Peer Group Development: Art or Science?

Transcription

1 Peer Group Development: Art or Science? Bank Director: Bank Executive and Board Compensation Conference November 4, 2013 Kristine Oliver Vice President Pearl Meyer & Partners Barbara Stephens Compensation Committee Chair First Business Financial Services, Inc

2 Overview of Today s Presentation 1 Why Use A Peer Group? Parameters for Developing a Peer Group Peer Group Selection Challenges Case Study: Peer Group Design at First Business Financial Services, Inc. How to Effectively Use A Peer Group Q & A

3 Why Use A Peer Group? 2 Pay Levels Relative Financial & Shareholder Return Performance Competitive Market Perspective Pay Programs Pay Policies & Practices

4 Parameters for Developing a Peer Group 3 Industry Size Thrifts Banks Location Attainability and quality of data Credit Unions Sufficient Sample (12 24 firms) External Factors Custom Peer Group

5 Size 4 Across industries, the most common size parameters for peer groups are Revenue, Market Capitalization, Number of Employees and Assets Financial Industry Assets Correlation between size measures versus base salary Correlation Coefficient Assets Revenue Market Cap Base Salary The scope should be within reasonable range of current/anticipated size Most prevalent size range one-half to two times a company s size Important: Target assets to fall at median of peer group (or close to it)

6 Location 5 In general, the executive talent market is considered on a national basis; however, in the Banking industry, we need to consider the location of the bank and its peers Community Banks have limited geographic scope for their activities due to their size and emphasis on relationship banking Different regions can exhibit different financial performance characteristics (i.e. Florida versus Massachusetts) Be aware of large variances in geographic salary differentials among your peer banks (i.e. NYC versus Upstate NY) However, when banks grow and reach to a certain size (i.e. $10B and larger), a national peer group starts to become a necessity due to lack of availability of comparable banks

7 Attainability and Quality of Data 6 Due to attainability and quality of data (or comparability of data), the following banks are often excluded from the peer group Private or mutual banks Can be included with use of published compensation surveys (if they participate) Non-exchange traded banks (e.g. OTCBB or Pink Sheet) Executive compensation disclosures are either not as robust or not required Banks with unique business models, MHCs, OTCBB, and Pink Sheet banks Tend to exhibit different financial performance characteristics and, accordingly, different compensation programs and practices Recent conversions Large, up front equity grants are typically provided to executives Even when smoothed over the vesting period, the grants may still be larger than typical annual grants (can cause some inflation to the market data) Have volatile financials due to the high up front expense and the time it takes to deploy the new capital

8 Sufficient Sample 7 According to ISS research, 57% of S&P 1500 companies included between 10 and 20 companies in their peer group. Generally, companies are considered a sufficient sample size because: It minimizes the impact of outliers when analyzing market data It provides adequate data to reach valid conclusions It s economical (if the sample size is too big, there will be additional expense to collect such a high amount of data) Less than 12 peer companies Less than reliable data due to high influence of outliers Considering high acquisitive environment, there could be too few peers in the future

9 External Factors ISS Peer Group Selection 8 Focus is on identifying companies that are reasonably similar to the subject company in terms of industry profile, size, and market capitalization Begin with 8 digit Global Industry Classification (GICS) code Comparable size measure (Assets for financial institutions); 0.4x 2.4x of the subject company s size Comparable market capitalization (0.25x 4x) the low and high end of the subject company s market cap bucket (based on Micro, Small, Mid, and Large) Prioritizes companies that: Maintain the subject company near the median of peer group revenue/assets Are in the subject company's peer group Have chosen the subject company as a peer Chooses peers from a pool of potential comparators that is created based on total assets (for banks), market capitalization, and industry parameters

10 External Factors Glass Lewis Peer Group Selection 9 Selection is based on an algorithm that considers relationships within peer networks (self-reported peers of all filers within GL s coverage universe) rather than focusing primarily on industry groupings and size characteristics Market-based approach developed by Equilar using a company s selfdisclosed peers and the peers of peers List of companies is refined based on strength of connections between the company and potential peers to develop final peer group

11 Peer Group Selection Challenges 10 High performing (or underperforming) Company Using financial performance data as a selection criterion => NO It shrinks your sample universe Can create significant turnover in the peer group due to performance volatility Adjust target pay positioning in line with long-term performance For example, the bank sustains performance at 65th percentile of peers, it may be appropriate target pay at 65th percentile Recruiting key employees from larger organizations Consider an aspirational peer group as a supplementary reference Provides a perspective on pay levels among firms with whom the bank is competing for executive talent Provides a perspective on future pay; pay level, mix and other practices, which will help smooth the transition Provide perspectives on upper boundaries target pay levels, when the bank is targeting above median pay opportunities of the size appropriate peer group when performance warrants (e.g. fast growing, high performing bank)

12 About First Business 11 First Business Financial Services (Nasdaq:FBIZ) is a $1.3 billion Wisconsinbased bank holding company that specializes in focused financial solutions for businesses, key executives, and high net worth individuals through its operating companies. First Business Financial Services, Inc. First Business Bank - Madison First Business Bank - Northeast First Business Bank - Milwaukee First Business Trust & Investments First Business Equipment Finance First Business Capital Corp. First Business Leasing

13 About First Business 12 Headquarters: Madison, WI Total assets at September 30, 2013: $1.3 Billion Experienced leadership Entrepreneurial management style Insider ownership of 10.1%(1) Business-focused model Mission: build long-term shareholder value as an entrepreneurial financial services provider to businesses, executives, and high net worth individuals Client relationship focus with high touch service 100% organic growth Protects culture Protects credit standards 1. As of March 20, Insider ownership consists of shares owned by directors and executive officers. Assumes exercise of all outstanding options exercisable or exercisable within 60 days of March 20, 2013.

14 Recent Recognition 13 Invited to ring the NASDAQ closing bell in recognition of public offering of 1.1 million shares of common stock, generating net proceeds of $27.1 million. Member of Sandler O-Neil + Partners Sm-All Stars List and Russell Microcap Index 15th ranked Top Performing Mid-Sized Public Bank in the USA by the American Bankers Association The Top Performing Stock in the Wisconsin Ticker as featured in the Milwaukee Journal Sentinel Outstanding 97% Client Satisfaction Rating #1 Preferred Business Bank award by readers of In Business Magazine 10 Time Member of the In Business Hall of Fame Voted a Top 10 Business of the Year by BizTimes Magazine Silver Award for Best Business Bank in the State by readers of Corporate Report Wisconsin

15 About the Board & Compensation Committee 14 Nine member holding company board Expertise includes: Finance Banking Entrepreneurship Management and Executive Experience Human Resources Compensation Committee is dedicated and knowledgeable

16 The Need 15 Times, they are a changin That seems like a lot of money! We have information, but we aren t like those other guys If we want it to be right, we have to do it ourselves with a little help from our friends Internal committee External consultant

17 The Process 16 Established a special committee Engaged our compensation consultant (PMP) Reviewed traditional approaches geography and asset size Explored our needs and concerns looking for true peers, including business banking model Drilled down into what we wanted as an outcome Are there enough peer business banks for an adequate size of peer group? Where would we would recruit from, if necessary? How important is asset size? Performance? Business model? Can we explain to our shareholders? Is one peer group better than two?

18 The Results 17 Confidence among board members and management that the comparisons are relevant One high-performing peer group of 20 banks with similar asset size ($546M to $2.3B, median of $1.4B) and business banking concentration (70% or more) Peers exclude certain geographic regions and performance concerns Peer group will be used for both performance and compensation comparisons

19 How to Effectively Use A Peer Group (and the data that comes along with it!) 18 Market Practices (Peer Group) Business Strategy Human Resource Strategy Drive Inform Compensation Strategy and Programs Shareholder / Proxy Advisor Perspectives Inform Public Optics and Governance Issues Financial Results Annual Compensation Decisions

20 Questions? 19