Annual Convention Compensation Strategies in an Evolving - - PowerPoint PPT Presentation

Compensation Strategies in an Evolving Environment

California Bankers Association 126th Annual Convention

May 4, 2017 Dan Wetzel Managing Director Pearl Meyer Bob Gotelli SVP, Director Human Resources Bank of Marin

Discussion Items

▪ Market Trends

• Base Salaries
• Annual Incentives
• Long-term Incentives
• Goal Setting
• Change-in-Control Benefits

▪ Regulatory Environment

2

Current state

▪ Strong market performance, declining unemployment, rising rates ▪ Salary budget increases remain flat – 3% per year

3

33%

• 13%

3% 21% 43%

• 38%

3% 41% 27% Fed Discount Rate CA Unemployment Rate Salary Budget Increase NASDAQ KBW Index

Change through March 2017

One Year Three-Year 300%

Compensation Expense - CA Banks

▪ Compensation expense per assets declining ▪ Expense per FTE increasing 4% per year

4

* Source: SNL Financial

1.35% 1.40% 1.45% 1.50% 1.55% 1.60% 1.65% 1.70% 1.75% $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000

Salary + Benefits Expense

Compensation Expense / Assets Compensation Expense / FTE

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

5

* Source: 2016 CBA Compensation & Benefits Survey

2017 Anticipated Executive Salary Increases

▪ Executive salaries at larger banks are expected to increase 3-5%

6

Source: Pearl Meyer “2017 Looking Ahead to Executive Pay Practices Survey”

3.5% 3.0% 5.0% 4.0% CEO Direct Reports

2017 Anticipated Salary Increases

Assets <$3B Assets >$3B

Annual Incentives

7

Annual Incentives – Market Perspective

▪ Most employees with base salaries over $100K are eligible for incentives

8

73% 78% 64% 55% 24% 14% 8% 4% Top Executives Salary $100K-$150K Salary $50K-$99K Salary <$50K

Annual Incentives*

% Eligible Target % of Salary

Source: 2016 CBA Compensation & Benefits Survey

Annual Incentives – By Employee Group

▪ Nearly all executives and managers participate and receive an annual incentive ▪ Participation decreases among other exempt and non-exempt employees

9

Source: 2017 Pearl Meyer Compensation Planning Survey

49% 45% 54% 76% 8% 18% 15% 5% 3% 3% 3% Non-Exempt Exempt Management Executive

Formal Plans

100% 90 to < 100% 80 to < 90% 34% 29% 42% 64% 32% 42% 37% 22% 8% 11% 8% 3% Non-Exempt Exempt Management Executive

Receiving Incentives Nearly 90%

Annual Incentives Looking Ahead…

▪ Banks are expecting 2017 annual incentives payouts to be equal to or higher than last year

10

Source: Pearl Meyer “2017 Looking Ahead to Executive Pay Practices Survey”

7% 15% 41% 24% 5% 2% 2% 49% 36% 5% Considerably lower Somewhat lower About the same Somewhat higher Considerably higher

Expections: Executive 2017 vs. 2016 Annual Incentives

Banks All Companies

85%

Long-term Incentives

11

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

74% 67% 63% 60% 58% 67% 2015 2014 2013 2012 2011 2010

Restricted Stock

57% 76% 68% 80% 58% 67% 2015 2014 2013 2012 2011 2010

Stock Options

30% 14% 11% 0% 5% 0% 2015 2014 2013 2012 2011 2010

Performance Contingent

CEO LTI Awards Public CA Banks

▪ Performance contingent award usage doubled over the past year

• Shareholder response
• Alignment with performance

13

Source: California Banks Assets $500M to $10B (n=29)

LTI – Market Perspectives

▪ Among public California Banks, long-term incentive awards to senior executives continue to increase in prevalence

14

Source: 2016 CBA Compensation & Benefits Survey 60% 79% 62% 66% 72% 79% 60% 70% 78% 68% 79% 71%

2010 2011 2012 2013 2014 2015

Long-term Incentives % Receiving CA Public Banks

CEOs CFOs Linear (CEOs) Linear (CFOs)

LTI Looking Ahead…

▪ Anticipated changes to LTI program include revising performance metrics and award mix

15

Source: Pearl Meyer “2017 Looking Ahead to Executive Pay Practices Survey”

11% 1% 1% 4% 9% 6% 4% 6% 11% 33% 40% 0% 0% 3% 6% 6% 9% 12% 12% 12% 26% 38% New Ownership Guidelines Eliminate CIC Discretion New Realizable Value Caps Increase Ownership Guidelines Add Double Trigger CIC Lengthen Vesting Period Implement Minimum Vesting Periods New Holding Requirements Shorten Vesting Period Change LTI Mix Change Performance Metrics

2017 Anticipated LTI Program Modifications

Banks All Companies

Goal Setting

16

Defining Performance

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

17

Dynamic Tension

▪ Selection of metrics should consider:

• Long-term strategic plan
• Balance with short-term incentive (“STI”) goals (i.e. “dynamic tension”)

18

Growth Goals

Short- Term Incentive Plan Long- Term Incentive Plan

Earnings / Return Goals Quality / Safety / Efficiency Goals

Revenue Net Income, EPS Assets, Loans, Deposits ROAA, ROAE Total Shareholder Return

The Goal Setting Process: Time Spent

▪ 53% of banks spend 6 hours or less on measure selection & calibration

19

< 2 Hours, 15% 2 - 4 Hours, 20% 4 - 6 Hours, 18% 6 to 8 Hours, 18% 8 to 10 Hours, 12% 10 Hours

• r More,

17%

US Banks

Based on a recent survey conducted by Pearl Meyer. Includes responses from 78 banks.

The Goal Setting Process: Influence

▪ For most companies, measure selection is driven by the annual budget

20

Based on a recent survey conducted by Pearl Meyer.

The Goal Setting Process: Considerations

▪ Fewer than 50% of companies always consider peer performance and market expectations

21

Based on a recent survey conducted by Pearl Meyer.

Prevalent 2015 Annual Incentive Metrics

▪ For executive teams, most banks utilize multiple performance metrics in annual incentive plans

22

53% 49% 39% 35% 27% 24% 18% Pre-tax / Net Income Net Loans Deposits ROAA

• Eff. Ratio

ROAE NPAs/Assets

Prevalent Annual Incentive Metrics

55% 100% 57% Balance Sheet Earnings Quality Metric

Prevalent Annual Incentive Metric Categories

* Source: West Coast Banks

Prevalent 2015 LTI Metrics

▪ For executive teams, most banks utilize absolute financial performance goals ▪ TSR goals are generally balanced with absolute financial goals

23

* Source: West Coast Banks

25% 21% 21% 18% 7% 46% 25% Quality EPS ROA ROE Regulatory Rating Relative TSR Relative Financials

Long-term Incentive Performance Metrics Banks are reconsidering the use of rTSR

LTI Plans & TSR Goals

▪ Most Participants are satisfied with plans ▪ Among general industry companies, there was a higher level of dissatisfaction with relative TSR plans

24

* Source: West Coast Banks Satisfied 67% Somewhat Satisfied 22%

Mgmt/Board Differ 11%

TSR-Based LTI US Banks

Very Satisfied 10% Satisfied 56% Somewhat Satisfied 20%

Somewhat Dissatisfied 3% Dissatisfied 3% Mgmt/Board Differ 8%

Performance-Based LTI US Banks

Based on a recent survey conducted by Pearl Meyer. Includes responses from 78 banks.

Incentive Plan Leverage

▪ Long-term Incentive Plans

• 30% set goals as all or none
• Highest stretch payout 200%

25

▪ Annual Incentive Plans

• 64% set threshold above 0%
• Highest stretch payout 250%

50% 100% 150% 100% 172% Threshold Target Maximum (Stretch)

Annual Incentive Leverage

25/50th Percentile 75th Percentile

50% 100% 150% 150% Threshold Target Maximum (Stretch)

Long-term Incentive Leverage

0% 20% 40% 60% 80% 100% Prevalence of Achievement Efficiency Ratio

Efficiency Ratio Prevalence 2003 - 2016

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%

26

Threshold Target Maximum

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

• f 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

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

Change-in-Control Benefits

29

Summary of Say on Golden Parachute Disclosures

416 U.S. Companies Acquired after 2010

30

2% 24% 38% 37% 5% 39% 38% 17% 11% 48% 33% 8% < 1X 1X - <2X 2X - <2.99X 2.99-3X

Prevalence of CIC Severance Multiples

CEO NEO (Tier 1) NEO (Tier 2)

Practice CEO Other NEOs (count 2-8) Eligibility 75% 80% Severance Multiple 2.99-3 X - 36% 2 - <3 X - 37% 1-2X - 23% 2.99-3 X - 17% 2 - <3 X - 38% 1-2X - 39% Severance Basis Base + Bonus (59%) Base (29%) Base + Bonus (53%) Base (39%) Severance Bonus Definition Annual Incentive Payout Treatment of Equity Time-Based Vesting

• Single Trigger 82%
• Double Trigger 13%

Majority vest in full based on target performance.

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%) Pro-rata bonus payout (50%) through date of termination

• Target performance (49%)
• Actual performance (33%)

Target 41%, Greater of 23%, Average 23%

Regulatory Environment

31

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