Guess whose pay Washington limited: BB&T Corp. Chief Executive Kelly King, who received $2.65 million; Huntington Bancshares Inc. CEO Stephen Steinour ($3.2 million); or Kevin Kabat, the CEO of Fifth Third Bancorp ($3.7 million)?
Answer: The two who got paid more, Steinour and Kabat.
They run companies that exited the Troubled Asset Relief Program only in the last three months, but their take-home pay for 2010 in salary, perquisites and money realized from stock awards was higher than that of King, whose company, in better shape at the time, repaid Tarp a year and a half ago.
The discrepancy illustrates what compensation expert Don Delves calls an "unintended consequence" of the tough compensation restrictions on banks holding federal aid. The strictures took effect in June 2009, the same month, as it happens, that BB&T and a handful of other top-performing banks like U.S. Bancorp got out of the program.
Fearful of losing their chiefs to better-paying rivals free of government strings, Fifth Third, Huntington and others that repaid Tarp later — and banned from doling out cash bonuses and options — tripled the base salaries of CEOs and other top executives, according to 2010 proxy statements filed this month with the Securities and Exchange Commission. Banks that got out of Tarp did not, which is essentially why Kabat and Steinour outearned King even though King's bank, BB&T, outperformed Fifth Third and Huntington in several basic metrics like return on equity and profit growth. Fifth Third's and Huntington's share-price growth did trounce the KWB Bank Index in 2010, however. The companies' stocks also did better — vastly better — than BB&T's 6%.
"Basically, you can pay as much salary as you want [still under Tarp]. People ended up making a little bit more than they might have otherwise under Tarp — nobody got a windfall," said Don Delves, president and founder of Delves Group in Chicago. "It caused banks to put stuff into the salary bucket that they normally would have put in the bonus bucket."
Fifth Third and Huntington included two things in salary: the same amount of cash they did in 2009 — about $1 million each — and a bunch of company stock, paid out every two weeks, to be settled after leaving Tarp, which Fifth Third did in February and Huntington did in December.
Steinour received $2 million of restricted common shares last year that he can liquidate this June.
Kabat got 282,000 so-called phantom shares — worth about $4.1 million — in 2010 and during part of 2009. They resemble a share appreciation right, but are settled in cash, not stock, and the payout is based on how much the company's shares increased in value from their grant date. Kabat will settle 120,000 of them this June as well, with the rest being paid out over the next two years.
Phantom shares were the favored way to raise salaries at a number of other Tarp-holding banks, including Comerica Inc. of Dallas, which continued using them after it repaid Tarp in March 2010. Comerica Chairman and CEO Ralph Babb received $1.6 million of them last year in addition to his $1 million cash salary. They were settled in February.
But the stock guaranteed the bulk of the annual pay of Steinour and Kabat before 2010 even started.
A spokeswoman for Huntington didn't return a call for comment about the use of phantom shares. A spokesman for Fifth Third said in an e-mail that it issued phantom shares because they were allowed under Tarp and that it has stopped issuing them in 2011. A spokesman for Comerica in an e-mail acknowledged the use of phantom shares and said Comerica also stopped using them this year. Huntington has discontinued their use as well.
Fifth Third set Kabat's base pay target of 47% of his total compensation in 2009; before taking Tarp, it was just 15%. Kabat's take-home pay was $3.7 million for the year: $1 million in cash, $2.66 million in vested stock and $41,000 in other compensation.
Take-home pay is what was collected during the year through salary, cash bonuses, perquisites like car or security services, vested shares and exercised options. Unexercised stock options and stock awards that haven't vested are excluded because their value varies and hasn't been realized yet.
At BB&T, 75% of King's total pay target was variable. His base salary last year was intended to "play a modest role in the overall pay package" because the company "believes" compensation should be "based on performance," according to its annual proxy.
The rest of King's pay was to be bonuses, and stock and options that depended on how well the company did in 2010. He missed out on at least two potential awards — a long-term incentive payment and performance-stock payout — because BB&T's return on equity fell short of its goal. The company's relatively strong performance for the year — earnings growth of 12% — netted him a $1.13 million cash bonus. The rest of his take-home included $937,500 in salary, $142,000 in other compensation and $166,562 in exercised options.
King also got a $5 million restricted stock award contingent on BB&T's having a higher return on equity target than half its peer banks for three years. He also has to stick around for five years to get it.
That kind of stock award is a shade of things to come in bank compensation — incentives that bind personal pay to the long-term performance of the bank, said Kevin Fitzsimmons, managing director of Sandler O'Neill & Partners LP.
Companies that waited a while to pay back Tarp were not entirely shielded from that shift in 2010, he said. For executives to realize their stock salary, he said, the companies needed to be healthy enough to get out of Tarp; shares had to increase in value: Huntington's were up 88% in 2010. Fifth Third's were up 50%; Comerica's rose 43%.
Salary stock was fair compensation in the spirit of the government's pay restrictions, he said.
"You still had to pay these people for their efforts so you wouldn't lose them to competing companies," Fitzsimmons said. "Companies had to get more creative. I wouldn't paint it, necessarily, with a negative brush. These managers are, perhaps, doing a very solid job."
