We have discussed five key components to consider in an incentive compensation plan. The viewpoints addressed in that blog and the increased scrutiny placed on bank executive compensation made in an article in the Wall Street Journal really stand out in its contrast. It pointed out that, on average, bank regulators make more than bankers. Not just a little more. The average bank regulator earns 2.7 times more than the average private banker. And this multiple has been increasing since the passage of the Dodd-Frank Act in 2010.
Deposit insurance premiums and examination fees paid by banks cover the cost of bank regulators, with the exception of the Consumer Financial Protection Bureau (CFPB), which is covered by taxpayer dollars through the Federal Reserve. Costs paid by banks are passed to consumers through higher fees and interest rates. As the WSJ article proposes, if compensation levels at regulatory agencies were in line with those of banks, examination fees and deposit insurance costs could be reduced by more than 50%. (We find it somewhat ironic that the CFPB is charged with protecting consumers when they purchase financial products.)
Generally speaking, bankers have done a good job of ensuring that their executive compensation is appropriate. Checks and balances serve to keep incentive standards in line. This can include the board of directors or compensation committee reviewing and approving compensation levels, or the monitoring and management of the bank’s efficiency ratio. As always, exceptions exist, such as in the case of some highly publicized compensation amounts of certain Wall Street executives. On average, however, the banking industry has taken a conservative approach.
The area that continues to challenge banks, as we outlined in the Incentive blog, is ensuring that the executive compensation is appropriately tied to performance, both good and bad. It is a difficult process to accurately measure an individual’s impact on the bottom line and determine the monetary value of that effort and experience.
No matter how challenging it may be to get a plan in place to reward performance and encourage retention appropriately, bankers and directors must stay diligent in monitoring and executing on their executive compensation plans. Even acknowledging that the plan will represent the unique variables of the institution and executive, it must ultimately produce clear, measurable, and results-driven data that answers regulators expectations.
Does your plan accurately reflect the different measurables like blend and use of incentive compensation choices, the people involved, economy, and long term confidence about institutional performance?