Total compensation for CEOs of large and midsize U.S. banks fell in 2023 as companies grappled with the fallout from last spring's banking crisis. Join us live at 1 p.m. Tuesday, July 9 as Kelly Malafis and Shaun Bisman of Compensation Advisory Partners talk about the results of their annual CEO pay analysis and describe how bank boards made decisions about executive compensation in a year rife with unexpected challenges.
Transcription:
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Allissa Kline (00:14):
Hi everybody. Welcome to this episode of Leaders, where we're going to cover the latest executive compensation trends among large and mid-size bank CEOs in the U.S.
My name is Allissa Kline. I'm a reporter for American Banker. I cover large and national banks and commercial and retail banking trends. Joining me today are two folks that we talk to every year about compensation trends. I have Kelly Malafis and Shaun Bisman from Compensation Advisory Partners, or CAP for short. CAP is a consulting firm that works with boards of directors and management teams to develop executive compensation programs. CAP was founded in 2009 and provides a range of services including compensation, strategy development, competitive market comparisons and benchmarking, and annual and long-term incentive plan designs.
Kelly is a founding partner of CAP. She has more than 20 years of experience as an executive compensation consultant. Her work includes a focus on compensation strategy development, evaluating the pay and performance relationship for senior executives, annual and long-term incentive plan design, compensation program governance, and board of director compensation. Kelly has advised large and small publicly traded companies across several industries. That includes financial services, insurance, pharmaceutical, manufacturing and retail.
And with Kelly is Shaun, who is also a partner at CAP. Shaun has more than 15 years of experience working with management and compensation committees. Shaun provides consulting services to both public and privately held companies. He also advises on corporate governance, peer group development, performance measurement, pay-for-performance validation, incentive plan design, and director compensation.
Welcome to both of you. It's great to see you again.
(02:16):
Let's see, Kelly, maybe the best place to start is if you could do an overview of CAP's annual executive compensation analysis process. I think we've been working together on this for at least four years. I'm interested, I guess, this year in what size banks were reviewed and what type of data you all analyzed.
Kelly Malafis (02:40):
Sure, sure. Allissa. Yep. This is the fourth year that we've partnered with American Banker to analyze compensation trends among banks, publicly-traded banks. And the process that we use to identify the sample is we look at proxies that were filed at the end of 2023 through the end of April 2024 for banks with assets of greater than $10 billion, and that criteria yielded a sample size of 59 banks this year. So our study includes 59 banks, and we look specifically at CEO pay and performance of those companies to assess the pay and performance relationship. In addition to pay levels and performance, we also look at trends in incentive plan design, the use of retention awards, the use of new measures in incentive plans such as ESG and DEI and say-on-pay results, et cetera. And when we do our analysis for pay and performance, we want to look at consistent incumbents. So when there's been a CEO transition, we'll only look at those companies that have the same CEO. So when we look at pay and performance, it's 55 banks with assets of $10 billion or more.
Allissa Kline (04:02):
Right. Okay. And you collect a lot of data, which you share with us, but I think you also use it to help your clients. So Shaun, can you talk a little bit about how CAP uses this data in serving your clients in financial services?
Shaun Bisman (04:21):
Yeah, sure. About one-third of our clients are on the financial services industry, and many of our clients really want to know what other banks are doing when it comes to pay and performance. So we use this data to host these webinars with American Banker and present it at various industry conferences, and we also share the data with our clients because once the proxies are filed, they really want to know the latest information on what are other banks paying their named executive officers, and how does that correlate with the financial performance of the bank. And banking is a highly regulated industry. A lot of macroeconomic factors have an impact on pay and performance.
So specifically in 2023, the inflationary environment, high interest rates, we had several bank failures early in 2023. And this really had an impact on the compensation for some of the banks, and we'll get into it a little later today. But our clients really want to know what did other banks do in 2023? How did they account for some of these unplanned events that happened throughout the year?
Allissa Kline (05:37):
Right. And there were several of those events. But before we talk about that, I want to just touch base and review some of your analysis from the two prior years. Let's see. We'll start with 2021. Median total compensation for bank CEOs that year rose 21.5%, which was a huge increase. It rose 7% in 2022. Can you all talk a little bit about some of the factors that drove the increases in 2021 and 2022?
Kelly Malafis (06:17):
Sure. Let me start there, Allissa. As you said, we've seen a lot of interesting trends in bank pay over the last several years. 2020 was the pandemic year where compensation was depressed across industries. But 2021 turned out to be a very strong financial performance year for the banking industry. The profits were up significantly and we saw a corresponding increase in pay. As you noted, total compensation was up 21.5%, and that was primarily driven by annual incentive bonuses being up almost 50% over the prior year. So that was a huge increase that we typically don't see in the industry or across industries. But it was really supported by the stronger financial performance.
And then the following year, performance was not as strong, but it was still healthy. And so bonuses were still being paid above target. And so that led to compensation still being up, albeit not as much. So total compensation was up in the high single digits. We also saw in 2022, it was a very tight labor market, and so target compensation was increasing for many positions, including for the CEO positions. So we saw some target bonuses go up. So then you combine that with performance, it helps to increase pay. So that's really what we saw in those last two years before we got to '23.
Allissa Kline (08:00):
Right. And '23 was a little bit different. After two years of increases, your analysis of those 55 banks showed a decrease in median total compensation. It was down about 6.6% among the pay packages that you reviewed. And it was the first decrease since 2020 when the pandemic drove down CEO pay in general. So what was the main culprit of that decrease for 2023?
Shaun Bisman (08:34):
So CEO compensation is often tied to the financial performance of a company. So if financial performance is down, you're expecting to see incentive payouts down. So we would say that pay and performance were well aligned in 2023 since financial performance, both on earnings and looking at stock price, were down year over year. And as I mentioned before, it was a very volatile market in 2023 with the bank failures, inflationary pressure, the interest rate environment as well. So when we look at both the pay and the performance, stock price was down for banks and it correlated with the compensation for CEOs. So that's really why pay was down, because of the financial performance in 2023.
Allissa Kline (09:27):
What happened with bonuses specifically? So you talk about three different parts to the compensation package: bonus, salaries and long-term incentive. Maybe we should look at bonuses specifically for 2023, in that group that you looked at.
Kelly Malafis (09:47):
Yeah. So many of the regional banks have incentive plans where they set their target goals for the year at the beginning of the year, within the first quarter. So most have approved their plans by February, early March. So in 2023, many companies had goals before the bank failures that occurred in late March, starting with SVB and then First Republic and Signature, which really sent the whole industry into a decline. So even if companies were not having the same liquidity issues initially, it really impacted other banks in terms of shifting their strategy to more asset-gathering/deposit-gathering versus making loans. It impacted the stock prices of many of the regional banks. And so goals that were originally set without that information became more challenging to achieve.
So what many of the boards that we work with, they took a wait and see approach and said, "Okay, we started the year thinking one thing, things have changed, but let's wait until the entire year plays out and see how financial performance comes out."
(11:13):
"And then we can use our discretion as a compensation committee to make adjustments." And so what many of our clients did was say, "Okay, what were things that were truly outside of the management's control?" So one item was the FDIC special assessment that really was not anticipated and out of [board's] control. And then some boards and banks went further, adjusting for the environment. But that's really how we saw the bonuses play out in 2023 where they were down. And some companies took some relief to get it closer to above a threshold level, somewhere between a threshold and target level.
Allissa Kline (12:02):
Okay. I think we've talked about the fact that overall bank CEO compensation could have tumbled even beyond the 6.6% from 2023 if bank boards hadn't taken certain measures to protect bonuses. Can you give me some sort of idea, some examples about what boards might've done to protect those bonuses?
Kelly Malafis (12:36):
Yeah, I think we covered a little bit of that, Allissa, in that if the plan that they had was showing an outcome that was lower than anticipated based on the information that the banks had at the beginning of the year, they really looked to see what was in management's control, what was more the environment and how much of an adjustment did they think was fair to both the shareholders and retentive to the participants. So some of the things that we saw them adjusted for related to the environment, some of it related to the change in strategy, right? A lot of our clients held back on loan activity. And some of it had to do with the regulatory impact of the bank failures at the beginning of the year.
Allissa Kline (13:32):
Okay. We talked last year, maybe the year before, about how boards are giving more consideration to qualitative performance and maybe less to quantitative targets, which as you've mentioned a couple of times can be impacted by things that banks can't necessarily control, like a pandemic. How do boards determine those qualitative metrics, and do you find that those metrics tend to stick and be applied the following year when they're thinking about compensation?
Shaun Bisman (14:10):
Yeah, so qualitative metrics generally make up about 20% of a bonus. Usually it's either a weighted component or it's part of some individual modifier. But when we think about qualitative assessments, the key really is to ensure that the results are still objective and measurable and less subjective. So when you think about a qualitative assessment, it's important to think about results that are maybe less quantifiable, but impact the bank's overall financial performance.
So in the beginning of the year, banks' management teams, they really come up with what qualitative metrics should we consider for the upcoming year? And some of them tend to be consistent year over year, like the customer or stakeholder experience or environmental, social and governance, specifically diversity, equity and inclusion metrics. Those tend to be similar year over year. But there are times when there are different metrics used, so if there's some key performance indicators, or KPIs, or some strategic objectives that is important for the long-term performance of the company, and then the board meets to set some annual goals upfront.
(15:31):
So there's definitely some goals that are consistent year over year. But there are a portion that really changes based on either one, the economic environment or the bank's strategy in the long term. But the key really is to have robust disclosure in the proxy statement for when the compensation committee makes these decisions. And what we don't see as an outsider, but as consultants, management teams, if you lift up the hood, there's a lot of information provided to the compensation committee to make this qualitative assessment more quantifiable and more objective and less subjective, because you really don't want to put pressure on the compensation committee to get it right. You want to provide them all the information that's appropriate in order for them to really measure those qualitative assessments.
Allissa Kline (16:27):
Sounds like challenging, I guess, different challenges every year to try to figure all of that out. So bonus payouts, we mentioned, are one part of the compensation package. Salaries and long-term incentives are the other two key components this year. Let's see. For 2023, you found that median salaries for bank CEOs rose 3.1%, which was about the same, I think, as 2022, and long-term incentives rose about 3.9% last year. Any key takeaways about those two categories? Any trends that you noticed in looking at those two categories, maybe in comparison to what happened with bonuses?
Kelly Malafis (17:20):
Sure. When we think about CEO compensation pay mix, the salary tends to be the smallest component of the pie. Then the next biggest piece is the annual cash bonus, and the biggest piece is the long-term incentive, which we look at the grant date value of the long-term incentive. So, what is the expected amount that the executive will get over the vesting or the performance period?
And so for the salaries, the 3.1% is in line with salary budget levels that we see across organizations. CEOs do not get increases every year, or they may get an increase every other year. So on average, it tends to not contribute as much to the total pie. And long-term incentives also tend to be a little bit more steady and less volatile in terms of the grant date value because a lot of board members and comp committees, they view it as an opportunity to earn something in the future.
(18:37):
And the actual value for it will be worth more or less based on how the stock price performs or how companies perform against long-term, usually three year, financial goals. So there's less volatility, we'd say, in the long-term value because the volatility comes with the performance based on, again, the vesting and the performance period. But with the bonuses, the key difference is, they're tied to the financial and strategic objectives in a given year. And as we've seen, when profitability is up and strong, the payments are higher. When there's less profitability, not as good performance, it tends to go down. So there's a lot more volatility in the bonus piece compared to the long-term and the salaries.
Allissa Kline (19:28):
Right. Okay. Did you notice any differences in CEO pay trends for 2023 when you looked at the largest banks and then compared to the smaller banks? And if so, what might those differences have been?
Shaun Bisman (19:48):
So when you compare the pay levels year over year in 2022 versus '23, they actually were fairly comparable for the large versus the small banks. I think total compensation was down roughly about 3% at the larger banks and then at some of the smaller banks, under about $50 billion in assets, it was down about 8%. And if you compare earnings and total shareholder return or the stock price, it was really similar between both groups. And it's really been the case the last few years where there wasn't really a noticeable difference between the small and the larger banks year over year in terms of compensation.
But if you looked at the year-over-year changes, the top three and the bottom three, it happened to be some of the larger, no sorry, the smaller banks. So if you look at the largest increases is BOK Financial, Old National, and United Bankshares, they had about a 25 to 30% increase year over year. And then the biggest decreases as well were some of the smaller banks. So specifically Bank of Hawaii, Western Alliance and WSFS Financial, compensation was down about 25% year over year. But again, there really weren't any noticeable differences between the two groups year over year.
Allissa Kline (21:09):
Okay. Any thoughts about differences in CEO compensation trends at banks versus every other company out there? Non-banks, corporations?
Kelly Malafis (21:30):
Yeah, let me start there. Typically, the key differences that we see in bank compensation structures versus general industry is in the way the programs are structured. So given the heavy regulatory oversight of financial institutions, and going back to 2008 and the financial crisis, there was incentive compensation guidance given by the Fed and other regulatory agencies that really shaped how the compensation programs are structured from the largest banks. That has trickled down into smaller banks.
So we see a lot less leverage in performance share plans, meaning across general industry companies can earn up to two times their target amount for performance shares. But in financial institutions, that's typically limited to one-and-a-half times. We see the use of stock options in the long term be much lower than it is across other industries. And in fact, there's many companies in banking that don't use options at all. We see the consideration of risk outcomes in compensation, which is really specific to the banking industry, and we don't see that as much across other industries. So it's really in the comp structures.
And I guess I'd also say other trends we've seen is there's a lot more volatility in the annual pay at banks than in some other industries, just given when performance is up, there's a willingness to pay, and when performance is down, the opposite will happen where pay is impacted.
Allissa Kline (23:27):
All of that makes sense. I wanted to touch briefly on ESG and DEI metrics specifically. I know you all take a look at some of this data as well. Any sense of the banks that you were able to analyze this year, how many may have incorporated DEI metrics into bank CEO pay packages? And I guess the rest of that question is what do you see as the future of DEI metrics and ESG as a whole playing a role in overall compensation decisions?
Kelly Malafis (24:11):
Yeah, we've been tracking the use of ESG or DEI metrics in incentive plans for the last couple of years, just given the external focus in this area. And what we found in the study this year is that about 50% of the banks in our sample will consider ESG or DEI in their annual incentive plan. We're looking at 2024 proxy statements, which disclose the 2023 incentive plan design. And when we compare '23 incentive plan design to the prior year, it's consistent. So it was about 50% last year as well.
When we think about going forward and the role of DEI and ESG, there's been a lot of pushback lately around DEI measures, just given the Supreme Court's ruling last summer around college admissions and whether these types of measures are legal and should companies be including them in their incentive plans. And so we won't really see the impact of this new focus in the public disclosures until next year in the 2025 proxies that'll talk about '24.
But from our experience working with our clients, we're not seeing companies make wholesale changes in this current year based on that. I think they're looking to see, are ESG and DEI measures important to our strategy? Is it something that we want to signal to our executives as an area of focus? Is it meaningful to our performance? And really making a year-to-year decision around the importance of these strategic objectives versus stripping them completely from the plan. So it's an evolving area, and it'll be interesting to see how it plays out.
Allissa Kline (26:20):
Yeah, it will be. I have one question left for you, but if there were any audience questions, now would be the time to pop those in. I like to ask this at the end of all of these sessions that we do every year. We're a little over halfway through the year. It's hard to tell what will come for the next six months, but I'm wondering if you can spot any trends at this point in terms of compensation. Is it up? Is it down for bank CEOs? And any sense of what we might see when you take a look at 2024 data next year?
Shaun Bisman (27:01):
Can we answer this question after Q2 earnings calls, which I think start Friday this week? I'm actually curious to go back to what I said last year, or Kelly said last year, to see if it's aligned.
But we've been tracking financial performance, so as of Q1, because that's the latest information available, we've been comparing analyst estimates as well for the 60 banks. So total shareholder return has generally been flat for the year compared to the S&P 500, which is up almost close to 15-20%. Earnings has also been flat for the banks, so specifically earnings per share and return on equity. So when I say flat, that's flat versus Q1 2024 versus Q3. As far as Q4 2023. So it's generally been flat. And then in terms of analyst expectations, there's been slight improvement where they're forecasting how other companies will perform by year end.
So if I had a crystal ball, I think we would say ... compensation would be up year over year, but maybe closer to where it was in 2021 or 2022, where it was up about 5-7%. So maybe more in the mid-single digit range we'd expect compensation to be when we're having this conversation next year.
Allissa Kline (28:28):
Yeah. Okay. Probably not the 21.5% from 2021.
Shaun Bisman (28:35):
Yeah, yeah, exactly. And there continues to be a lot of economic uncertainty. We don't know where the Fed's going to go with the interest rate environment. We obviously have a big presidential election in November. So a lot of these economic conditions are going to have a lot of impact on the pay levels for 2024.
Allissa Kline (28:56):
We do have two questions. I don't know if we have time, but I'll ask one of them. What is the approximate percentage breakdown of total comp between salary bonus and long-term comp?
Shaun Bisman (29:14):
I don't have that math in front of me, but I would say generally for a CEO of a bank, salary is about 10% of the mix. An annual incentive is about maybe 20%, 20-30% of the mix. And then the rest is in the long-term incentive compensation. So as Kelly mentioned before, the long-term incentive piece is the biggest piece of the pie for our CEO compensation, usually about probably 60-75% of the total pay.
Allissa Kline (29:46):
Okay. I think we're at time. Thank you both, Shaun and Kelly. It's great to see you again. Thanks for all of your work that you do every year and putting this analysis together. We appreciate it.
