Compensation Hot Topics:

Transcription

1 Compensation Hot Topics: Being Prepared for Boomers to Millennials Presented by: Kathy Smith, President Attracting Quality Developing Loyalty Embracing Leadership 1255 West 15th Street, Suite 830; Plano, TX /

2 Capabilities, Products & Services Compensation Consulting Executive & Director Benefits Plans Succession Planning Benefit Expense Offset/BOLI Long-Term Care & Disability Income Planning Administrative Services

3 Trends in Compensation More emphasis on incentive compensation to retain and reward key personnel More bonus deferrals in light of the Fed guidance Stock Options and Restricted Stock are certainly still viable Increased interest in Phantom Stock Plans and Stock Appreciation Rights Plans Clawback provisions implemented with incentive plans Longer term incentive plans

4 Challenges In Delivering Compensation Structuring Components of Compensation that are attractive to key employees, while assuring the bank has appropriate retention and reward features. Employees have varying concerns with the delivery of compensation that is dependent upon where they are in their career cycle. Retention strategies that work for senior executives are not as effective for younger employees

5 Compensation Interests by Generation MILLENNIALS: Emphasize current pay Incentives being paid out in short time frames Ability to financially handle big ticket purchases is rewarding GEN X: In addition to current compensation & incentives, the opportunity to accumulate wealth that pays while still in mid-career is attractive Planning for delivery of deferred compensation around the time children will enter college BOOMERS: Compensation that addresses post-retirement needs becomes more critical and attractive Caring for parents as well as children is a challenging dynamic

6 Different Elements of Executive Compensation are Used to Achieve Different Objectives Employment/CIC Agreements Long-Term Wealth Accumulation Mid-Term Deferred Incentives Equity-Based Plans Short-Term Deferred Incentives Annual Cash Incentive Attractive to Millennials Standard Benefits Benefit Expense Offset/BOLI

7 Different Elements of Executive Compensation are Used to Achieve Different Objectives Employment/CIC Agreements Long-Term Wealth Accumulation Mid-Term Deferred Incentives Equity-Based Plans Short-Term Deferred Incentives Attractive to Gen-Xers Annual Cash Incentive Standard Benefits Benefit Expense Offset/BOLI

8 Different Elements of Executive Compensation are Used to Achieve Different Objectives Employment/CIC Agreements Long-Term Wealth Accumulation Mid-Term Deferred Incentives Equity-Based Plans Attractive to Boomers Short-Term Deferred Incentives Annual Cash Incentive Standard Benefits Benefit Expense Offset/BOLI

9 Different Elements of Executive Compensation are Used to Achieve Different Objectives Employment/CIC Agreements Long-Term Wealth Accumulation Mid-Term Deferred Incentives Equity-Based Plans Short-Term Deferred Incentives Annual Cash Incentive Standard Benefits Benefit Expense Offset/BOLI

10 Annual Cash Incentive Plan (ACIP) Plan Highlights Employees selected by bank Discretionary or scorecards to measure performance bank wide branch wide department wide individual Design affordable plan

11 Different Elements of Executive Compensation are Used to Achieve Different Objectives Employment/CIC Agreements Long-Term Wealth Accumulation Mid-Term Deferred Incentives Equity-Based Plans Short-Term Deferred Incentives Annual Cash Incentive Standard Benefits Benefit Expense Offset/BOLI

12 Deferred Cash Incentive Plan (DCIP) Eligibility Available to all senior and junior officers Term Five year deferral plan with officer receiving payment early in sixth year of each deferral (January or February) Specifics Additional cash compensation, often percentage of salary Payable in short-term, five years Deferred amounts may earn at the bank s ROE Forfeited if they leave the bank ( golden handcuffs ) Plan is flexible with multiple variations Can be exempt from 409A if payout is structured properly

13 Different Elements of Executive Compensation are Used to Achieve Different Objectives Employment/CIC Agreements Long-Term Wealth Accumulation Mid-Term Deferred Incentives Equity-Based Plans Short-Term Deferred Incentives Annual Cash Incentive Standard Benefits Benefit Expense Offset/BOLI

14 Equity Sharing Plans for Key Bank Executives Stock Plans for Key Bank Executives Restricted Stock Stock Options (ISO & NSO) Stock Appreciation Rights (SAR) Phantom Stock (PSU) Real equity because actual stock certificates are involved Synthetic equity because no actual stock certificates are involved

15 Stock Appreciation Rights Phantom Stock Stock Appreciation Rights Future Appreciation Future Appreciation Current Equity Value Current Equity Value Phantom Stock provides both current grant value and future appreciation to the plan participant; key executive or director. Stock Appreciation Right Plans provide only future appreciation to the plan participant; key executive or director PS Plans are more generous and therefore more costly than SAR Plans

16 Different Elements of Executive Compensation are Used to Achieve Different Objectives Employment/CIC Agreements Long-Term Wealth Accumulation Mid-Term Deferred Incentives Equity-Based Plans Short-Term Deferred Incentives Annual Cash Incentive Standard Benefits Benefit Expense Offset/BOLI

17 Long-Term Wealth Accumulation Plans Objective Provide key senior executives a supplemental retirement stream of income at retirement Method Formula driven Ensure change of control is a positive impact to the executive Offset IRS caps on qualified plans Usually has vesting schedule prior to retirement Example Traditional Salary Continuation Plan Supplemental Retirement Plans (SRPs) Phantom Stock Plans/SARs may be used in lieu of SRPs

18 Compensation for Directors There are various forms of compensation and benefits for directors: Cash Compensation Monthly Board Fees Annual Retainer Committee Fees Traditional Fee Deferral Plans Fee Continuation Plans Phantom Stock/Stock Appreciation Rights Plans Stock Options/Grants/Warrants Long-Term Care Benefits Bank-Owned Life Insurance Estate Planning

19 Benefit Expense Offset/BOLI Recovering the Costs of Deferred Compensation and Other Executive Nonqualified Benefit Plans

20 What are the Two Most Common Ways of Paying these Executive Benefit Plan Costs? Pay out of current increased earnings If the bank has unutilized Bank-Owned Life Insurance (BOLI) capacity, use additional BOLI as a source of incremental earnings to cover the costs

21 A Paradigm Shift Bank-Owned Life Insurance Traditional Retail Life Insurance Cash Surrender Value Death Benefit Death Benefit Cash Surrender Value

22 Pro Forma Income Statement Tax Results of Alternative Assets vs BOLI (1) (2) (3) Alternative First Year Asset Placement: $2,750,000 Asset BOLI Gain / (Loss) Due to BOLI Income Income 2.00% 3.29% First Year Gross Income 55,000 90,400 35,400 Load / Surrender Charges Income Tax (38.9%) 21, ,395 Net Earnings Impact 33,605 90,400 56,795

23 (1) (2) (3) (4) (5) (6) Annual Annual Annual Annual Annual Cumulative After-Tax BOLI Alternative Net BOLI Bank Bank Year Expenses Gain Asset Cost 2 Gain Impact Impact 1 (37,282) 90,400 (33,605) 56,795 19,513 19,513 2 (37,665) 90,836 (34,016) 56,821 19,156 38,669 3 (39,785) 91,117 (34,431) 56,686 16,901 55,570 4 (42,024) 93,616 (34,852) 58,764 16,740 72,310 5 (44,390) 95,579 (35,278) 60,301 15,912 88,222 6 (46,888) 97,546 (35,709) 61,837 14, ,171 7 (49,528) 100,590 (36,145) 64,444 14, ,087 8 (52,317) 103,836 (36,587) 67,249 14, ,020 9 (18,988) 107,674 (37,034) 70,640 51, , (53) 111,496 (37,487) 74,009 73, , , ,042 (37,945) 80,097 81, , , ,188 (38,409) 82,780 86, , , ,042 (38,878) 85,164 90, , , ,810 (39,353) 87,457 94, , , ,675 (39,834) 89,841 98, , , ,798 (40,321) 91, , , , ,193 (40,813) 93, , , , ,430 (41,312) 95, ,096 1,031, ,293 (16,323) 37,970 37,970 3,343, ,165 (16,523) 37,642 37,642 3,381, ,013 (16,725) 37,288 37,288 3,418, ,492 (16,929) 592, ,564 4,011,271 (295,927) 4,307,198 4,011,271

24 Different Elements of Executive Compensation are Used to Achieve Different Objectives Employment/CIC Agreements Long-Term Wealth Accumulation Mid-Term Deferred Incentives Equity-Based Plans Short-Term Deferred Incentives Annual Cash Incentive Standard Benefits Benefit Expense Offset/BOLI

25 Employment/Change in Control Agreements Key Provisions Term (length of contract) Duties, responsibilities and reporting lines Compensation elements Severance triggers Severance payments Change in control related provisions Post-employment obligations

26 Coordination of Benefits Lack of coordination of benefits may lead to unintended results Common coordination concerns Impact of overall compensation in determining retirement benefits Impact on severance payments made in connection with a change in control Key areas for coordination Employment/change in control agreements Supplemental retirement benefits Incentive plan payments Equity grants

27 QUESTIONS?

28 Thank You! Kathy Smith ext. 104