Compensation Advisory Partners (CAP) conducted a study of executive compensation trends in the regional banking industry. The study examined 2023 CEO compensation levels and pay practices among 40 regional banks across three groups based on FY’23 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 and highlights current issues facing the banking industry in 2024.

Highlights

1	2023 Performance and Pay Outcomes Total CEO compensation in 2023 decreased 2 percent on average across all asset groups, compared to a 6 percent average increase in 2022 and an 11 percent increase in 2021. Banks across the board experienced declines in earnings, profitability and Total Shareholder Return (TSR) in the wake of industry-wide turmoil and economic uncertainty. CEO pay for the medium and large banks decreased, primarily driven by sharp year-over-year declines in bonus payouts and the small banks had a modest increase year-over-year, as their bonuses were modestly up from prior year. Despite a modest increase among the small banks and decreases among the medium and large banks, compensation levels year-over-year would have been lower if banks had not intervened to adjust their financial metrics or pay discretionary bonuses to account for the impact of the 2023 regional banking crisis. Common adjustments included the interest rate environment, the special FDIC assessment, and deposit volumes.
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. However, lower bonus payouts due to poor financial performance placed greater emphasis on base salaries and long-term incentives in 2023 for medium and large banks.
3	Annual and Long-term Incentive Plan Metrics The most prevalent metrics for annual and long-term incentive plans remained consistent to prior years. For annual incentives, the most prevalent metrics generally include Earnings Per Share (EPS), Efficiency Ratio, Asset Quality and Return on Assets (ROA), with the small and medium banks also considering Loan and Deposit levels more frequently than large banks. Performance against individual goals is prevalent at over half the banks in our sample. For long-term plans, relative TSR, Return on Equity (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, and it decreased slightly year-over-year. Overall, in 2023 20 percent (n=8) of the banks considered ESG as part of the bonus decision – primarily as an award component – compared to 25 percent (n=10) in 2022. The ESG categories banks most frequently disclose relate to Human Capital and Diversity, Equity & Inclusion (DE&I). There has been a general push-back on ESG-related priorities and their use in incentive plans. We expect this area of plan design to evolve as organizations confirm their ESG objectives and their link to business outcomes.
5	Looking Ahead Given the current banking landscape and operational environment, there continues to be uncertainty surrounding the performance outlook for 2024. Against the backdrop of moderating inflation, looming rate cuts and the upcoming presidential election, banks’ shareholder returns have moderately increased year-to-date; however, bank returns and profitability are down in the first half of 2024 compared to the first half of 2023, highlighting the industry’s challenges in the wake of last year’s regional banking crisis.

2023 Performance and Pay Outcomes

Performance Results

Bank financial performance was down in 2023 as banks shifted their priorities to focus on deposit gathering vs. loan growth following bank shutdowns at Silicon Valley Bank, Signature, and First Republic early in 2023. Many banks also undertook cost-cutting measures to rein in pandemic-era overexpansion and withstand persistent economic uncertainty. Amid this environment, earnings, profitability and return metrics largely declined in 2023 vs. 2022.

Among the three groups, small banks performed the best in 2023, with EPS and Net Income declining at a slower rate compared to medium and large banks. As of December 31, 2023, small banks also outperformed in TSR over 1- and 3-year periods, although the 1-year TSR still reflected a 4.5 percent decline compared to the previous year.

CEO Annual Incentive Payouts

At median, CEO annual incentive payouts were at or below target across all groups and notably decreased 18 percent, 40 percent and 46 percent year-over-year for the small, medium and large banks, respectively; 28 banks (70 percent of total sample) paid bonuses below target compared to 11 last year. Payouts among the three groups notably decreased at all percentiles year-over-year, which can be attributed to the banks’ weaker performance in 2023.

Annual incentives would have decreased further if not for adjustments to financial metrics. In response to the banking crisis, just over one-third of companies with formulaic or goal-based plans modified their bonus plan metrics or provided a discretionary payout. 8 percent of these banks (n=3) would have paid no annual incentive but opted to adjust their metrics or provide a discretionary bonus. Banks commonly adjusted for the interest rate environment, the special FDIC assessment, and deposit volumes.

Total Pay Changes

Consistent with 2023 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 modestly for the small banks and decreased for the medium and large banks. Large banks experienced the steepest decline in total compensation (-7 percent), followed by medium banks (-1 percent), while CEO pay at small banks rose by 3 percent. The 7 percent decline at large banks was primarily driven by a 30 percent drop in annual incentive payouts. Medium banks saw a 1 percent decrease, also largely due to a 26 percent reduction in annual incentives, though this was partially offset by a 6 percent increase in long-term incentives. Small banks saw modest increases of 3 percent to 4 percent in CEO cash compensation, while long-term incentive values remained flat year-over-year for both small and large banks. Long-term incentive grant values were less influenced by company performance and were generally determined by competitive market positioning. The significant decrease in annual bonuses for medium and large banks was attributable to their weak financial performance in a challenging operating environment. Additionally, bonuses fell because performance goals had been set prior to the 2023 banking crisis, as banks shifted their strategy to focus on new priorities. Approximately 75 percent of medium and large banks paid bonuses below target, while around 60 percent of small banks did the same. Like in 2022, base salary values remained steady across the banks, with median increases ranging from 4 percent to 6 percent.

Chief Executive Officer Pay Mix

Similar to 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 annual incentives shrunk for both medium banks – from 32 percent in 2022 to 19 percent in 2023 – and large banks – from 34 percent in 2022 to 24 percent in 2023 – stemming from the steep year-over-year decline in payouts for these groups. Since the CEO pay mix reflects actual compensation, greater emphasis is placed on base salary and long-term incentives in 2023 for medium and large banks. The pay mix for small banks was similar year-over-year.

Pay Practices

Annual Incentive Plans

The most common approach to funding annual incentive plans is "goal attainment," where actual financial performance is measured against pre-established targets set at the start 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. EPS, Efficiency Ratio, 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 (on average approximately 40 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 25 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 over 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, and customer service.

Long-term Incentive (LTI) Plans

The most common long-term incentives used across industries, including banking, are stock options, time-vested stock (restricted stock or restricted stock units), and performance-vested stock. Similar to the broader market, the banks in our sample take a portfolio approach to their LTI plans, with around 70 percent of them granting two or three types of LTI vehicles. The small and medium banks more frequently use a single LTI vehicle (37 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 0 to 8 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 60 percent of banks use a relative measure other than TSR.

ESG in Incentive Plans

Among our sample, 20 percent of banks included ESG goals in their annual incentive plans for 2023. Over the past year, ESG issues have become increasingly politicized and remain a hot-button issue for employees, activist investors, institutional investors, politicians, and the public. Companies across industries have modified their DE&I policies following threats of legal action from conservative groups; some have reduced or removed DE&I components from their executive pay structures, while others are shifting from DE&I metrics to broader human capital or workforce-related measures. Against this backdrop, among the banks in both this and last year’s study we have seen a slight decline in the use of ESG metrics in incentive plans. Two banks removed ESG-related metrics from their plans while one added it, generating a net loss of one ESG-using bank. This year, three banks have standalone weighted components in their annual incentive plans tied to ESG (weighted 10 to 20 percent), a unique practice among the sample. The remaining banks measure performance on a qualitative basis either as part of a standalone strategic or individual component (weighted 15 to 25 percent). None of the banks in this year's sample made discretionary adjustments to plan funding. Given the rise in anti-ESG sentiment and fears of backlash, banks may be hesitant about adding new goals and may rethink the ways in which they currently incorporate ESG into their incentive plans. Wall Street banks have already begun to deemphasize DE&I initiatives, which may have a cascading effect throughout the financial services industry.

Looking Ahead

The year 2024 has been marked by unpredictability. As November draws near, the market is bracing for the outcome of one of the most divisive and turbulent campaign cycles in recent history. The Supreme Court’s recent decision to overturn the Chevron doctrine has raised questions about existing federal agency rules, creating short-term uncertainty for regulated industries, including banking. Meanwhile, with inflation showing signs of easing, the Federal Reserve is widely expected to cut interest rates at its September meeting, a move that could have significant implications for bank financial performance and incentive plan outcomes.

As of the 2nd quarter of 2024, regional banks have announced negative year-over-year earnings and returns, lower net interest margins and slower loan growth, though year-to-date TSR is up in the high single digits. However, it remains to be seen how the banking industry will respond to the evolving political and economic landscape for the remainder of the year. The economy remains resilient and fears of a damaging recession are waning, with jobless claims staying relatively low in the face of high interest rates and consumer spending increasing.

Each bank's financial performance is influenced by various factors, including asset size, product mix, sector concentration, growth strategy, and loan portfolio. As we approach the end of 2024, all banks will need to strike a balance between aligning pay with financial results and shareholder returns.

For questions or more information, please contact:

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

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

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

Hanna Borsack and Becca Friday provided research assistance for this report.

Regional Banks in CAP’s Study (n=40)

Small Banks
($1B – $5B in assets)

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

Medium Banks
($5B – $10B in assets)

• 1st Source Corporation
• Amerant Bancorp Inc.
• Camden National Corporation
• CNB Financial Corporation
• German American Bancorp, Inc.
• Heritage Commerce Corp
• Heritage Financial Corporation
• Independent Bank Corporation
• National Bank Holdings Corporation
• Park National Corporation
• Stock Yards Bancorp, Inc.
• Univest Financial Corporation
• Westamerica Bancorporation

Large Banks
($10B – $20B in assets)

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

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1 For 2023, includes 2023 base salary, annual incentive payout based on 2023 performance and 2024 long-term incentive grants. For 2022, includes 2022 base salary, annual incentive payout based on 2022 performance and 2023 long-term incentive grants.