Executive Management Exempt Non-Exempt Nearly 90% Nearly all executives and managers participate and receive an annual incentive Participation decreases among other exempt and non-exempt employees Source: 2017 Pearl Meyer Compensation Planning Survey 9

10 Annual Incentives Looking Ahead Banks are expecting 2017 annual incentives payouts to be equal to or higher than last year Expections: Executive 2017 vs Annual Incentives Considerably higher Somewhat higher 5% 5% 24% 36% 85% About the same 41% 49% Somewhat lower 2% 15% Considerably lower 2% 7% Banks All Companies Source: Pearl Meyer 2017 Looking Ahead to Executive Pay Practices Survey 10

11 Long-term Incentives 11

12 Overview of LTI Vehicles Full-Value Stock Awards Restricted Stock Awards ( RSAs ) Restricted Stock Units ( RSUs ) Performance Shares / Units Tied to threshold, target and stretch goals and payout opportunities Performance conditions unrelated to share price (operational metrics) and/or conditions tied to the company s stock price (market-based) Absolute perspective, relative perspective, or combination thereof Stock Appreciation Awards Stock Options or Stock Appreciation Rights ( SARs ): - Service-based vesting, and/or Performance-based conditions Other Awards Long-term Cash Incentive 12

13 CEO LTI Awards Public CA Banks Performance contingent award usage doubled over the past year Shareholder response Alignment with performance Performance Contingent 14% 11% 30% 5% 0% 0% Restricted Stock Stock Options 67% 58% 60% 63% 67% 74% 67% 58% 80% 68% 76% 57% Source: California Banks Assets $500M to $10B (n=29) 13

14 LTI Market Perspectives Among public California Banks, long-term incentive awards to senior executives continue to increase in prevalence 60% 60% Long-term Incentives % Receiving CA Public Banks 79% 70% 62% 78% 66% 68% 79% 72% 79% 71% CEOs CFOs Linear (CEOs) Linear (CFOs) Source: 2016 CBA Compensation & Benefits Survey 14

15 LTI Looking Ahead Anticipated changes to LTI program include revising performance metrics and award mix 2017 Anticipated LTI Program Modifications Banks All Companies Change Performance Metrics Change LTI Mix Shorten Vesting Period New Holding Requirements Implement Minimum Vesting Periods Lengthen Vesting Period Add Double Trigger CIC Increase Ownership Guidelines New Realizable Value Caps Eliminate CIC Discretion New Ownership Guidelines 12% 11% 12% 6% 12% 4% 9% 6% 6% 9% 6% 4% 3% 1% 0% 1% 0% 11% 38% 40% 26% 33% Source: Pearl Meyer 2017 Looking Ahead to Executive Pay Practices Survey 15

16 Goal Setting 16

17 Defining Performance Incorporate balanced performance metrics Set realistic targets Avoid entitlements Are simple and focused Support overall corporate objectives Are self funded 17

18 Dynamic Tension Selection of metrics should consider: Long-term strategic plan Balance with short-term incentive ( STI ) goals (i.e. dynamic tension ) Growth Goals Revenue Short- Term Incentive Plan Assets, Loans, Deposits Earnings / Return Goals Net Income, EPS ROAA, ROAE Total Shareholder Return Quality / Safety / Efficiency Goals Long- Term Incentive Plan 18

19 The Goal Setting Process: Time Spent 53% of banks spend 6 hours or less on measure selection & calibration 10 Hours or More, 17% US Banks < 2 Hours, 15% 8 to 10 Hours, 12% 2-4 Hours, 20% 6 to 8 Hours, 18% 4-6 Hours, 18% Based on a recent survey conducted by Pearl Meyer. Includes responses from 78 banks. 19

20 The Goal Setting Process: Influence For most companies, measure selection is driven by the annual budget Based on a recent survey conducted by Pearl Meyer. 20

21 The Goal Setting Process: Considerations Fewer than 50% of companies always consider peer performance and market expectations Based on a recent survey conducted by Pearl Meyer. 21

22 Prevalent 2015 Annual Incentive Metrics For executive teams, most banks utilize multiple performance metrics in annual incentive plans Prevalent Annual Incentive Metric Categories 100% 53% Prevalent Annual Incentive Metrics 49% 39% 35% 55% 57% 27% 24% 18% Balance Sheet Earnings Quality Metric Pre-tax / Net Income Net Loans Deposits ROAA Eff. Ratio ROAE NPAs/Assets * Source: West Coast Banks 22

23 Prevalent 2015 LTI Metrics For executive teams, most banks utilize absolute financial performance goals TSR goals are generally balanced with absolute financial goals Long-term Incentive Performance Metrics 46% Banks are reconsidering the use of rtsr 25% 21% 21% 18% 25% 7% Quality EPS ROA ROE Regulatory Rating Relative TSR Relative Financials * Source: West Coast Banks 23

24 LTI Plans & TSR Goals Most Participants are satisfied with plans Dissatisfied 3% Somewhat Dissatisfied 3% Somewhat Satisfied 20% Performance-Based LTI US Banks Mgmt/Board Differ 8% Very Satisfied 10% Satisfied 56% Somewhat Satisfied 22% Mgmt/Board Differ 11% TSR-Based LTI US Banks Satisfied 67% Among general industry companies, there was a higher level of dissatisfaction with relative TSR plans Based on a recent survey conducted by Pearl Meyer. Includes responses from 78 banks. * Source: West Coast Banks 24

25 Incentive Plan Leverage Annual Incentive Plans 64% set threshold above 0% Highest stretch payout 250% Long-term Incentive Plans 30% set goals as all or none Highest stretch payout 200% Annual Incentive Leverage 172% 150% 100% Long-term Incentive Leverage 100% 150% 50% 50% Threshold Target Maximum (Stretch) 25/50th Percentile 75th Percentile Threshold Target Maximum (Stretch) 25

26 Prevalence of Achievement Goal Setting Rule of Thumb A rule of thumb for prevalence of plan performance goals Threshold achieved 80% Target 40-60% Maximum / stretch 10-20% 100% 80% 60% Efficiency Ratio Prevalence Target Threshold 40% 20% Maximum 0% Efficiency Ratio 26

27 Safety & Soundness In July 2010 the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (collectively, the Agencies ) issued their Final Guidance on Sound Incentive Compensation Policies (the Guidance ). The Guidance involves all incentive plans, not just those applicable to executives The Guidance was issued to help ensure that financial institutions do not compensate employees in such a way that it threatens the safety and soundness of the enterprise The Guidance consists of three core principles: The need to balance risk and reward The need to integrate controls and risk management into the compensation process The need to provide strong corporate governance on compensation matters The Guidance requires that financial institutions establish a three part mechanism to manage the risk imposed by incentive compensation plans: A mechanism for identifying Material Risk Takers ( MRTs ) An analysis of compensation plans to ensure they contain specified safeguards related to risk A corporate governance structure which helps to mitigate risk 27

28 SEC Second Proposal on Incentive Compensation at Financial Institutions (Dodd-Frank Section 956) Section 956 applies to certain covered financial institutions - financial institutions with consolidated net assets at least $1 billion Proposed general requirements for all Covered Institutions All institutions must: - Prohibit ICAs that encourage inappropriate risks by providing excessive compensation ; - Prohibit ICAs that encourage inappropriate risks that could lead to a material financial loss ; - Establish requirements for performance measures to appropriately balance risk and reward; - Create and retain records for all new ICAs, demonstrating compliance with the rules, for a minimum of seven years, including but not limited to: Copies of all ICA plans, Record of who is subject to each plan, Description of how the overall ICA is compatible with effective risk management and controls; - Disclose the records to the appropriate agency upon request Boards and Committees must: - Conduct oversight of the overall ICA - Review and approve all ICAs for SEOs - Approve any material exceptions or adjustments to ICAs or related policies for SEOs Performance Measures must: - Include financial and non-financial measures of performance weighted to reflect risk-taking; - Allow non-financial measures of performance to override financial measures if appropriate; and - Be subject to adjustment to reflect actual losses, inappropriate risks taken, compliance deficiencies, or other measures or aspects of financial and non-financial performance 28

29 Change-in-Control Benefits 29

30 Summary of Say on Golden Parachute Disclosures 416 U.S. Companies Acquired after 2010 Prevalence of CIC Severance Multiples CEO NEO (Tier 1) NEO (Tier 2) 48% 39% 38% 38% 37% 33% 24% 2% 5% 11% 17% 8% < 1X 1X - <2X 2X - <2.99X X Practice CEO Other NEOs (count 2-8) Eligibility 75% 80% Severance Multiple Severance Basis Severance Bonus Definition Annual Incentive Payout Treatment of Equity X - 36% 2 - <3 X - 37% 1-2X - 23% Base + Bonus (59%) Base (29%) Time-Based Vesting Single Trigger 82% Double Trigger 13% Majority vest in full based on target performance. Target 41%, Greater of 23%, Average 23% X - 17% 2 - <3 X - 38% 1-2X - 39% Base + Bonus (53%) Base (39%) Pro-rata bonus payout (50%) through date of termination Target performance (49%) Actual performance (33%) Performance Contingent Vesting Single Trigger 71% Double Trigger 15% 280G Excise Tax Provision Silent (41%) Best after tax (19%) Silent (44%) Best after tax (16%) 30

31 Regulatory Environment 31

32 Our View on the Coming Deregulation The Questions: Are we entering a post compliance-driven era, a new era of deregulation? What rules are coming and going? Our Views: Regulatory reduction priority - Rolling back some unpopular rules - Slowing everything in the pipeline - Taking much longer to write and approve anything new Reducing banking restrictions likely a high priority Congress likely to push to amend Dodd Frank. changes. but not wholesale revision and certainly not abolishing it altogether Pay ratio likely here to stay, but it could be simplified and the playing field may be leveled a bit (e.g., calculations for US-based employees only) Clawback rules. with Wells Fargo now likely to be implemented with some modifications Pay-vs-performance rules become low priority. They ve already proven problematic with rtsr as the measure 32