Compensation Advisory Partners (CAP) conducted a study of executive compensation levels and design practices in the banking industry. The study includes 18 U.S. banks with greater than $50 billion in assets across three different groups: Money Center banks (n=4), Custody banks (n=3), and Super Regional banks (n=11). This report summarizes the findings of CAP’s study and identifies other hot topics in executive compensation affecting the banking industry.

Key Takeaways

  • Pay and performance: 2019 financial performance results were generally flat relative to 2018. Despite flat operating results, one- and three-year total shareholder return (TSR) were strong for the period that ended December 31, 2019. Chief executive officer (CEO) compensation increased modestly by two percent at median, generally aligning with flat financial performance.
  • Compensation program design: In recent years, executive incentive plan design among banks in this group has been stable. Earnings per share (EPS) is the most common short-term incentive metric and return on tangible common equity (ROTCE) is the most common long-term incentive metric. Stock options continue to be less common among banks than among companies in other industries with only 6 of 18 granting them for 2019.
  • Looking ahead: For compensation and human resources committees of the board, a key focus for the second half of 2020 and beyond will be evaluating the impact of the COVID-19 pandemic on executive incentive plans. Many banks in CAP’s study use discretionary annual incentive plans and relative incentive metrics in long-term performance plans, allowing for greater flexibility and requiring fewer adjustments to manage the unplanned impact of the pandemic. Additionally, CAP expects companies and committees to continue to focus on diversity and inclusion and gender pay equity.

2019 Pay and Performance Outcomes

2019 financial results were generally flat relative to 2018 for the banks in CAP’s study. EPS growth was positive, but significantly lower than 2018. Revenue, operating income, and net income were flat after considerable increases in 2018. Banks saw significant growth in 2018 due in part to the 2017 Tax Cuts and Jobs Act. Banks faced a more challenging economic backdrop in 2019 with low interest rates and pressure on net interest margins. 2019 EPS results for the banks in CAP’s study tended to be below analyst expectations set at the beginning of the year primarily due to the low interest rate environment. EPS results for the Money Center banks were less impacted because these businesses are more diverse. Despite flat operating results, one- and three-year TSR were strong for the period that ended December 31, 2019. The chart below summarizes median performance results for the banks in CAP’s study:

Metric

Median Percent Change

Year Ended December 31, 2018

Year Ended December 31, 2019

EPS

+34.8%

+6.1%

Net Income

+29.8%

-1.5%

Pre-tax Operating Income

+ 12.8%

-0.6%

Revenue

+5.3%

+1.2%

1-Year TSR

-17.6%

+33.5%

3-Year TSR (Cumulative)

+24.1%

+25.5%

Source: S&P Capital IQ Financial Database.

In 2019, total direct compensation, including base salary, annual cash bonus, and awarded long-term incentives, among CEOs increased two percent versus 2018 at median. This is a smaller increase than in 2018 when total direct compensation for CEOs increased seven percent at median. 2019 annual cash bonuses were mixed among this group and resulted in no change at median, indicating that 2019 cash bonuses were aligned with relatively flat operating performance. The chart below summarizes median changes in CEO pay for the group:

Element

Median Percent Change for CEOs

Year Ended December 31, 2018

Year Ended December 31, 2019

Base Salary

No Change

No Change

Annual Cash Bonus

+7.0%

No Change

Awarded Long-term Incentive

+5.6%

+4.2%

Awarded Total Incentive

+8.0%

+2.7%

Total Direct Compensation

+6.8%

+2.4%

Note: Excludes companies where there was a change in CEO.

Compensation and benefits expense increased approximately three to four percent at median on an absolute basis in 2018 and 2019 but stayed relatively flat as a percentage of revenue. Compensation and benefits expense increased slightly as a percentage of net income in 2019 after declining significantly from 2017 to 2018 due to the change in tax rate under the 2017 Tax Cuts and Jobs Act.

33.8%34.0%34.8%138.2%106.9%110.7%0.0%20.0%40.0%60.0%80.0%100.0%120.0%140.0%160.0%201720182019Median Compensation and Benefits ExpenseAs % of RevenueAs % of Net Income

Executive Incentive Compensation Program Design

Incentive Compensation Model

The banking industry is different from other industries in that some banks determine a total incentive award based on annual performance and then allocate the total incentive between annual cash bonus and long-term incentive awards (e.g., the total incentive award for the year is delivered 40 percent through an annual cash bonus and 60 percent through long-term incentives). Among the banks in CAP’s study, 39 percent use this approach, including most Money Center and custody banks and several Super Regional banks. The remaining banks make separate decisions for the annual cash bonus and long-term incentive awards, which is consistent with general industry practice.

Short-term Incentive Plan

Half of the companies in CAP’s study have primarily discretionary short-term incentive plans. This practice is more prevalent in the banking industry than in other industries.

The other half of companies maintain more formulaic short-term incentive plans, often referred to as goal attainment plans, that pay out, at least in part, based on financial results relative to pre-established “threshold,” “target,” and “maximum” goals. These plans most often provide for a payout of 200 percent of target for “maximum” performance or better, though several companies provide maximum opportunities of 150 percent of target, and one company provides a maximum opportunity of greater than 200 percent of target.

EPS is the most common financial metric across these short-term plans. Companies also use the Efficiency Ratio, return on assets (ROA), and return on equity (ROE), but they are less common in short-term plans. Most companies measure annual performance against absolute performance goals; however, several companies include a relative performance component.

89%33%33%33%22%11%100%33%0%10%20%30%40%50%60%70%80%90%100%EPSEfficiency RatioROAROEPre-tax/Operating IncomeNet IncomeAbsoluteRelative

Note: Percentages do not add to 100 percent due to some companies using multiple metrics.

Long-Term Incentive Plan

Long-term incentive programs among companies in CAP’s study are most often composed of time-based restricted stock or units, and long-term performance plans (e.g., performance share units). Only 33 percent of banks in the study use stock options, making them less common among this group than in the broader market. Companies tend to weight long-term performance plans as at least 50 percent of the target total long-term incentive award. All of the banks in the study that use stock options are super regional banks. None of the money center or custody banks use stock options. Of the companies in the study, 11 percent use long-term performance plans as their only long-term incentive vehicle. The chart below outlines the average long-term incentive mix across companies in CAP’s study:

65%64%52%30%36%34%5%14%All Banks (n=18)Banks with Time-based Restricted Stock/UnitsBanks with All Three Vehicles (n=5)Average CEO Long-term Incentive MixLong-term Performance PlanTime-based Restricted Stock/UnitsStock Optionsand Performance Plans (n=10)

Note: Two companies use long-term performance plans as their only long-term incentive vehicle and one company uses a long-term performance plan and stock options.

Of the banks in CAP’s study, 83 percent use return on equity (ROE) or a variant of that measure as a metric in their long-term performance plans. Variants of ROE include return on tangible common equity (ROTCE) and return on common equity (ROCE). ROTCE is the most common of these variants. EPS and relative TSR are also common long-term performance plan metrics.

78 percent of companies use at least one relative metric in their long-term performance plans. Specifically, all Super Regional banks use relative metrics in their long-term performance plans. In other industries, relative metrics are typically limited to TSR; however, the banks in CAP’s study also use relative financial measures, including relative ROE variants, EPS growth, and ROA. This is likely due to the significant degree of comparability between the Super Regional banks in CAP’s study.

50%33%33%22%17%17%11%6%6%6%100%78%0%10%20%30%40%50%60%70%80%90%100%ROTCETSREPSROEPre-tax/Operating Income/MarginROCEROAEfficiency RatioBook ValueRevenueAbsoluteRelativePrevalence of Long-term Incentive Metrics (n=18)

Note: Percentages do not add to 100 percent due to some companies using multiple metrics.

Among banks, long-term performance plans most often have maximum payout opportunities of 150 percent of target. In the broader market, most long-term performance plans have maximum payout opportunities of 200 percent of target. Maximum opportunities tend to be lower at banks due, in part, to regulatory guidance to limit upside leverage in incentive plans to avoid encouraging imprudent risk-taking.

Looking Ahead to the Rest of 2020 and Beyond—Hot Topics in Executive Compensation

COVID-19 Pandemic: Impact and Response

The COVID-19 pandemic has impacted businesses globally. Companies in some industries have been severely impacted and have had to resort to furloughs and wage reductions to cut costs and preserve cash. Most U.S. banks have avoided such actions. Instead, U.S. banks have taken positive employee actions such as, providing additional compensation for in-person workers and additional paid sick leave or other health benefits.

Although banks have avoided cutting employee-related costs to date, bank financial results are expected to be adversely impacted by COVID-19 in 2020. Though some banks may have benefited from fee income related to Paycheck Protection Program loans, we expect the negative impact of a challenging economic environment and zero-interest-rate environment to outweigh any benefits. This could impact payouts on in-progress annual and long-term incentive plan cycles. CAP conducted a survey in the first half of 2020 to get a sense of whether companies intend to take action to address the impact of COVID-19 on incentive plans. Several of the banks in CAP’s study participated in the survey and nearly all responded that it was too early to determine if or what action would be taken. CAP expects that companies will have better insight into the extent of the impact of COVID-19 on incentive plan outcomes and whether action is warranted when second quarter results are available.

Companies with formulaic annual incentive plans and absolute incentive plan metrics will likely have to make the most significant adjustments to address the impact of COVID-19, which was unplanned and not in management’s control. Discretionary short-term incentive plans and relative metrics will likely not require action. Given that 50% of the banks in CAP’s study use discretionary annual incentive plans and 78% use at least one relative metric in their long-term performance plan, this group may not have to make as many adjustments as companies in other industries.

Diversity and Inclusion and Gender Pay Equity

In 2019 and the first half of 2020, board human resources committees continued to focus on diversity and inclusion, and gender pay equity at companies across industries. Financial services firms are often the focus of discussions on these topics in the media, among regulators, and among institutional investors.

In 2020, Arjuna Capital, an institutional investor that engages companies on gender pay equity, published the third edition of its gender pay equity scorecard, which grades companies on disclosure of gender pay gaps and commitments to address pay inequity. Several of the banks in CAP’s study are included in the scorecard. Notably, Citigroup was one of only three companies to receive the highest grade of “A.” Citigroup voluntarily published its global gender pay gap and U.S. minority pay gap in both 2019 and 2020. Additionally, 22 percent of companies in CAP’s analysis included shareholder proposals in their 2020 proxy statements requesting that the banks report the median gender pay gap. These proposals failed to receive majority support from shareholders.

In June 2019, Congresswomen Maxine Waters, Chairwoman of the House Financial Services Committee, and Joyce Beatty, Chairwoman of the Diversity and Inclusion Subcommittee, sent a letter to 44 bank holding companies with assets of greater than $50 billion, requesting information about each institution’s diversity and inclusion data and policies. In February 2020, the House Financial Services Committee published their findings in a report titled, “Diversity and Inclusion: Holding America’s Large Banks Accountable.” The report found that the demographics of bank employees reflect the U.S. population; however, senior management teams and boards of directors are mostly white and male. Additionally, the report stated that not all institutions responded fully to each of the questions in the letter.

Though these disclosures are not mandatory, CAP expects that investors and regulators will continue to call for transparency around diversity and inclusion policies and gender pay equity in the banking industry and broader market. As these calls for transparency put pressure on banks to “get this right,” Citigroup and Wells Fargo have publicly stated diversity goals and are considering progress on these goals as part of the compensation decision process for top executives.

Conclusion

Compensation programs among the banks in CAP’s study continue to effectively tie pay outcomes to performance. In recent years, incentive plan designs among these banks have generally been stable.

However, the second half of 2020 holds a great deal of uncertainty. The full extent of the COVID-19 pandemic’s duration and economic impact is still unknown, the low interest rate environment may inhibit growth, and the 2020 election may have a significant impact on the regulatory environment. CAP expects this uncertainty will likely result in decreases in 2020 CEO compensation and could result in changes to executive incentive plan designs in the second half of 2020 or early 2021. We also expect banks in our study to continue their efforts to make progress on the diversity and inclusion front.


For questions or more information, please contact:

Eric Hosken Partner
eric.hosken@capartners.com 212-921-9363

Michael Bonner Senior Associate
michael.bonner@capartners.com 646-486-9744

Chris Callegari Senior Analyst
chris.callegari@capartners.com 646-486-9747

Stefanie Kushner provided research assistance for this report.


Banks in CAP’s Study (n=18)

Money Center Banks

  • Bank of America Corporation
  • Citigroup, Inc.
  • JPMorgan Chase & Co.
  • Wells Fargo & Company

Custody Banks

  • The Bank of New York Mellon Corporation
  • Northern Trust Corporation
  • State Street Corporation

Super Regional Banks

  • Citizens Financial Group, Inc.
  • Comerica, Inc.
  • Fifth Third Bancorp
  • Huntington Bancshares, Inc.
  • KeyCorp
  • M&T Bank Corporation
  • The PNC Financial Services Group, Inc.
  • Regions Financial Corporation
  • Truist Financial Corporation
  • U.S. Bancorp
  • Zions Bancorporation

Compensation Advisory Partners (CAP) examined 2018 executive pay levels and pay practices among 43 companies in the regional bank industry. The companies were stratified into three groups based on asset size: $1B – $5B in assets (“small banks”; n=14), $5B – $10B in assets (“medium banks”; n=15) and $10B – $20B in assets (“large banks”; n=14). This report discusses both the similarities and differences in compensation levels and practices between the three groups.

Highlights

  • As banks increase in size, a higher percentage of total pay shifts from fixed compensation to at-risk or variable compensation
  • 2018 was a strong financial performance year with annual incentive payouts to Chief Executive Officers (CEOs) above target for all groups reviewed
  • The ratio of CEO pay relative to other Named Executive Officers (NEOs) increases as banks increase in asset size
  • For all banks, the most prevalent metrics generally include Asset Quality, Efficiency Ratio, Return on Assets (ROA), Return on Equity (ROE), Earnings Per Share (EPS), and Net Income in their annual incentive plans with smaller banks also factoring in Loan and Deposit levels more frequently
  • For long-term performance plans, relative Total Shareholder Return (TSR), ROA, ROE and EPS are frequently used together. Larger banks also incorporate other metrics more often on both a relative and absolute basis
  • A well-designed compensation program that is aligned to the bank’s business strategy is necessary to garner shareholder support and to attract and retain talent

CEO Target Pay Levels and Mix

Unsurprisingly, CEO total target compensation is correlated with bank size. This is seen across industries, as larger organizations are generally more complex and, therefore, leading these companies usually comes with greater management challenges and risks. For banks, larger asset sizes generally mean the institution has more customers and branches, and/or the bank offers more products and services. Higher pay levels also correlate with a larger portion of pay that is at-risk or variable, and comes with a higher level of scrutiny from investors and regulators. Executives are often paid more fixed compensation, on average, at smaller banking institutions and more variable compensation at larger banks.

33%40%53%28%27%22%39%33%25%0%10%20%30%40%50%60%70%80%90%100%$10B - $20B$5B - $10B$1B - $5BCEO Target Pay Mix by Asset SizeBaseAnnual IncentiveLong-Term IncentivesAt-risk Compensation: 47% At-risk Compensation: 60% At-risk Compensation: 67%

This is evident when looking at the percentage of target compensation that CEOs received during the last fiscal year, where 53 percent of compensation was fixed at the small banks compared to 40 percent at the medium banks and only one-third at the large banks. Larger banks also grant more compensation in the form of equity, which is tied to either multi-year vesting and/or performance criteria. These equity grants make up approximately one-third of medium bank target pay for CEOs and roughly 40 percent at the large banks in the sample. By comparison, smaller banks only grant 25 percent of their compensation, on average, in these long-term equity vehicles. Additionally, we found that not all small banks grant equity on an annual basis.

2018 Performance and Pay Outcomes

Performance Results

Financial performance appeared strong in 2018 when compared with 2017, which can be attributed, in part, to the reduction in the corporate tax rate under the Tax Cuts and Jobs Act in 2017. This reduced tax rate magnified year-over-year changes in after-tax metrics such as EPS and Net Income, with banks of all sizes performing very well. Pre-tax Operating Income and ROE results were also strong for all groups. TSR, on a one-year basis, was generally down for the year ending December 31, 2018; however, this was consistent with the downward trend seen in the overall market and super regional and Wall Street banks at the end of 2018.

Metric Median Percent Change Year Ended December 31, 2018
Asset Size
$1B – $5B $5B – $10B $10B – $20B
EPS +37.4% +29.5% +58.7%
Net Income +52.0% +43.1% +71.3%
Pre-tax Operating Income +14.2% +10.3% +14.1%
Return on Equity +171 bps +134 bps +251 bps
1-Year TSR -10.1% -18.8% -16.4%

Bps – Basis points
Source: S&P Capital IQ Financial Database

CEO Annual Incentive Payouts

Overall, the large banks had the best performance of the three groups in 2018 based on the financials reviewed, followed by the small banks. This performance was ultimately rewarded by annual incentive plans, as seen in CEO annual incentive payouts. Large banks had the highest annual incentive payouts as a percentage of target, 127 percent, at median, and only one bank in the large bank group paid an annual incentive below target.

Summary Statistics CEO Payout as Percent of Target
Asset Size
$1B – $5B $5B – $10B $10B – $20B
75th percentile 142% 124% 147%
Median 117% 100% 127%
25th percentile 94% 76% 114%

Total Pay Changes

CEO actual total compensation (base salary, actual annual incentive and long-term incentives) also increased in 2018. The largest increase was at the large banks (9%) which was driven by a combination of higher annual incentive payouts and larger long-term equity grants. Long-term incentive (LTI) levels were flat year-over-year, at median, at both the small and medium sized banks. The actual total direct compensation increases seen at these groups (7% and 5%, respectively) were driven primarily by higher annual incentive payouts in 2018 compared to 2017. Base salaries increased modestly (3% to 3.5%), at median, for each group.

3.6%9%7%-1%7%3.0%5%5%0%5%3.6%20%11%7%9%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%Base SalaryActual Annual IncentiveActual Total CashCompensationLong-Term IncentivesActual Total DirectCompensationMedian Change in CEO Actual Compensation by Element (2018 vs. 2017)$1B - $5B$5B - $10B$10B - $20B

Other Executive Pay / Roles

In addition to CEO pay, companies are required to disclose compensation for the Chief Financial Officer (CFO) and the next three highest paid other executives or NEOs in their Summary Compensation Tables (at smaller companies, sometimes only one other executive besides CEO and CFO is disclosed). The positions and roles that these other NEOs have vary somewhat based on the size of the bank. NEO positions that are commonly seen across these three groups include President, Chief Operating Officer, Chief Credit Officer, Chief Lending Officer, various Bank Leaders, and Chief Risk Officer. The small and medium sized banks more frequently have Chief Credit Officers and Chief Lending Officers in their NEO group whereas the larger banks in our sample more frequently have General Counsels, Chief Administrative and Chief Information Officer positions. Differences in NEO composition among our three sample groups may be indicative of each bank’s stage in their evolution and each bank’s critical areas of oversight.

The CFOs at the small and medium banks were paid approximately half of what the companies’ CEOs took home, at median, compared to 40 percent at median for the large banks. When looking at the median for average other NEO compensation, smaller bank NEOs are compensated the highest as a percent of CEO pay at 50 percent. This median compensation figure for other NEOs trends downward for medium banks (44%) and large banks (36%).

Asset Size Percent of CEO Total Direct Compensation
CFO All Other NEOs
Median Range Median Range
$1B – $5B 51% 31% – 66% 49% 30% – 60%
$5B – $10B 49% 38% – 71% 44% 31% – 67%
$10B – $20B 40% 23% – 61% 36% 22% – 61%

Pay Practices

Annual Incentive Plans

The most common annual incentive plan approach is a “goal attainment” plan where 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 payout. Approximately 80 percent of the medium and large banks use three or more weighted financial metrics compared to 85 percent of the small banks. Return measures (ROE, ROA, etc.), Efficiency Ratio, Asset Quality, EPS, and Net Income are the most prevalent metrics used at these banks; however, Returns, EPS and Net Income were typically weighted more than Efficiency Ratio and Asset Quality metrics. The small banks differ from the medium and large banks in that they more frequently use Loan or Deposit measures in their plans, with these metrics usually accounting for no more than 20 percent of the total plan.

54%54%46%31%15%31%54%38%46%8%46%46%54%46%46%31%23%8%31%15%57%57%29%36%36%29%7%7%21%14%0%20%40%60%AssetQualityEfficiencyRatioReturn onAssetsEPSReturn onEquityNet IncomeDepositsLoansIndividualGoalsStrategicGoalsAnnual Incentive Metric Prevalence by Asset Size$1B - $5B$5B - $10B$10B - $20B

Smaller banks also tend to use and assign higher weightings to individual and strategic measures. These individual and strategic measures are prevalent at 54 percent of the small banks studied compared to 46 percent and 35 percent at the medium and large banks, respectively. These individual and strategic measures can often vary year to year due to shifting priorities of different initiatives at the bank. Diversity and inclusion measures are making headlines (i.e., Citigroup included in its scorecard for senior executives), though it is still a minority practice to formally include these types of metrics in incentive plans. These priorities are likely being discussed at all banks, and it will be interesting to see if and how these measures are incorporated in the future when determining compensation.

Long-term Incentive 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. Most medium and large banks use a portfolio approach in their long-term incentive plan, with approximately three-fourths of these banks granting two or three LTI vehicles. Small banks more frequently either use a single LTI vehicle (43%) or have no long-term incentive plan (14%). The LTI mix seen between the three groups is fairly consistent, with stock options continuing to be the least utilized LTI vehicle, on average about 10 percent of the overall LTI mix. Time-vested restricted stock typically makes up about 30 percent to 40 percent of the LTI mix among these banks, with performance plans making up the bulk (55% to 60%) of LTIs in the total sample.

8%9%13%37%31%31%55%60%56%0%10%20%30%40%50%60%70%80%90%100%$10B - $20B$5B - $10B$1B - $5BCEO LTI Mix by Asset SizeStock OptionsRS/RSUsPerformance Plan

Performance plans 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 percent to 200 percent of the target level. Over three-quarters of companies in each asset group measure performance for their performance plan against two or more metrics. The most prevalent metrics used are relative TSR, Returns and EPS for all three groups, and it is common that two of these measures are paired together to determine all or the majority of the payout. As banks increase in size, it becomes more likely that both absolute and relative comparisons are made when determining payouts; 54 percent of the large banks look at performance on both an absolute and relative basis compared with 36 percent of medium sized banks and 12 percent of small banks.

Asset Size Performance Plan Measures
Measurement Type(s)
Absolute Only Relative Only Both
$1B – $5B 44% 44% 12%
$5B – $10B 43% 21% 36%
$10B – $20B 23% 23% 54%

TSR is almost exclusively measured on a relative basis, often measured against either the company-defined peer group or an industry index. Relative TSR is more commonly installed as a weighted metric and can also be used as a final modifier of the calculated payout, typically by 20 percent to 25 percent. For banks with a performance plan, relative TSR is more commonly used at the larger banks (62%) than at the small banks (56%) and medium sized banks (43%).

56%56%44%11%0%11%11%11%0%43%29%57%43%14%21%7%7%14%62%31%54%23%8%0%0%0%0%0%20%40%60%80%TSREPSReturn onEquityReturn onAssetsEfficiency RatioAsset QualityDepositsLoansCharge-OffsPerformance Plan Metric Prevalence by Asset Size$1B - $5B$5B - $10B$10B - $20B

Incentive Plan Metric Best Practices

It is important for banks to select performance metrics and set targets in their annual and long-term incentive plans that support each organization’s business strategy and priorities for the performance period being assessed.

There is generally a negative perception when a company uses the same measure in both its short- and long-term incentive programs. Despite the different time horizons for measurement, the concern stems from the possibility of excessive risk taking to influence one particular outcome. Looking at only banks with both annual and long-term incentive plans, it is more common for the small and medium sized banks to have the same metric in both their short- and long-term incentive plans. Two-thirds of both the small and medium banks have overlapping metrics compared to less than half (46%) of banks in the largest group. This difference may be driven by the increased external scrutiny on companies as they grow in size.

Incentive plan goal setting and adjustments are also an area of focus from both proxy advisory firms and investors. When targets are set lower than the prior year target and actual results, and adjustments are made to GAAP metrics, the concern is that goals are not challenging, or adjustments are made to overly insulate management from external factors that may have impacted results.

When selecting incentive plan performance measures, alignment with what the bank is trying to achieve is important, and if the decision is made to use the same metrics across incentive plans, it is important to discuss the supporting rationale in the company’s disclosures. Further, banks should disclose the process for determining specific goals and the incentive range, explain if performance goals are lower than the previous year, and describe and provide rationale for adjustments to GAAP measures.

Conclusion

While size may be an indicator of compensation levels and fixed versus variable pay, it is important for banks of all asset levels to continue to tie pay outcomes to performance. As banks review their incentive plan design, they should consider how industry related drivers, such as interest rate movements, deposit betas, ratio of fee to non-fee income, and credit cycles, should be incorporated in performance metric selection. In today’s competitive environment, a well-designed compensation program that is aligned to the bank’s business strategy is necessary to garner shareholder support and to attract and retain talent.


For questions or more information, please contact:

Kelly Malafis
Partner
kelly.malafis@capartners.com
212-921-9357

Ryan Colucci
Senior Associate
ryan.colucci@capartners.com
646-486-9745

Shaun Bisman
Principal
shaun.bisman@capartners.com
212-921-9365

Whitney Cook
Senior Analyst
whitney.cook@capartners.com
646-486-9748


Regional Banks in CAP’s Study (n=43)

Small Banks (n=14)
($1B – $5B in assets)

  • Bridge Bancorp, Inc.
  • Capital City Bank Group, Inc.
  • Central Valley Community Bancorp
  • CNB Financial Corporation
  • Evans Bancorp, Inc.
  • Farmers National Banc Corp.
  • First Business Financial Services, Inc.
  • First Financial Northwest, Inc.
  • German American Bancorp, Inc.
  • Heritage Commerce Corp
  • Independent Bank Corporation
  • National Bankshares, Inc.
  • Old Line Bancshares, Inc.
  • Sierra Bancorp

Medium Banks (n=15)
($5B – $10B in assets)

  • 1st Source Corporation
  • Amerant Bancorp Inc.
  • Banc of California, Inc.
  • Boston Private Financial Holdings, Inc.
  • Brookline Bancorp, Inc.
  • First Busey Corporation
  • First Commonwealth Financial Corporation
  • First Foundation Inc.
  • Lakeland Bancorp, Inc.
  • LegacyTexas Financial Group, Inc.
  • Opus Bank
  • Park National Corporation
  • Seacoast Banking Corporation of Florida
  • Univest Financial Corporation
  • Westamerica Bancorporation

Large Banks (n=14)
($10B – $20B in assets)

  • Ameris Bancorp
  • Atlantic Union Bankshares Corporation
  • BancorpSouth Bank
  • Bank of Hawaii Corporation
  • Berkshire Hills Bancorp, Inc.
  • Cadence Bancorporation
  • Community Bank System, Inc.
  • First Merchants Corporation
  • First Midwest Bancorp, Inc.
  • Glacier Bancorp, Inc.
  • Great Western Bancorp, Inc.
  • Old National Bancorp
  • Trustmark Corporation
  • United Bankshares, Inc.

Compensation Advisory Partners (CAP) examined executive compensation levels and design practices at 12 publicly traded, U.S. investment banks. The 12 companies in the study have a revenue range of $139 million to $7.2 billion. The broad revenue range enabled CAP to focus on independent, advisory-focused investment banks and to have a sufficient sample for the study. As an additional reference point for comparison purposes, CAP also reviewed executive compensation levels and practices at three large, diversified financial institutions (“Wall Street Banks”) with significant investment banking operations. Revenue at the Wall Street Banks ranged from $35.9 billion to $104.0 billion.1

Key Takeaways

  • The investment banking pay model and the industry’s approach to incentive compensation are distinct from general industry practices, and are important to understand when evaluating market data.
  • Median pay levels for Chief Executive Officers (CEOs) increased 11 percent from 2017 to 2018, which reflects strong 2018 operating results. Pay levels for Chief Financial Officers (CFOs) increased five percent, while pay levels for other Named Executive Officers (NEOs) increased 11 percent.
  • Two-thirds of the investment banks studied now grant performance share units (PSUs) to their CEOs as part of annual incentive compensation awards. CAP expects a continued increase in the prevalence of PSU awards.
  • For the investment banks that grant PSUs to their CEOs, the grant value of PSU awards represents approximately one-half of the total value of the deferred, long-term portion of incentive compensation.

A Unique Industry

From economic, performance and compensation perspectives, independent investment banks stand apart from general industry and other financial services firms. The unique aspects of the industry are important to understand when looking at their executive compensation levels and practices.

Human Capital Focus. The investment banking industry has a strong human capital focus: The industry’s assets are its people. Most individuals in the industry are highly educated, trained and compensated. A firm’s success depends on its ability to attract, retain and reward highly skilled bankers with strong business networks and deal-execution skills. Given the industry’s human capital focus, the largest expense category for investment banks is compensation and benefits.

Year-to-Year Results. Like most professional services firms, investment banks focus heavily on year-to-year financial metrics, such as revenue growth, operating margin and overall profitability. The industry tends to be cyclical and highly sensitive to overall economic conditions. In addition, a firm’s results for the year can be skewed by factors such as a large deal closing in January instead of prior to December 31.

A key metric in the evaluation of most senior, non-corporate investment-banking professionals is annual revenue generation. Long-range planning is largely limited to senior corporate executives, and firm investments often generate returns more quickly than in capital-intensive industries.

The Investment Banking Pay Model. Investment banks approach executive compensation in a manner that is distinct from general industry norms. At investment banks, each year a total incentive is determined based on an often highly discretionary review of prior-year performance. The total incentive is then delivered to executives as a mix of annual cash incentive compensation and deferred, long-term incentive compensation. Of the investment banks in CAP’s study, 92 percent use this investment banking pay model for top executives, as do all three Wall Street Banks.

The investment banking pay model contrasts with the broadly used, traditional compensation model where annual incentive and long-term incentive components are separate and determined independently. In most other industries, the annual cash incentive is often determined in a highly structured, formulaic manner, and the annual long-term incentive grant target value is largely market-based, with the grant value being typically independent of prior-year performance.

While executive incentive awards in the investment banking industry tend to be more discretionary in nature when juxtaposed with the more formulaic approach used in general industry, the investment banks do base their year-to-year incentive decisions on specific criteria, such as revenue and profitability. In fact, several of the investment banks in the study disclosed information about their incentive decision-making processes, which can be thought of as following a “structured discretion” approach.

2018 Industry Performance

The investment banks in CAP’s study reported strong operating results for 2018. Revenue increased 14.9 percent, and pre-tax operating income increased 39.7 percent. Despite this, the investment banks’ total shareholder return (TSR) – which takes into account stock price changes and dividends – was down 19.8 percent during 2018, driven by steep declines in the fourth quarter.

The following table summarizes financial and market results for CAP’s investment banking sample for 2018 and 2017:

Metric

Median Percent Change

Year Ended December 31, 2018

Year Ended December 31, 2017

Revenue

+14.9%

+13.4%

Pre-tax Operating Income

+39.7%

+14.3%

Operating Margin

+2.4%

+0.1%

Return on Equity (ROE)

+4.5%

-1.4%

1-Year TSR

-19.8%

+25.6%

3-Year TSR (compound annual growth rate, or CAGR)

+5.7%

+6.3%

Source: S&P Capital IQ financial database

In addition to the traditional financial and market-based performance measures, investment banks track and report a human-capital metric called the compensation and benefits ratio. The ratio reflects compensation and benefits expenses as a percentage of revenue. The compensation and benefits ratio among CAP’s investment banking sample declined by 9.3 percentage points for full year 2018 versus full year 2017. This decrease was driven by the year-over-year change in revenue (+14.9 percent), which outpaced changes in compensation and benefits costs.2

59.6%67.8%36.0%37.4%0%10%20%30%40%50%60%70%80%90%100%20182017Compensation and Benefts Ratio2Investment Banks (n=12)Wall Street Banks (n=3)

Source: S&P Capital IQ financial database

The compensation and benefits ratio is higher for the investment banks in the study relative to the Wall Street Banks. The Wall Street Banks have multiple business lines in addition to investment banking, and have a more diversified workforce in terms of employee roles and pay levels.

Named Executive Officer (NEO) Compensation

CAP analyzed 2017 and 2018 pay levels for the five NEOs disclosed in the proxy statements for each of the investment banks. While base salaries were flat from 2017 to 2018, total compensation was up year-over-year, reflective of an industry focused on linking pay outcomes with performance outcomes.

Compensation Component

Median Percent Change

Year Ended December 31, 2018

CEO

CFO

Other NEOs (avg.)

Base Salary

No Change

No Change

No Change

Incentive Pay

+11.8%

+5.1%

+12.2%

Total Direct Compensation

+11.4%

+4.9%

+11.1%

The year-over-year pay increase for the CEO and other NEOs was approximately 11 percent, which reflects the industry’s strong 2018 operating performance. The pay increase for the CFO was smaller, at approximately five percent, which is in part reflective of a smaller portion of annual pay being variable for this role, as discussed further below.

Pay Mix and Incentive Compensation

As shown in the pay-mix charts that follow, the investment banking industry places significant emphasis on performance-based, variable incentive compensation. On average, performance-based, variable incentive compensation represents 92 percent of annual pay for CEOs of the investment banks. The other NEOs have a pay mix that is similar to that of CEOs, with 90 percent of annual pay delivered through variable incentive compensation. In contrast, CFOs at investment banks have a slightly less variable pay mix, with about 80 percent delivered through variable incentive compensation and 20 percent delivered in salary.

Average Compensation Mix Among Investment Banks 8%33%59%22%46%32%10%46%44%Base SalaryCurrent Cash IncentiveDeferred/Long-Term IncentiveCEO CFOOther NamedExecutive Ofcers

Investment banks deliver incentive compensation using a mix of cash and deferred equity vehicles, such as restricted stock, restricted stock units and performance share units (PSUs). The long-term incentive component adds a retention hook by deferring payment of a portion of annual incentive pay. It also provides a link to the company’s long-term shareholder value creation. Among the investment banks in the study, approximately two-thirds of CEO incentive pay and approximately one-half of incentive pay for other NEOs have been deferred over at least three years, most often through restricted stock/units but also through performance share units (PSUs).

A notable change within the investment banking industry has been taking place in terms of long-term incentive vehicle prevalence. PSUs have been increasing in prevalence among study companies. In fact, a majority of CEOs of the investment banks now receive annual PSU awards, with prospective, generally three-year performance requirements. Among the CEOs who receive PSUs, approximately half of long-term incentive compensation is provided through these awards. The most common performance metrics associated with PSU use in the investment banking industry are TSR and return measures, such as return on equity (ROE), followed by revenue growth and operating margin.

While investment banks will continue to focus on prior-year performance in making incentive pay decisions, CAP believes that the use of PSUs for top corporate executives will continue to increase at the investment banks in the study. Investors and proxy advisors (i.e., Institutional Shareholder Services, or ISS, and Glass Lewis) encourage the use of PSU programs with prospective multi-year goals.

Equity Overhang

CAP analyzed equity overhang, which is a measure of shareholder dilution. Median equity overhang for the investment banks is 28.0 percent, which exceeds ISS “excessive dilution” thresholds but should be considered within the context of the industry’s human capital focus and the partnership model from which these public companies emerged. The average equity overhang for the Wall Street banks is 13.6 percent.3

ISS Limit (Russell 3000) 28.0%13.6%0%5%10%15%20%25%30%Investment BanksWall Street BanksEquity Overhang3

ISS uses its Equity Plan Scorecard (EPSC) model to determine the shareholder vote recommendation for new share requests for equity and incentive compensation plans. The EPSC includes certain “overriding” factors, one of which is “excessive” dilution. This factor, which applies to S&P 500 and Russell 3000 EPSC models only, will be triggered by ISS when the company’s equity compensation program is estimated to dilute shareholders’ holdings by more than 20 percent (S&P 500 model) or 25 percent (Russell 3000 model). This overriding factor may warrant an ISS “against” vote recommendation despite an above-threshold EPSC score. All but one of the investment banks in the study are in the Russell 3000, while only two of the companies are in the S&P 500. All three Wall Street banks are in both indices.

Two-thirds of the investment banks have equity overhang levels that would exceed the ISS “overriding” factor threshold. This indicates that, for a majority of publicly traded investment banks, ISS would be likely to recommend that shareholders vote against a new share request no matter what the plan features are or what the benefits of maintaining an ongoing equity compensation plan are to various stakeholders, including the company, employees and shareholders. The ISS “overriding” factor threshold does not make sense for the investment banking industry and exemplifies why industry-specific understanding is important when designing and evaluating compensation programs.

When publicly traded investment banks seek shareholder approval for new share requests, shareholder outreach is advisable, and the resolution should include information that makes a strong case for the share request. Also, setting internal expectations for a likely level of shareholder support is important. For example, among non-S&P 500, Russell 3000 investment banks, median shareholder support for such new share requests during the past three years was approximately 66 percent. ISS recommended that shareholders vote against the proposals, but each time the proposals passed with majority shareholder support (albeit, with lower support than broader market norms, in part driven by proxy advisor policies that do not take into account industry-specific considerations).

Equity Run Rate

CAP also analyzed the equity run rates for the investment banks. Equity run rates measure shareholder dilution from equity grants made in a particular year. In recent years, the median annual gross run rate for the investment banks has ranged from about four percent to 7.5 percent.

Given its human capital focus and approach to incentive compensation, this industry often focuses more on the net run rate, which takes into account forfeitures and repurchases, than on the gross run rate used in most industries. For example, the net run rate is frequently the only version of run rate discussed in new share request proposals in this industry. Among the investment banks, the median net run rate has ranged from approximately -1.3 percent to 2.3 percent in recent years. In this industry, buybacks are often viewed as a tool used to limit or net-out annual shareholder dilution from compensation programs.

Peer Groups for Compensation Benchmarking

CAP assessed the size and composition of the peer groups used by the investment banks for compensation benchmarking purposes. Publicly traded companies generally disclose the peer groups they use for compensation benchmarking purposes in their annual proxy statements. Relative to other industries, the peer groups used by the investment banks are smaller and more industry focused.

Among the investment banks studied, the median peer group size is 11 companies, while the 75th percentile is 14 companies. The peer group size for the Wall Street banks is even smaller, with an average of six companies. In contrast, a recent Equilar and CAP study of 500 companies across different industries found the median peer group size to be 17 companies.

The investment banking peer groups are smaller than those used in other industries because the executive compensation programs in this industry are unique, and companies choose to compare themselves mostly with publicly traded direct competitors – of which a limited number exist. This is very different than how peer groups are approached in many other industries where companies are screened more broadly for size and other operating metrics. In the 500-company general industry sample noted above, only eight percent of companies maintained a peer group where at least 75 percent of constituent companies were from the same industry classification, and only 30 percent of companies maintained a peer group where 100 percent of constituent companies were from the same industry sector classification. In addition, only 54 percent of companies maintained a peer group where at least 75 percent of constituent companies were from the same, broader industry sector classification.

Moreover, when developing or validating a peer group used for executive compensation benchmarking, it is typical practice to use quantitative screens for size and/or other operating metrics. Oftentimes, potential peers with less than one-half or more than two times the revenue of the company are eliminated. However, the investment banks studied do not generally use such narrow size screens when developing or validating their compensation benchmarking peer group.

CEO Pay Ratio

In 2017, most publicly traded companies were required to begin reporting in their annual proxy statement the CEO Pay Ratio, which is the ratio of CEO compensation to that of the median employee. For the investment banks, CEO compensation in 2018 was 42 times the compensation of the median employee at the company. This is significantly less than the median CEO pay ratio among Russell 3000 companies as shown in the following table. The lower CEO pay ratio at investment banks is driven by higher median employee pay relative to general industry.

Investment Banks

Russell 3000

2018 Median CEO Pay Ratio

42x

78x

2018 Median CEO Pay

$5,389,867

$5,422,777

Change from 2017

+7%

2018 Median Employee Pay

$179,011

$61,782

Change from 2017

+9%

The average CEO pay ratio for the three Wall Street Banks was 243x in 2018, much higher than both the 42x and the 78x shown above. Among the Wall Street Banks, average CEO pay was approximately $20 million and average median employee pay was nearly $120,000. CEO pay at the Wall Street Banks reflects the size and complexity of the organizations, and the lower median employee pay reflects the greater variety of business lines and employee roles.

Conclusion and Looking Ahead

During 2018, the investment banks in CAP’s study rewarded executives commensurately with operating performance outcomes. PSU awards, with prospective, pre-defined multi-year performance goals, are now a significant part of incentive compensation awards for CEOs at the majority of the investment banks in the study. Looking ahead, we expect to see an increasing prevalence of PSU awards for corporate leaders at public investment banks. We also expect to see many companies within this industry enhancing their compensation-related shareholder communication, proxy-based and otherwise. Lastly, we have seen the industry heighten its focus on gender pay equity and representation by women in the management ranks; we expect this trend to continue.

The market for talent among independent, advisory-focused investment banks is highly competitive. Companies can choose to compete or fall behind. Doing so effectively – according to internal and external stakeholders – requires real-time industry insight, deviating from market practices that are common in other industries, and a compensation-related shareholder communication strategy that specifically addresses important industry-specific distinctions.

For questions or more information, please contact:

Bonnie Schindler Principal
Bonnie.Schindler@capartners.com 847-636-8919

Matt Vnuk Principal
Matt.Vnuk@capartners.com 212-921-9364

Whitney Cook and Brooke Warhurst provided research assistance for this report.

Appendices

Key Terms Defined

Compensation & Benefits Ratio

Compensation and benefits expense as a percent of revenue.

Equity Dilution or Overhang

Represents maximum potential dilution (i.e., the sum of all outstanding or available shares under equity plans divided by the sum of the company’s common shares outstanding and all outstanding or available shares under equity plans).

Equity Run Rate (also called “Burn Rate”)

Represents equity grants (including full-value shares and stock options) made during the year divided by the company’s average common shares outstanding.

Investment Bank Compensation Model

Reflects an often highly discretionary review of prior-year performance. The total incentive is then delivered to executives as a mix of annual cash incentive compensation and deferred, long-term incentive compensation.

ISS Excessive Dilution Threshold

ISS policy to vote against new share requests when the company’s equity compensation program is estimated to dilute shareholders’ holdings by more than 20 percent (S&P 500 company) or 25 percent (non-S&P 500, Russell 3000 company).

Net Run Rate (also called “Net Burn Rate”)

Represents equity grants (including full-value shares and stock options) made during the year minus forfeitures and repurchases divided by average common shares outstanding.

Operating Margin

Measures how much profit a company makes on each dollar of revenue. The calculation is operating income, or earnings before interest and taxes, as a percentage of revenue.

Total Direct Compensation (TDC)

The sum of base salary; annual incentives and bonuses; and long-term incentives, such as restricted stock, stock options, and cash- and share-based performance plans.

Total Shareholder Return (TSR)

TSR measures the change in stock price over a period of time, with dividends assumed to be reinvested at the time they are paid.

Traditional Compensation Model

Reflects a compensation structure where annual incentive and long-term incentive components are separate and determined independently. This is the typical pay model across industries.


1 When summary statistics are reported in this study, medians are used for the 12 public investment banks, while averages are used for the three Wall Street Banks.

2 When summary statistics are reported in this study, medians are used for the 12 public investment banks, while averages are used for the three Wall Street Banks.

3 When summary statistics are reported in this study, medians are used for the 12 public investment banks, while averages are used for the three Wall Street Banks.

Investment Banks

  • Cowen Inc.
  • Evercore Inc.
  • Greenhill & Co., Inc.
  • Houlihan Lokey, Inc.
  • Jefferies Financial Group Inc.
  • JMP Group LLC
  • Lazard Ltd
  • Moelis & Company
  • Piper Jaffray Companies
  • PJT Partners Inc.
  • Raymond James Financial, Inc.
  • Stifel Financial Corp.

Selected Wall Street Banks

  • The Goldman Sachs Group, Inc.
  • JPMorgan Chase & Co.
  • Morgan Stanley

Compensation Advisory Partners (CAP) conducted a study of executive compensation levels and design practices in the banking industry. The study includes 19 U.S. banks with greater than $50 billion in assets across three different groups: Money Center banks (n=4), Custody banks (n=3), and Super Regional banks (n=12). This report summarizes the findings of CAP’s study and identifies other hot topics in executive compensation affecting the banking industry.

Key Takeaways

  • Pay and performance: 2018 performance was mixed. Pre- and post-tax earnings growth improved over the prior period, while revenue growth and total shareholder return (TSR) were weaker. Chief executive officer (CEO) compensation generally aligns with these results, with CEO pay increasing in 2018, but to a lesser degree than in 2017.
  • Compensation program design: In recent years, executive incentive plan design among banks in this group has been stable. Earnings per share (EPS) is the most common short-term incentive metric and return on tangible common equity (ROTCE) is the most common long-term incentive metric. Stock options continue to be less common among banks than among companies in other industries.
  • Looking ahead: Diversity and inclusion and gender pay equity, the adoption of the new credit loss measurement standard, and regulators’ intentions to finalize Dodd-Frank rules governing incentive compensation at banks are some of the key issues that compensation and human resources committees of banks will need to consider in the second half of 2019 and beyond.

2018 Pay and Performance Outcomes

2018 was a mixed performance year for the banks in CAP’s study. EPS and net income both grew significantly, due in large part to the reduction in the corporate tax rate under the Tax Cuts and Jobs Act of 2017. Operating income growth was also up in 2018, indicating that strong operating results also played a part in the increases in EPS and net income. At the same time, revenue growth in 2018 was slightly lower than revenue growth during the prior year. TSR declined for the one-year period that ended December 31, 2018, consistent with the overall market. In addition, TSR was lower for the three-year period that ended December 31, 2018, than for the prior three-year period that ended December 31, 2017. The chart below summarizes median performance results for the banks in CAP’s study:

Metric Median Percent Change
Year Ended December 31, 2017 Year Ended December 31, 2018
EPS +14.0% +31.7%
Net Income +15.3% +25.9%
Pre-tax Operating Income +9.6% +13.4%
Revenue +7.0% +5.4%
1-Year TSR +19.3% -18.3%
3-Year TSR (Cumulative) +57.1% +25.3%

Source: S&P Capital IQ Financial Database.

In 2018, total direct compensation, including base salary, annual cash bonus, and awarded long-term incentives, among CEOs increased 7.8 percent versus 2017 at median. This is a smaller increase than in 2017 when total direct compensation for CEOs increased 11.1 percent at median. The smaller increase in 2018 is primarily due to changes in annual cash bonuses, which were mixed among this group and resulted in an increase of 1.5 percent at median. This is a shift from the period from the prior year when nearly all banks in CAP’s sample increased CEO bonuses, and the median increase was 16.3 percent. The chart below summarizes median changes in CEO pay for the group:

Element Median Percent Change for CEOs
Year Ended December 31, 2017 Year Ended December 31, 2018
Base Salary No Change No Change
Annual Cash Bonus +16.3% +1.5%
Awarded Long-term Incentive +7.0% +6.5%
Awarded Total Incentive +12.7% +7.8%
Total Direct Compensation +11.1% +7.8%

Compensation and benefits expense increased approximately three to four percent at median on an absolute basis in 2017 and 2018 but stayed relatively flat as a percentage of revenue. In addition, compensation and benefits expense declined as a percentage of net income, likely due to tax reform.

Median Compensation and Benefts Expense35.4%160.4%33.8%139.7%34.1%106.9%0%20%40%60%80%100%120%140%160%180%201620172018As % of RevenueAs % of Net Income

Executive Compensation Program Design

Incentive Compensation Model

The banking industry is different from other industries in that some banks determine a total incentive award based on annual performance and then allocate the total incentive between annual cash bonus and long-term incentive awards (e.g., the total incentive award for the year is delivered 40 percent through an annual cash bonus and 60 percent through long-term incentives). One-third of the banks in CAP’s study use this approach. The remaining two-thirds make separate decisions for the annual cash bonus and long-term incentive awards, which is consistent with general industry practices.

Short-term Incentive Plan

Short-term incentive plans in the banking industry tend to be more discretionary than in other industries. Of the companies in CAP’s study, 47 percent have primarily discretionary short-term incentive plans.

The remaining 53 percent of companies maintain more formulaic short-term incentive plans that pay out, at least in part, based on financial results relative to pre-established “threshold”, “target”, and “maximum” goals. These plans most often provide for a payout of 200 percent of target for “maximum” performance or better, though several companies provide maximum opportunities of less than 200 percent of target, and one company provides a maximum opportunity of greater than 200 percent of target.

EPS is the most common financial metric across these short-term plans. Companies also use Efficiency Ratio, return on assets (ROA), and ROTCE, but they are less common in short-term plans. Most companies measure annual performance against absolute performance goals; however, several companies include a relative performance component.

90%40%30%30%20%100%40%10%10%0%10%20%30%40%50%60%70%80%90%100%EPSEfficiency RatioROEROAPre-Provision Net RevenuePre-tax / Operating IncomeNet IncomeAbsoluteRelative

Note: Percentages do not add to 100 percent due to some companies using multiple metrics.

Long-Term Incentive Plan

Long-term incentive programs among companies in CAP’s study are most often composed of time-based restricted stock or units and long-term performance plans (e.g., performance share units). Only 26 percent of banks in the study use stock options, making them less common among this group than in the broader market. Companies tend to weight long-term performance plans as at least 50 percent of the target total long-term incentive award. Of the companies in the study, 11 percent use long-term performance plans as their only long-term incentive vehicle. The chart below outlines the average long-term incentive mix across companies in CAP’s study:

14%5%51%65%35%30%64%36%Banks with All Three Vehicles (n=5)All Banks (n=19)Average Long-term Incentive MixLong-term Performance PlanTime-based Restricted Stock/Units Stock Options

Note: Two companies use long-term performance plans as their only long-term incentive vehicle and one company uses a long-term performance plan and stock options.

84 percent of the banks in CAP’s study use return on equity (ROE) or a variant of that measure as a metric in their long-term performance plans. Variants of ROE include ROTCE and return on common equity (ROCE). ROTCE is the most common of these variants. Relative TSR and EPS are also common long-term performance plan metrics.

68 percent of companies use at least one relative metric in their long-term performance plans. Specifically, nearly all Super Regional banks use relative metrics in their long-term performance plans. In other industries, relative metrics are typically limited to TSR; however, the banks in CAP’s study also use relative financial measures, including relative ROE variants, EPS growth, and ROA. This is likely due to the significant degree of comparability between the Super Regional banks in CAP’s study.

47%32%32%26%21%100%68%16%11%0%10%20%30%40%50%60%70%80%90%100%ROTCETSRROEEPSROAPre-tax / Operating Income / MarginROCE5%5%Book Value5%RevenueEfficiency RatioAbsoluteRelativePrevalence of Long-term Incentive Metrics (n=19)

Note: Percentages do not add to 100 percent due to some companies using multiple metrics.

Among banks, long-term performance plans most often have maximum payout opportunities of 150 percent of target. In the broader market, most long-term performance plans have maximum payout opportunities of 200 percent of target. Maximum opportunities tend to be lower at banks due, in part, to regulatory guidance to limit upside leverage in incentive plans to avoid encouraging imprudent risk-taking.

Stock Ownership Guidelines and Holding Requirements

In recent years, practices around stock ownership guidelines and holding requirements have generally been stable. All of the banks in CAP’s study have ownership guidelines and/or holding requirements.

89 percent of companies maintain stock ownership guidelines. Most companies express the guideline as a multiple of salary. The most common guidelines are 6x base salary for CEOs and 3x base salary for other NEOs, though several companies maintain higher guidelines.

3%3%35%47%18%44%56%Greater than 6Less than 66xGreater than 33x

Note: Guidelines that are not a multiple of salary have been converted to an implied multiple of salary in the charts above.

In the years following the 2008 financial crisis, several banks in CAP’s study, including the Money Center banks, adopted policies requiring NEOs to hold a portion of the net after-tax shares received from stock vesting or option exercises (“net shares”) until retirement or termination from the company or later. Many thought this trend would catch on throughout the banking industry; however, most smaller banks never adopted such policies. Of the companies in CAP’s study, 42 percent disclose policies of this kind. These policies typically require NEOs to hold 50 percent of net shares until retirement or one-year post-retirement.

Looking Ahead to the Rest of 2019 and Beyond—Hot Topics in Executive Compensation

Diversity and Inclusion and Gender Pay Equity

In recent years, corporate diversity and inclusion have become a main area of focus culturally and for certain institutional shareholders. As a result, compensation and human resources committees are increasingly focusing on gender pay equity and representation at companies across industries. In particular, the financial services industry faces intense public scrutiny around its diversity and inclusion policies and gender pay equity.

This public pressure has only increased in 2019. Earlier this year, Arjuna Capital, an institutional investor that is notably outspoken on this topic, published a gender pay equity scorecard that included several of the banks in CAP’s study. In June, Congresswomen Maxine Waters and Joyce Beatty sent a letter to bank holding companies with assets of greater than $50 billion, requesting information about each institution’s diversity and inclusion data and policies. In 2019, 21 percent of companies in CAP’s analysis included shareholder proposals in their proxy statements requesting that the banks report the median gender pay gap. Though these proposals failed to receive majority support from shareholders, CAP expects that requests for disclosure around diversity and inclusion policies and gender pay equity will continue both in the banking industry and broader market.

Current Expected Credit Loss (CECL) Standard

One key development for 2020 is the implementation of the Financial Accounting Standards Board’s (FASB’s) new credit loss measurement approach, the current expected credit loss (CECL) model, which will impact loan loss reserves. An early announcement from JPMorgan Chase indicates that it expects the change to increase reserves by 35 percent; however, the impact on reserves will vary from bank to bank based, in part, on the makeup of the loan portfolio. The move to the new reporting standard will impact results for profit and return measures and may have an impact on incentive plan goals that were previously set for outstanding long-term performance plan cycles.

Dodd-Frank Rules on Incentive Compensation at Banks

Recently, news outlets have been reporting that regulators plan to finalize the Dodd-Frank rules governing incentive compensation at banks ahead of the 2020 presidential election. While this may seem counterintuitive to the current climate of deregulation, many believe that the current administration aims to finalize the rules to prevent the adoption of more onerous rules under a Democratic administration. If regulators move forward with this agenda item, banks will need to review their current incentive plans and, as necessary, consider adjusting them to comply with the final rules.

Mergers and Acquisitions (M&A) Activity

Early in 2019, BB&T Corporation and SunTrust Banks, Inc. announced that they will merge to create the eighth largest U.S. bank by assets. The combined bank will be called Truist Financial. The industry has not seen a merger of this magnitude since the 2008 financial crisis. The success of this combination could indicate a shift in attitudes around M&A activity between major financial institutions. However, given the regulatory uncertainty heading into the 2020 election, it remains to be seen if this merger will be the first in a series or a one-time event.

Conclusion

Compensation programs among the banks in CAP’s study continue to effectively tie pay outcomes to performance. In recent years, incentive plan designs among these banks have generally been stable.

However, the impending change in regulatory guidance following adoption of final Dodd-Frank rules may cause banks to begin to adjust incentive plan designs, though will likely not result in major changes. Other areas of uncertainty, including the impact of the implementation of the CECL standard, potential for a credit cycle or economic downturn, and uncertainty around the 2020 election, may affect incentive plan goal-setting processes or cause banks to make additional adjustments to executive compensation programs in 2020 and 2021.

For questions or more information, please contact:

Eric Hosken Partner eric.hosken@capartners.com 212-921-9363

Michael Bonner Senior Associate michael.bonner@capartners.com 646-486-9744

Diane Lee and Joshua Hovden provided research assistance for this report.

Banks in CAP’s Study (n=19)

Money Center Banks

  • Bank of America Corporation Citigroup, Inc.
  • JPMorgan Chase & Co.
  • Wells Fargo & Company

Custody Banks

  • The Bank of New York Mellon Corporation Northern Trust Corporation
  • State Street Corporation

Super Regional Banks

  • BB&T Corporation
  • Citizens Financial Group, Inc. Comerica, Inc.
  • Fifth Third Bancorp
  • Huntington Bancshares, Inc.
  • KeyCorp
  • M&T Bank Corporation
  • The PNC Financial Services Group, Inc. Regions Financial Corporation SunTrust Banks, Inc.
  • U.S. Bancorp
  • Zions Bancorporation

Compensation Advisory Partners (CAP) examined 2017 executive pay levels and pay practices among 26 companies in the regional bank industry. The companies were divided into two groups based on asset size: $5B – $10B in assets and $10B – $20B in assets. This report analyzes pay levels and practices among the two sets of banks.

Highlights

The mix of fixed pay (base salary) vs. variable pay (incentives) is similar among both sets of banks; however, incentive plan metrics and mix of long-term incentive (LTI) vehicles used varies by group.

  • The smaller banks in our study focus on Earnings Per Share (EPS), Return on Assets (ROA), Return on Equity (ROE) and Return on Tangible Common Equity (ROTCE) in their annual incentive plans while the larger banks rely more heavily on Net Income and Efficiency Ratio
  • $5B – $10B banks tend to place more emphasis on time-based restricted stock, whereas $10B – $20B banks weight performance-based LTI more heavily; there is limited use of stock options among both groups
  • $10B – $20B banks are more likely to cap performance-based LTI plan maximums below 200%, reflecting a trend among much larger financial institutions which have limited upside in their performance plans due to regulator input. Among the $5B – $10B banks, caps of 200% of target are more prevalent

CEO Compensation

As is the case in most industries, CEO compensation generally increases as the size of the bank increases; larger banks have more stringent regulatory requirements, tend to offer a broader range of services, and may be exposed to higher levels of risk. The range between the 25th percentile and 75th percentile for CEO pay among the $5B – $10B in assets banks is very narrow, which is likely driven by the smaller spread in asset size ($5B) compared to the larger group ($10B).

2017 CEO Target Compensation

Asset Size $5B – $10B $10B – $20B
Pay Component 25th %ile

($000s)

Median

($000s)

75th %ile

($000s)

25th %ile

($000s)

Median

($000s)

75th %ile

($000s)

Base Salary $613 $700 $737 $700 $780 $916
Bonus ($) $321 $450 $568 $450 $701 $876
Bonus (% of salary) 55% 70% 80% 70% 85% 100%
Target Total Cash $943 $1,200 $1,325 $1,291 $1,519 $1,577
LTI ($) $453 $567 $745 $588 $1,117 $1,574
LTI (% of salary) 70% 81% 113% 84% 121% 164%
Target Total Direct $1,469 $1,655 $1,924 $1,769 $2,694 $3,261

The relationship between fixed and variable incentive pay is similar across the two groups of banks. For CEOs in our sample, base salary (fixed pay) represents approximately 40% of total compensation, while incentives (variable pay) represent 60% of total compensation. In our experience, this contrasts with the banks over $20B in assets, where variable pay often comprises over 75% of the total pay mix. As salaries generally fall within the same range ($600K – $900K) among all banks studied, the differences in dollar amounts come largely in the form of increased long-term incentives, where the median LTI as a percent of salary is 81% for the $5B – $10B banks, compared to 121% for the $10B – $20B banks.

37%39%26%25%37%36%0%10%20%30%40%50%60%70%80%90%100%$10B - $20B$5B - $10BCEO Pay Mix (by Asset Size)BaseBonusLTI

Pay Practices

Annual Incentive Plans

Most companies in our study use “goal attainment” annual incentive plans. These are plans in which the company compares actual results to pre-established metrics with set weightings, leverage, and performance goals to determine incentive funding. Nearly a quarter of the companies instead use “discretionary” annual incentive plans, wherein companies consider a wide range of performance results — financial, strategic and/or individual performance — to determine incentive payouts, with no specific formula to determine earned awards. This approach allows a Compensation Committee to consider not only annual performance results, but external or internal factors influencing such results and adjust as appropriate.

Annual Incentive Plan – Metrics

Companies with Goal Attainment Plans

Among the $5B – $10B banks, EPS is the most prevalent metric followed closely by return measures (particularly ROA, ROE / ROTCE). Notably, the larger banks’ most prevalent metrics are asset-related metrics followed by net income and efficiency ratio. The larger banks tend to use metrics that emphasize more than just profitability and incentivize how efficiently the bank utilizes its resources to generate a profit and operate the business, while incorporating metrics that measure the underlying profitability.

Strategic goals are not prevalent in either group; only three banks, all in the $10B – $20B group, include strategic initiatives tied to the technology strategy or diversity and inclusion. These priorities are likely being discussed at all banks, but, companies and committees may shy away from including them in incentive plans as it is challenging to set measurable goals. Therefore, they must rely more heavily on discretion.

46%31%31%23%15%8%8%15%46%23%23%31%31%46%38%62%15%15%31%31%0%10%20%30%40%50%60%70%EPSROAROE / ROTCENet IncomeEfficiencyRatioAsset Ratio /QualityLoansDepositsOtherFinancialMetricsStrategicGoalsAnnual Incentive - Metric Types (by Asset Size)$5B - $10B$10B - $20B

Notes: Other Financial Metrics include Earnings Before Income Tax (EBIT)/Op. Income, Net Interest Margin, Non-Perf. Assets, Total Shareholder Return (TSR), Core Non-Interest Income, Charge-Offs, Operating Expense, Regulatory Criteria, Revenue, Price-to-Book Ratio, Non-Interest Expense, Dividend Increase, Fee Income Growth.

Long-Term Incentive Plans

Mix of LTI Vehicles

For CEOs among the $10B – $20B banks, performance-based LTI represents 60% percent of the LTI mix. This contrasts with $5B – $10B banks, where time-based restricted stock represents 60% of the mix. Stock options account for less than 5% of total mix (only about 10% of companies use them) for all banks in our sample. The $10B – $20B banks’ LTI is more comparable to general industry, where performance-based equity accounts for about two-thirds of total LTI mix; however, we see much less use of stock options in the regional banking industry than in the broader market. Regulators view stock options as risky, as the value can be realized based on macro-economic conditions, rather than company-specific events or financials and many financial services companies have decreased or eliminated the use of stock options entirely.

4%3%35%61%61%36%0%10%20%30%40%50%60%70%80%90%100%$10B - $20B$5B - $10BAverage CEO LTI Mix (by Asset Size)Stock OptionsRS/RSUPerformance Plan

Performance Plan Leverage

Among the $5B – $10B group, the most prevalent upside leverage on performance plans is 200% of target, similar to general industry. For the $10B – $20B group, 150% and 200% of target are equally prevalent. Capping performance plans at 150% of target is common among banks over $20B in assets, as increased scrutiny from regulators led to a practice of reduced upside leverage. While the $10B – $20B banks have followed to some extent, most of the $5B – $10B and nearly half of the $10B – $20B companies have maximums of 200% of target.

Performance Plan Maximum Prevalence
Asset Size < 150% 150% >150% – <200% 200%
$5B – $10B 14% 14% 0% 72%
$10B – $20B 0% 45% 10% 45%

Long-Term Incentive Plan Metrics

86%43%29%14%14%14%29%31%38%31%38%8%8%15%0%10%20%30%40%50%60%70%80%90%ROCE / ROTCETSRROA / ROTAEPSBook ValueAsset Ratio /QualityOther FinancialMetricsLong-Term Incentive Metrics (by Asset Size)$5B - $10B$10B - $20B

Note: Other financial metrics include Loan Growth, Tier 1 Capital Ratio, Efficiency Ratio, Price-to-Book Ratio; Prevalence is shown for companies that have LTI that use performance metrics.

The most prevalent metric in the LTI plan, used by nearly all $5B – $10B banks is Return on Common Equity (ROCE) / ROTCE followed by TSR. Among the $10B – $20B banks, TSR and EPS are the most common metrics, followed by return metrics. In our experience, the use of relative TSR in performance plans is a majority practice for banks over $20B in assets.

CEO Pay Ratio

As expected, the pay ratio correlates with the size of the bank, with the $10B – $20B banks having higher ratios at median and overall. Among the $5B – $10B banks, the median CEO pay ratio was 35:1, and almost doubles to 64:1 among the $10B – $20B banks. 2018 was the first year of CEO pay ratio disclosure which received much less attention overall than anticipated.

Conclusion

Overall, asset size has a significant impact on pay practices, particularly in banks with less than $20B in assets. The $10B – $20B banks generally have similar pay practices to their larger counterparts. On average, all banks in our sample have a similar total pay mix; however, annual incentive and LTI plan metrics, LTI mix, and LTI plan leverage vary. While the banks over $20B in assets have made significant pay practice changes in the post-financial crisis era, not all have cascaded down to banks less than $20B in assets. Regardless of size, we are seeing banks continue to focus on aligning pay and performance with an increased focus on strategic priorities. Bank boards today are discussing how to remain competitive, including how to enhance the customer relationship and to keep up with the digital transformation the industry is undergoing. We expect more boards to start to consider implementing strategic metrics in incentive plans in order to incentivize executives to enrich the customer experience and implement digital strategies.


For questions or more information, please contact:

Kelly Malafis Partner
kelly.malafis@capartners.com 212-921-9357

Shaun Bisman Principal
shaun.bisman@capartners.com 212-921-9365

Ryan Colucci Associate
ryan.colucci@capartners.com 646-486-9745

Joanna Czyzewski Associate
joanna.czyzewski@capartners.com 646-486-9746

Whitney Cook and Joshua Hovden provided research assistance for this report.


Appendix: Regional Banks

Banks with Assets $5B – $10B

  • Boston Private Financial Holdings, Inc.
  • Brookline Bancorp, Inc.
  • First Busey Corporation
  • First Foundation Inc.
  • First Merchants Corporation
  • Independent Bank Corp.
  • Lakeland Bancorp, Inc.
  • LegacyTexas Financial Group, Inc.
  • Mercantil Bank Holding Corporation
  • Opus Bank
  • Pacific Premier Bancorp, Inc.
  • Seacoast Banking Corporation of Florida
  • Tompkins Financial Corporation

Banks with Assets $10B – $20B

  • BancorpSouth Bank
  • Bank of Hawaii Corporation
  • Berkshire Hills Bancorp, Inc.
  • Cadence Bancorporation
  • CenterState Bank Corporation
  • First BanCorp.
  • First Midwest Bancorp, Inc.
  • Great Western Bancorp, Inc.
  • Home Bancshares, Inc. (Conway, AR)
  • MB Financial, Inc.
  • Old National Bancorp
  • Trustmark Corporation
  • United Bankshares, Inc.

Compensation Advisory Partners (CAP) examined 2016 executive pay levels and practices among 43 companies in the regional bank and thrifts and mortgage finance industries. The companies were divided into three groups: small banks (< $20B in assets), mid-size banks ($20B – $50B in assets) and large banks (≥$50B in assets). This report analyzes the differences in pay levels and practices among the three sets of banks given the different sizes and regulatory oversight affecting each group of companies.

Highlights

Pay practices across banks of various sizes are generally consistent; however, there are still a few key differences:

  • Larger banks tend to place more emphasis on variable pay (annual and long-term incentives)
  • Smaller banks generally use a wider array of metrics in their annual incentive plan compared to larger banks that tend to use a few key measures
  • Most larger banks cap long-term incentive plan maximums at 150% of target as a result of regulator input; among smaller banks, caps above 150% of target are still used, although many use a 150% maximum

CEO and CFO Compensation

CEO and CFO compensation increases as the size of the bank increases which is not surprising as size is viewed as an indicator of increased complexity. This trend is generally true in most industries. The range between the 25th percentile and 75th percentile for CEO pay among the large banks (≥$50B) is very narrow.

CEO Total Direct Compensation CFO Total Direct Compensation
Assets 25th %ile

($000s)

Median

($000s)

75th %ile

($000s)

25th %ile

($000s)

Median

($000s)

75th %ile

($000s)

< $20B $2,023 $2,469 $2,897 $727 $778 $1,149
$20B – $50B $3,274 $3,614 $4,299 $1,112 $1,394 $1,528
$50B $7,242 $7,901 $8,088 $2,480 $2,608 $3,400

When comparing pay mix across our three groups of banks, there is a strong relationship between asset size and amount of variable or incentive pay. For CEO’s among the small banks, base salary (fixed pay) represents one-third of total compensation and incentives (variable pay) represent two-thirds of total compensation. This contrasts with the other groups, in which variable pay comprises almost 75% and 85% for the mid-size and large banks, respectively. As salaries generally fall within the same range ($800K – $1M) among the three groups of banks, the differences in pay come largely in the form of increased long-term incentives.

Among all three groups, the CEO had a higher percentage of variable pay than the CFO. It is common across all industries for the CEO to have a slightly greater emphasis on performance-based compensation.

22% 16% 36% 27% 43% 33% 25% 24% 25% 27% 25% 28% 53% 60% 39% 46% 32% 39% CFO CEO CFO CEO CFO CEO Assets Pay Mix Base Bonus LTI ≥$50B $20B - $50B <$20B

Pay Practices

Annual Incentive Plans

A majority of companies in our study use “goal attainment” annual incentive plan funding. These are plans in which the company compares actual results to pre-established metrics, with set weightings, and performance goals to determine incentive funding. However, some companies use “discretionary” funding annual incentive plans, a common practice in larger financial services companies (for example, Bank of America and JPMorgan). These companies consider a wide range of performance results — financial, strategic and/or individual — to determine incentive payouts, with no specific formula to determine earned awards. This approach allows a company to not only consider the level of performance results each year, but to consider external or internal factors influencing such results and make adjustments based on this qualitative review as appropriate.

Annual Incentive Plan – Metrics

Companies with goal attainment plans

33% 33% 33% 40% 20% 40% 25% 17% 58% 0% 10% 20% 30% 40% 50% 60% 70% 1 or 2 3 4 or more Number of Metrics $20B - $50B < $20B ≥ $50B 0% 10% 20% 30% 40% 50% 60% 70% EPS ROA ROE / ROTCE Net Income Efciency Ratio Other FinancialMetrics Strategic Goals Annual Incentive - Metric Types ≥ $50B $20B - $50B < $20B

The small banks tend to use more metrics in their annual incentive plan compared to the other groups. Earnings per share (EPS) is the most prevalent metric across all subsets followed closely by return measures (particularly Return on Assets and Return on Equity/Return on Tangible Common Equity). Notably, the small banks use strategic metrics more frequently than the larger banks. This may be due to the emphasis on growth and driving strategic results that cannot adequately be captured by a typical financial metric.

Long-Term Incentive (LTI) Plans

Mix Of LTI Vehicles

Regardless of size, long-term incentive mix remains consistent across all groups. Stock options account for approximately 5% of total mix (only about 30% of companies use them, on average), while performance-based plans account for about 60% of total long-term incentive mix and time-based restricted stock makes up the difference. This is comparable to general industry, where performance-based equity accounts for about two-thirds of total LTI mix; however, we see much less use of stock options in the regional banking industry than the broader market. Stock options are viewed as risky by the regulators and many financial services companies have decreased or eliminated the use of stock options entirely. Time-based restricted stock may provide better retention and performance-based plans may offer a better link between pay and financial performance.

7% 34% 59% 4% 36% 60% 7% 32% 61% 0% 10% 20% 30% 40% 50% 60% 70% Stock Options Time-Based RSU Performance Plans Average LTI Mix ≥ $50B $20B - $50B < $20B

Performance Plan Leverage

Median upside leverage on performance plans among all three groups is 150% of target, influenced by input from regulators for the largest regional banks (general industry often pays maximum at 200% of target). Larger banks face increased scrutiny from regulators to discourage excessive risk taking. While the regional banks have followed to some extent, several of the smaller companies (particularly those less than $20B) have maximums of 175% or 200% of target.

As a % of Target
LTI Payout Leverage > $50B $20B – $50B < $20B
Threshold Maximum Threshold Maximum Threshold Maximum
75th Percentile 50% 150% 50% 175% 40% 200%
Median 50% 150% 50% 150% 25% 150%
25th Percentile 27% 125% 25% 150% 21% 150%

Long-Term Incentive Plan Metrics

0% 10% 20% 30% 40% 50% 60% 70% TSR EPS ROA ROTCE ROE / ROCE Book Value EfciencyRatio Other Long-Term Incentive Metrics ≥ $50B $20B - $50B < $20B

Total Shareholder Return (TSR) is the most common metric in the long-term incentive plan, followed by EPS and return metrics. Many mid-size and small banks use TSR as a stand-alone weighted metric, accounting for at least 50% of performance plan results. The impact of shareholder advisory groups, such as ISS, may be driving the heavy use of TSR. Larger companies tend to use TSR as a modifier and not as a weighted metric. Long-term performance plans tend to be less complex than annual incentive plans with more than 60% of regional banks (as a whole) using only one or two metrics.

Conclusion

Overall, the smaller regional banks generally have similar pay practices to their larger counterparts. However, pay mix, number of metrics in annual incentive plans and long-term incentive plan leverage vary. Larger banks have made significant pay practice changes in the post-financial crisis era, and while regional banks have adopted some of these changes as well, not all have cascaded down. The current economic uncertainty may present some additional challenges in this industry but we expect the trend to continue toward increased performance compensation.


For questions or more information, please contact:

Eric Hosken Partner eric.hosken@capartners.com 212-921-9363

Kelly Malafis Partner kelly.malafis@capartners.com 212-921-9357

Alex Stahl Senior Associate alex.stahl@capartners.com 646-486-9741

Ryan Colucci Associate ryan.colucci@capartners.com 646-486-9745

Joanna Czyzewski Associate joanna.czyzewski@capartners.com 646-486-9746

Robert Martin provided research assistance for this report.

Compensation Advisory Partners (CAP) provides an annual update on pay levels for Chief Financial Officers (CFOs) and Chief Executive Officers (CEOs). This year’s update is based on a sample of 118 companies with median revenue of $12 billion. Additional information on criteria used to develop the sample of companies is included in the Appendix.

Highlights 2016 vs 2015

  • Adjustments to base salaries were less frequent in 2016 than in the past 3 years for CEOs and CFOs. Less than 50% of companies made increases in 2016 for CEOs, resulting in a median increase of 0%, while 70% of CFOs received an increase, with median increase of 3.0%
  • Among the companies that made salary increases, the median CEO and CFO 2016 increase was 3.3% and 4.4%, respectively, and these increases were lower compared to the increases in our 2015 study (3.8% and 5.1% respectively)
  • The 2016 median increases in actual total direct compensation (i.e., cash plus equity) for both CEOs and CFOs were 5.4% and 3.9%, respectively
  • Median actual bonus increases were up modestly, 1.5% for CEOs and 1.1% for CFOs, reflective of modest performance improvement (revenue and net income growth) in 2016
  • Median target bonus opportunities remained unchanged for both CEOs (150% of salary) and CFOs (100% of salary), with CEO target bonus unchanged for the fourth year of our study
  • Growth in long-term incentive opportunities at median approximated 4% for both positions
  • CFO total compensation continues to approximate one-third of CEO total pay
  • The emphasis of variable pay over fixed pay, and performance-based equity over time-based equity, continues

Study Results

Salaries

In the past, we have seen a steady growth in the number of CEOs and CFOs receiving salary increases in each year. However, for the 2015-2016 period the salary increase prevalence of 49% for CEOs and 71% for CFOs was lower than more recent years and comparable to the 2012-2013 period where only 48% and 69% of CEOs and CFOs, respectively, received increases. Median 2016 salary increases were 3.0% for CFOs and 0% for CEOs.

% of Executives Receiving Salary Increases

 

2014 – 2015

2015 – 2016

 Position

No Increase

Receiving Increase

No Increase

Receiving Increase

CEO

42%

58%

51%

49%

CFO

23%

77%

29%

71%

0 . 0 % 0 . 0 % 3 . 3 % 0 . 0 % 3 . 0 % 5 . 6 % 25th Percentile Median 75th Percentile 2 . 1 % 3 . 3 % 5 . 5 % 3 . 0 % 4 . 4 % 7 . 7 % 25th Percentile Median 75th Percentile CEO CFO Only Companies with Increases All Companies 2016 Salary Increases

Actual Pay Levels

As shown in the table below, salary increases were higher for CFOs since most CEOs did not receive an increase. Yet, the median increases in actual bonus and long-term incentives remained similar for both CFOs and CEOs.

The median rate of increase in actual total direct compensation levels for CEOs and CFOs was 5.4% and 3.9% in 2016, respectively. We also found that in 60% of companies CFOs were receiving higher increases (6.2% at median) than CEOs. However, in the 40% of companies where CEO increases were higher, the median increase approximated 1.5x the CFO increase, contributing to the slightly higher increase in actual total direct compensation for CEOs.

Median Percentage Change in Pay Components

Pay Components

2014 – 2015

2015 – 2016

CEO

CFO

CEO

CFO

Salary

2.5%

3.9%

0.0%

3.0%

Actual Bonus

0.0%

-0.1%

1.5%

1.1%

Long-Term Incentives

6.8%

7.6%

3.8%

4.1%

Actual Total Direct Compensation

2.2%

1.4%

5.4%

3.9%

Similar to actual bonuses, median target bonuses remained flat for both CFOs and CEOs.

Target Bonus as % of Salary

Summary Statistics

2015

2016

CEO

CFO

CEO

CFO

25th Percentile

130%

80%

138%

85%

Median

150%

100%

150%

100%

75th Percentile

180%

120%

190%

120%

Median Pay Increase by Industry1

Median salary increases were generally aligned between CEOs and CFOs in 5 of 9 industries. There were some differences in the Consumer Discretionary, Industrials, Information Technology, and Materials industries. The biggest difference was in the Industrials industry where the median CEO increase was 0% compared to the CFO median increase of 4.9%. In the Industrials industry, only 10 of 23 CEOs received a salary increase with a median of 3.2%, compared with 19 of 23 CFOs received salary increases with a median of 6.3%. The Energy industry increases were 0% for both CFOs and CEOs for the second year in a row as the industry continues to face challenges with low oil prices.

Differences by industry were slightly more pronounced when looking at actual total direct compensation, with the biggest difference in the Utilities industry where the median increase was 12.2% for CEOs and 1.1% for CFOs. Given a sample of 9 companies, the median results are skewed by two companies that had very different increases for each position. Excluding these outliers creates a narrower difference (approximately 3%) between median CEO and CFO increases. None of the industries saw a decrease in total compensation at median.

0.0% 0.0% 0.0% 0.0% 0.8% 1.7% 2.1% 3.0% 4.2% 0.0% 0.2% 2.9% 4.9% 2.9% 4.0% 2.1% 3.0% 3.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Energy(n=6) Financials(n=18) InformationTechnology(n=9) Industrials(n=23) ConsumerDiscretionary(n=14) Materials(n=12) ConsumerStaples (n=12) Utilities(n=9) Healthcare(n=13) Base Salary CEO CFO
Actual Total Direct Compensation 6.4% 3.4% 6.2% 4.6% 5.4% 12.2% 5.9% 12.2% 2.3% 6.2% 1.4% 1.9% 8.6% 5.6% 19.6% 2.9% 1.1% 3.9% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Energy(n=6) Financials(n=18) InformationTechnology(n=9) Industrials(n=23) ConsumerDiscretionary(n=14) Materials(n=12) ConsumerStaples(n=12) Utilities(n=9) Healthcare(n=13) CEO CFO

Target Pay Mix

The structure of the overall pay program (salary, bonus, LTI) has remained largely unchanged since 2011. CEOs continue to receive less in the form of salary and more in variable pay opportunities, especially LTI, than CFOs.

CEOs CFOs 13% 12% 22% 20% 21% 22% 22% 23% 66% 66% 56% 57% 2011 2016 2011 2016 Salary Bonus LTI

Long-Term Incentive (LTI) Vehicle Prevalence and Mix

There was very little change in the type of vehicles used to deliver LTI awards in 2016 vs. 2015. Most companies continue to use two different vehicles to deliver LTI, with approximately 20% of companies studied using all 3 equity vehicles (stock options, time-based stock awards, and performance plan awards).

Performance plans account for roughly 50+% of LTI awards on average among companies studied. The other half of LTI is delivered through an almost equal mix of stock options and time-vested restricted stock awards.

The most notable change since 2011 has been a general shift from stock options to performance plans.

LTI Mix

 

2011

2015

2016

 LTI Vehicles

CEO

CFO

CEO

CFO

CEO

CFO

Stock Options

32%

32%

24%

23%

23%

22%

Time Vested Restricted Stock

17%

22%

20%

25%

20%

24%

Performance Plans

51%

46%

56%

52%

57%

54%

Conclusion

2016 performance overall, was generally flat compared to last year. Median revenue growth was 1% (vs -1% in 2015) and net income growth was 0% (vs -1% in 2015). Total shareholder return was much higher in 2016 and most of the growth was post the election results; the full year return was 16% (vs -2% in 2015). Yet total pay increases were slightly higher than in 2015, which we believe were directionally aligned with the small performance improvements.

We expect the overall executive pay mix to continue to emphasize the variable, at-risk components of pay (such as bonuses and LTI). We also expect the emphasis on performance-based LTI plans to remain similar to current practice. Given increased shareholder scrutiny and influence of Say on Pay, we anticipate that aligning pay outcomes with company performance is the imperative for all companies and Boards.

Appendix

Sample Screening Methodology

Based on the screening criteria below, we arrived at a sample of 118 public companies with median 2016 revenue of $12B.

Revenue

At least $5B in revenue for fiscal year 2016

Fiscal year-end

Fiscal year-end between 9/1/2016 and 12/31/2016

Proxy Statement Filing Date

Proxy statement filed before 3/31/2017

Tenure

No change in CEO and CFO incumbents in the past three years

Industry

All industries have been considered for this analysis


1 Excludes one company in the Telecommunications Services industry and one in the Real Estate industry.

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