Compensation Advisory Partners (CAP) conducted a study of executive compensation trends in the regional banking industry. The study examined 2022 CEO compensation levels and pay practices among 40 regional banks across three groups based on FY’22 asset size: $1B – $5B in assets (“small banks”; n=13), $5B – $10B in assets (“medium banks”; n=13) and $10B – $20B in assets (“large banks”; n=14). This report compares both compensation levels and incentive plan design across the groups. We also highlight current issues facing the banking industry in 2023.

Highlights

1	2022 Performance and Pay Outcomes Total CEO compensation in 2022 increased 6 percent on average across all asset groups, compared to an 11 percent increase in 2021. Medium and large banks experienced declines in earnings and profitability partly because 2021 was a very strong performance year. However, CEO pay increased since most banks achieved target or greater performance results. Total Shareholder Return (TSR) was also weaker in 2022 (-2 percent) for all banks compared to 2021, when TSR was strong (+34 percent).
2	Total Pay Mix As asset size increases, a higher percentage of banks’ CEO total pay shifts from fixed compensation to at-risk or variable compensation, and a larger emphasis is placed on long-term vs. annual incentives.
3	Annual and Long-term Incentive Plan Metrics The most prevalent metrics for annual and long-term incentive plans remained consistent with prior years. For annual incentives, the most prevalent metrics generally include Efficiency Ratio, Earnings Per Share (EPS), Asset Quality and Return on Assets (ROA), with the small and medium banks also considering Loan and Deposit levels more frequently. Performance against individual goals is prevalent among half the banks in our sample. For long-term plans, relative TSR, ROE, EPS and ROA are frequently used together.
4	Use of Environmental, Social and Governance (ESG) Metrics in Incentive Plans Among all banks in our study, the inclusion of ESG metrics in annual incentive plans continues to be a minority practice, but it notably doubled year-over-year. In 2022, 25 percent (n=10) of the banks considered ESG as part of the bonus decision – primarily as an award component – compared to 13 percent (n=5) in 2021. No banks in the sample considered ESG in determining long-term incentives. The ESG categories banks most frequently disclose relate to Human Capital and Diversity, Equity & Inclusion (DE&I).
5	Looking Ahead Given the current banking landscape and operational environment, there continues to be uncertainty surrounding the performance outlook for 2023. With the recent bank failures, increase in cost of funds, higher capital requirements and evolving regulatory environment, banks’ shareholder returns have been negatively impacted year-to-date; however, banks continue to be profitable in the first half of 2023 with financial performance generally flat compared to the first half of 2022.

2022 Performance and Pay Outcomes

Performance Results

Bank 2022 financial performance reflects the market normalizing post-pandemic, following a strong performance year in 2021. Earnings, profitability and return metrics were all stronger in 2021 vs. 2022. For 2022, the high interest rate environment lifted net interest margin and increased net interest income growth, which in turn helped boost earnings and profitability.

When comparing across all three groups, the small banks generally had the strongest performance year in 2022, as EPS and Net Income grew at higher rates than the medium and large banks. As of 12/31/2022, TSR performance on a 1- and 3-year basis was also better for the small banks.

CEO Annual Incentive Payouts

At median, CEO annual incentive payouts were above target across all groups but decreased 9 and 17 percent year-over-year for the small and medium banks, respectively; 11 banks paid bonuses below target compared to just five last year. Payouts among the larger banks increased modestly at all percentiles year-over-year despite poorer performance in 2022, which can be attributed to market-based increases in target bonus opportunities following strong 2021 results and high performance on individual and strategic components.

Total Pay Changes

Despite a moderation in financial performance and annual incentive payouts as a percent of target, CEO actual total compensation1 (base salary, annual incentive payouts, and long-term incentives) increased for all asset groups in 2022. Large banks saw the largest increase in total compensation (+12 percent), and CEO pay at small and medium banks increased +5 percent and +3 percent, respectively. The 12 percent increase among the large banks was primarily driven by annual incentive payouts (+19 percent). Increases for small and medium banks were led by long-term incentive increases of +16 percent and +4 percent, respectively. While long-term incentive grant date values are generally determined by competitive market positioning, the comparatively strong 2022 performance among small banks amidst an industry-wide downturn may have had an outsized impact on this compensation element. The increase in annual bonuses among large banks can be attributed to market-based adjustments to target opportunities year-over-year and strong performance against individual or strategic goals; about 80 percent of large banks consider such goals, which are primarily determined on a discretionary basis and subject to greater volatility in a given year. Like 2021, base salary values were consistent across the banks, with increases ranging from about 3 to 5 percent at median.

Chief Executive Officer Pay Mix

Like our findings from prior years, CEOs at the larger banks have higher overall pay levels and more of their total pay delivered in at-risk or variable compensation (i.e., annual or long-term incentives). Conversely, CEOs at smaller banks are often paid more fixed compensation (i.e., base salary). The portion of total compensation delivered in the form of long-term incentives increased year-over-year for both small banks – from 18 percent in 2021 to 23 percent in 2022 – and medium banks – from 23 percent in 2021 to 28 percent in 2022. The pay mix for large banks was similar year-over-year.

Pay Practices

Annual Incentive Plans

The most common annual incentive plan funding approach is “goal attainment,” in which actual financial achievement is compared to pre-established goals made at the beginning of the fiscal year. The banks in our sample typically utilize several corporate metrics when determining their annual incentive payouts. Approximately 75 percent of the small, medium and large banks use three or more weighted financial metrics. Efficiency Ratio, EPS, Asset Quality (i.e., non-performing assets, non-performing loan ratio) and ROA are among the most prevalent metrics used at these banks. Among the banks that use them, Earnings (EPS and Net Income) were typically weighted more (approximately 25 to 50 percent of the total plan) than Returns (ROA or ROE), Efficiency Ratio and Asset Quality metrics (approximately 15 to 25 percent of the total plan). The small and medium banks differ from the large banks in that they more frequently use Loan or Deposit measures in their plans, with these metrics accounting for no more than 30 percent of the total plan.

Individual goals are prevalent among all asset groups. The small and medium banks predominantly incorporate individual performance as a standalone weighted metric (typically 20 percent weighting), while half of the large banks that measure individual performance use a discretionary assessment. The medium and large banks are more likely to incorporate strategic goals such as audit quality, risk management, net promoter score, succession planning, customer service and technology initiatives.

Long-term Incentive (LTI) Plans

The most typical long-term incentives used across industries, including the banking industry, include stock options, time-vested stock (restricted stock [RS] or restricted stock units [RSUs]) and performance-vested stock. Like the broader market, the banks in our sample use a portfolio approach for their LTI plans, with nearly 75 percent of these banks granting two or three LTI vehicles. The small and medium banks more frequently use a single LTI vehicle (31 percent, on average), and only one bank in the entire sample does not grant equity. The LTI mix among the three groups is consistent, with stock options continuing to be the least utilized equity vehicle – on average about 1 to 7 percent of the overall LTI mix. Time-vested RS typically comprises about 30 to 45 percent of the LTI mix among these banks, with performance plans making up the bulk (about 55 to 65 percent) of LTI plans in the total sample.

Performance-based awards are typically granted annually and have overlapping 3-year performance periods. Payouts can fluctuate based on achievement of performance measures, and the upside is normally limited to 150 to 200 percent of the target level. Approximately 80 percent of companies in each asset grouping (that utilize performance plans) measure performance against two to four metrics. The most prevalent metrics used are Returns, relative TSR and EPS for all three groupings, and it is common that two of these measures are paired together to determine all, or the majority of, the payout.

TSR is almost exclusively measured on a relative basis, often measured against either the company-defined peer group or an industry index. In our sample, relative TSR is used mostly as a weighted metric, and only 5 percent of all banks use it as a modifier of the calculated payout. Other common relative metrics include ROE, ROA and EPS growth. Among the total sample, approximately 55 percent of banks use a relative measure other than TSR.

ESG in Incentive Plans

Given that ESG issues remain an area of focus for employees, institutional investors, and the public, banks are increasingly linking compensation to measurable ESG initiatives such as DE&I. Among the banks in our sample, while still a minority practice, we have seen an uptick in the use of ESG metrics in incentive plans. In 2022, 10 banks included ESG goals in their annual incentive plans, up from five in 2021. Most banks measure performance on a qualitative basis either as part of a standalone strategic or individual component (weighted 10 to 25 percent), or as part of a discretionary adjustment to plan funding. Two banks (Evans Bancorp and Berkshire Hills Bancorp) have standalone weighted components of their annual incentive plans tied to ESG (15 to 20 percent, respectively), a unique practice among the sample. The inclusion of these goals continues to evolve, and we may see banks revisit the use of ESG goals in incentive plans given the recent Supreme Court decision on affirmative action and a rise in anti-ESG shareholder proposals. While larger banks may continue to lead the push for ESG metric incorporation in incentive plans, we may see greater hesitance from small and medium banks as uncertainties abound regarding this hot-button issue.

Looking Ahead

Each week brings new and potentially conflicting signals about the health of the economy. For the banking industry, there continues to be uncertainty surrounding the rise in interest rates, consumer spending habits, inflationary environment, deposit competition, unrealized losses in bond portfolios, worsening credit conditions and the overall regulatory environment. As we approach the final months of 2023, financial performance and incentive plan results will be heavily impacted by the interest rate environment, decrease in mortgage origination, economy’s impact on loan quality and interest rate spreads, volatility with provisioning, and competition for deposits.

As of the 2nd quarter of 2023, regional banks have posted flat year-over-year returns and earnings, poorer Efficiency Ratios, slower deposit growth and double-digit decreases in TSR. However, despite the Federal Reserve raising interest rates to a 22-year high, the economy remains resilient, inflation is leveling off at lower rates than in 2022, unemployment is low, residential housing construction and consumer spending are strong, credit quality remains sound, and loan losses are at historically low levels.

Each bank’s financial performance is impacted differently based on asset size, product mix, sector mix / concentration, growth strategy, and loan portfolio. As we approach the end of 2023, all banks will need to strike a balance between aligning pay with financial results and shareholder returns, which may be challenging in the current environment of moderate to flat growth and profitability and double-digit decreases in stock price performance.

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For questions or more information, please contact:

Kelly Malafis
Partner
[email protected]
212-921-9357

Shaun Bisman
Principal
[email protected]
212-921-9365

Theo Allen
Associate
[email protected]
646-568-1157

Hanna Borsack and Gray Broaddus provided research assistance for this report.

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Regional Banks in CAP’s Study (n=40)

Small Banks ($1B – $5B in assets)

• Bar Harbor Bankshares
• Capital City Bank Group, Inc.
• Central Valley Community Bancorp
• Enterprise Bancorp, Inc.
• Evans Bancorp, Inc.
• Farmers National Banc Corp.
• First Business Financial Services, Inc.
• First Financial Northwest, Inc.
• Independent Bank Corporation
• LCNB Corp.
• National Bankshares, Inc.
• Oak Valley Bancorp
• Sierra Bancorp

Medium Banks ($5B – $10B in assets)

• 1st Source Corporation
• Amerant Bancorp Inc.
• Banc of California, Inc.
• Brookline Bancorp, Inc.
• Camden National Corporation
• CNB Financial Corporation
• First Commonwealth Financial Corporation
• German American Bancorp, Inc.
• Heritage Commerce Corp.
• Park National Corporation
• Stock Yards Bancorp, Inc.
• Univest Financial Corporation
• Westamerica Bancorporation

Large Banks ($10B – $20B in assets)

• Atlantic Union Bankshares Corporation
• Banner Corporation
• Berkshire Hills Bancorp, Inc.
• Community Bank System, Inc.
• Enterprise Financial Services Corp.
• First Busey Corporation
• First Foundation Inc.
• First Merchants Corporation
• Heartland Financial USA, Inc.
• Lakeland Bancorp, Inc.
• Renasant Corporation
• Seacoast Banking Corporation of Florida
• Trustmark Corporation
• WesBanco, Inc.

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