Purpose of a Formal Compensation Plan

Transcription

1 Total Compensation: Understanding Plan Elements and Strategy Julia Date Johnson, or subtitle Senior Manager ww w.wi Wipfli LLPpfli. com Today s Agenda Purpose of a Formal Compensation Plan Compensation Strategy Considerations Compensation Philosophy Regulatory Concerns and Importance of Compensation Plan Design Linking Pay with Performance Plan Documentation Sound Incentive Compensation Principles Wipfli LLP 2 1

2 Purpose of a Formal Compensation Plan To ensure pay is competitive and aligned with the compensation philosophy To ensure pay is established and administered fairly and equitably for the work being performed To recognize the value each employee brings to the bank To attract, motivate, and retain talent To provide administrative guidelines for compensation-related decisions Wipfli LLP 3 Compensation Strategy Considerations What is your desired market position? Position Compensation Component 25 th Percentile (lag) 50 th Percentile (meet) 75 th Percentile (lead) Base Salary Annual Incentives Long-Term Incentives Benefits Perks Total Compensation ww w.wi Wipfli LLPpfli. com 2

3 Compensation Philosophy Guides compensation decision making Specifies the purpose of each component of the employee s total compensation mix Articulates the mix of base salary, short-term incentives, long-term incentives, and benefits Wipfli LLP 5 Compensation Structure Example Base Salary Annual Incentive Long-Term Incentive Benefits Retirement Perquisites Total Comp Senior Executives Below Substantially Above Substantially Above Below Below Below Above Management and Supervisors At Above Above At At NA Above Employees Slightly Above At NA At At NA Slightly Above Wipfli LLP 6 3

4 Total Compensation Mix Chief Executive Officer Industry Standards Base Salary Annual Bonus LTIP Other Total Less than $250M 66.7% 12.2% 10.5% 10.6% 100% $200 -$500M % $500 - $1B % $1B - $5B % Over $5B % Source: SNL Financial Wipfli LLP 7 Regulatory Concerns In deconstructing the events leading to the financial crisis in the financial institution industry, the agencies determined that a significant contributing factor was poorly designed compensation arrangements In particular, incentive compensation plans Wipfli LLP 8 4

5 Importance of Compensation Plan Design Misaligned and/or flawed incentive e plans encourage risk-taking behavior that may reward short-term gains without consideration of longterm risks, thereby jeopardizing the safety and soundness of financial institutions. Wipfli LLP 9 Corporate Governance Form an informed compensation committee composed of outside directors. Ensure all decisions impacting compensation risk are approved by the committee. Allow committee access to external experts. At the time payments are approved, have the committee conduct a postmortem opportunity to discuss necessary adjustments for the next plan year. Wipfli LLP 10 5

6 Annual Target Levels: Example Outline Example Target Incentives Tier Position As % of Salary I CEO 30% II EVP/Senior Mgmt 25% III Dept Managers and Commercial Bankers III, II 20% IV Staff Support Managers 15% Wipfli LLP 11 Goal Setting Tie goals to budgeted financial results and strategic plan. Determine who establishes team and/or individual goals. Establish goals before the performance period. Determine appropriate thresholds and maximums. Cap payouts at a reasonable level. Wipfli LLP 12 6

7 Annual Incentive Considerations What performance criteria are appropriate to use as a basis for annual incentive awards? Individual Department Bankwide CEO X Sr/Dept Mgrs X X Exempt X X X Employees X X X Wipfli LLP 13 Performance Management Loop 1. JOB DESCRIPTION 6. SALARY REVIEW 2. JOB EVALUATION 5. PERFORMANCE REVIEW 3.SALARY/GRADE RANGES 4. EMPLOYEE OBJECTIVES Wipfli LLP 14 7

8 Performance Measures Can be measured and quantified Are tied to strategic plan Use absolute and/or relative goals Use gates /qualifiers to manage risk Balance bank, team, and individual Keep it simple and understandable Wipfli LLP 15 Calculation and Verification of Performance and Rewards Determine what data or reports will be utilized to calculate incentives. Identify position that gathers and calculates payouts. Verify results and payout calculations. Consider incorporating risk sensitive provisions, i.e., claw backs, deferral of payment. Have board approve results and payments. Wipfli LLP 16 8

9 Stress Testing Run what if scenarios for all incentive arrangements. Test scenarios against YTD results periodically. Adjust accounting accruals periodically to reflect likely outcomes. Wipfli LLP 17 Plan Documents Develop plan documents that clearly present plan features and provisions, including plan period, timing of payments, performance thresholds, expectations, etc. Reserve and protect rights of the bank. Do not alter the employment at-will status. Wipfli LLP 18 9

10 Three Key Principles 1. Balanced Risk-Taking Incentives 2. Compatibility With Effective Controls and Risk Management 3. Strong Corporate Governance Wipfli LLP 19 Balanced Risk-Taking Incentives Incentives should not encourage short-term profit at the expense of short- and long-term risks. Incentives should account for and adjust risks and losses as wells as gains. Two employees who generate the same revenue, but with different risk levels, should not receive the same incentive compensation. Wipfli LLP 20 10

11 Balanced Risk-Taking Incentives (continued) Plans should account for the full range of risks, including credit, market, liquidity, operations, legal, compliance, and reputational. Methods to make incentive compensation more sensitive to risk include risk adjustments, deferral payments, longer performance periods, reduced sensitivity to short-term performance. Wipfli LLP 21 Compatibility With Controls Risk management processes should support the development and maintenance of balanced incentive plans. Risk management personnel should have a role in designing and monitoring plans. Internal controls need to support development of balanced plans and identify employees who expose the bank to risk. Wipfli LLP 22 11

12 Strong Corporate Governance Compensation committee/board of directors should have an active role in designing g and reviewing plans on an ongoing basis for all covered employees. Structure, composition, and resources available to the board of directors should allow for effective oversight. Wipfli LLP 23 Covered Employees Senior executives and others with bankwide (or material business line) oversight Individuals whose activities may expose the bank to material amounts of risk Groups of employees who may expose the bank to material amounts of risk Wipfli LLP 24 12

13 Compensation Risk Assessment Inventory all compensation arrangements. Identify risks associated with each plan. Conduct a team risk assessment. Present review findings to compensation committee and/or board of directors. Modify incentive arrangements as needed. d Wipfli LLP 25 Conclusions Total compensation should be competitive and aligned with the compensation philosophy. Incentive compensation must be carefully balanced with bank s risk tolerance and is but one component of total compensation. Sound incentive compensation policies i assist in managing risk, not eliminating it. Wipfli LLP 26 13

14 Questions Wipfli LLP 27 Julia Johnson Senior Manager Wipfli LLP 28 14