Total Compensation Plan Elements and Strategy
Total Compensation Plan Elements and Strategy
Date Bankers or subtitle Indiana Association September 2017
© Wipfli LLP © Wipfli LLP
1
Session Highlights
Purpose of a Formal Compensation Plan
Compensation Strategy Considerations
Compensation Philosophy
Compensation “Mix”
Regulatory Concerns
Importance of Plan Design
Plan Documentation
Compensation Risk Assessment © Wipfli LLP
2
Purpose of a Compensation Plan
To ensure pay is competitive and aligned with the compensation philosophy
To ensure pay is established and administered fairly and equitably for the work being performed
To recognize the value each employee brings to the bank
To attract, motivate, and retain talent
To provide administrative guidelines for compensation-related decisions © Wipfli LLP
3
Compensation Component Roles Motivate Compensation Component
Attract
Base Salary
X
X
Annual Incentives
X
X
Long-Term Incentives
Retain Short-term
X
Long-term
X
Change Behavior
Provide Security/ Protection
X X
X
Basic Benefits
X
Supplemental Benefits
X
Supplemental Retirement Plan
X
Perquisites
X
X
© Wipfli LLP
4
Compensation Strategy Compensation Component
25th Percentile (Lag)
50th Percentile (Meet)
75th Percentile (Lead)
Base Salary Annual Incentives Long-Term Incentives Basic Benefits Supplemental Benefits Supplemental Retirement Plan Perquisites Total Compensation
© Wipfli LLP
5
Compensation Philosophy
Board Compensation Committee
Market position
Reward mix
Annual incentive philosophy
Reward focus (bank, team, individual)
Long term incentive philosophy
Retirement philosophy
© Wipfli LLP
6
Compensation Philosophy
Guides compensation decision making
Specifies the purpose of each component of the employee’s total compensation mix
Articulates the mix of the compensation components
Sample Compensation Philosophy
© Wipfli LLP
7
Total Compensation Component Mix EXAMPLE Base Salary
Annual Incentive
LongTerm Incentive
Benefits
Retirement
Perqs
Total Comp
Executives/ Senior Management
Above Market
Above Market
Above Market
Above Market
At Market
Below Market
Above Market
Management/ Supervisors
At Market
Above Market
Above Market
At Market
At Market
NA
Above Market
Employees
Slightly Above Market
At Market
NA
At Market
At Market
NA
Slightly Above Market
© Wipfli LLP
8
Total Compensation Building Blocks
© Wipfli LLP
9
Regulatory Concerns In deconstructing the events leading to the financial crisis in the financial institution industry, the agencies determined that a significant contributing factor was poorly designed compensation arrangements. In particular, incentive compensation plans.
© Wipfli LLP
10
Importance of Plan Design Misaligned and/or flawed incentive plans encourage risk-taking behavior that may reward short-term gains without consideration of long-term risks, thereby jeopardizing the safety and soundness of financial institutions.
© Wipfli LLP
11
Corporate Governance
Form an informed compensation committee composed of outside directors.
Ensure all decisions impacting compensation risk are approved by the committee.
Allow committee access to external experts.
At the time payments are approved, have the committee conduct a “postmortem” opportunity to discuss necessary adjustments for the next plan year. © Wipfli LLP
12
Goal Setting
Tie goals to budgeted financial results and strategic plan.
Determine who establishes team and/or individual goals.
Establish goals before the performance period.
Determine appropriate thresholds and maximums.
Cap payouts at a reasonable level.
© Wipfli LLP
13
Annual Incentive Considerations What performance criteria are appropriate to use as a basis for annual incentive awards? Individual
Department
CEO
Bankwide X
EXEC/SM
X
X
Exempt
X
X
X
Employees
X
X
X
© Wipfli LLP
14
Performance Management Loop JOB DESCRIPTION
COMPENSATION REVIEW
JOB EVALUATION
PERFORMANCE REVIEW
SALARY GRADE/RANGES
EMPLOYEE OBJECTIVES
NON-INCUMBENT SPECIFIC INCUMBENT SPECIFIC © Wipfli LLP
15
Example Annual Incentive Targets Example Targets Tier
Position
As % of Salary
I
CEO
30%
II
Executive Management
25%
III
Department Managers and Commercial Bankers
20%
IV
Staff Support Managers
10%
V
Employees
5%
© Wipfli LLP
16
Performance Measures
Can be measured and quantified
Are tied to strategic plan
Use absolute and/or relative goals
Use “gates”/qualifiers to manage risk
Balance bank, team, and individual
Keep it simple and understandable
© Wipfli LLP
17
Calculation and Verification of Performance and Rewards
Determine what data or reports will be utilized to calculate incentives.
Identify position that gathers and calculates payouts.
Verify results and payout calculations.
Consider incorporating risk-sensitive provisions, i.e. “claw backs,” deferral of payment.
Have board approve results and payments. © Wipfli LLP
18
Stress Testing
Run “what-if” scenarios for all incentive arrangements.
Test scenarios against YTD results periodically.
Adjust accounting accruals periodically to reflect likely outcomes.
© Wipfli LLP
19
Plan Documents
Develop plan documents that clearly present plan features and provisions, including plan period, timing of payments, performance thresholds, expectations, etc.
Reserve and protect rights of the bank.
Do not alter the employment at-will status.
© Wipfli LLP
20
Compensation Risk Assessment
Inventory all compensation arrangements.
Identify risks associated with each plan.
Conduct a team risk assessment.
Present review findings to compensation committee and/or board of directors.
Modify incentive arrangements as needed.
© Wipfli LLP
21
Conclusions
Total compensation should be competitive and aligned with the compensation philosophy.
Incentive compensation must be carefully balanced with bank’s risk tolerance and is but one component of total compensation.
Sound incentive compensation policies assist in managing risk, not eliminating it.
© Wipfli LLP
22
Questions
Julia Johnson Senior Manager, Talent Management [email protected] 920.662.2876 www.wipfli.com © Wipfli LLP
23
www.wipfli.com/fi © Wipfli LLP
Date Bankers or subtitle Indiana Association September 2017
© Wipfli LLP © Wipfli LLP
1
Session Highlights
Purpose of a Formal Compensation Plan
Compensation Strategy Considerations
Compensation Philosophy
Compensation “Mix”
Regulatory Concerns
Importance of Plan Design
Plan Documentation
Compensation Risk Assessment © Wipfli LLP
2
Purpose of a Compensation Plan
To ensure pay is competitive and aligned with the compensation philosophy
To ensure pay is established and administered fairly and equitably for the work being performed
To recognize the value each employee brings to the bank
To attract, motivate, and retain talent
To provide administrative guidelines for compensation-related decisions © Wipfli LLP
3
Compensation Component Roles Motivate Compensation Component
Attract
Base Salary
X
X
Annual Incentives
X
X
Long-Term Incentives
Retain Short-term
X
Long-term
X
Change Behavior
Provide Security/ Protection
X X
X
Basic Benefits
X
Supplemental Benefits
X
Supplemental Retirement Plan
X
Perquisites
X
X
© Wipfli LLP
4
Compensation Strategy Compensation Component
25th Percentile (Lag)
50th Percentile (Meet)
75th Percentile (Lead)
Base Salary Annual Incentives Long-Term Incentives Basic Benefits Supplemental Benefits Supplemental Retirement Plan Perquisites Total Compensation
© Wipfli LLP
5
Compensation Philosophy
Board Compensation Committee
Market position
Reward mix
Annual incentive philosophy
Reward focus (bank, team, individual)
Long term incentive philosophy
Retirement philosophy
© Wipfli LLP
6
Compensation Philosophy
Guides compensation decision making
Specifies the purpose of each component of the employee’s total compensation mix
Articulates the mix of the compensation components
Sample Compensation Philosophy
© Wipfli LLP
7
Total Compensation Component Mix EXAMPLE Base Salary
Annual Incentive
LongTerm Incentive
Benefits
Retirement
Perqs
Total Comp
Executives/ Senior Management
Above Market
Above Market
Above Market
Above Market
At Market
Below Market
Above Market
Management/ Supervisors
At Market
Above Market
Above Market
At Market
At Market
NA
Above Market
Employees
Slightly Above Market
At Market
NA
At Market
At Market
NA
Slightly Above Market
© Wipfli LLP
8
Total Compensation Building Blocks
© Wipfli LLP
9
Regulatory Concerns In deconstructing the events leading to the financial crisis in the financial institution industry, the agencies determined that a significant contributing factor was poorly designed compensation arrangements. In particular, incentive compensation plans.
© Wipfli LLP
10
Importance of Plan Design Misaligned and/or flawed incentive plans encourage risk-taking behavior that may reward short-term gains without consideration of long-term risks, thereby jeopardizing the safety and soundness of financial institutions.
© Wipfli LLP
11
Corporate Governance
Form an informed compensation committee composed of outside directors.
Ensure all decisions impacting compensation risk are approved by the committee.
Allow committee access to external experts.
At the time payments are approved, have the committee conduct a “postmortem” opportunity to discuss necessary adjustments for the next plan year. © Wipfli LLP
12
Goal Setting
Tie goals to budgeted financial results and strategic plan.
Determine who establishes team and/or individual goals.
Establish goals before the performance period.
Determine appropriate thresholds and maximums.
Cap payouts at a reasonable level.
© Wipfli LLP
13
Annual Incentive Considerations What performance criteria are appropriate to use as a basis for annual incentive awards? Individual
Department
CEO
Bankwide X
EXEC/SM
X
X
Exempt
X
X
X
Employees
X
X
X
© Wipfli LLP
14
Performance Management Loop JOB DESCRIPTION
COMPENSATION REVIEW
JOB EVALUATION
PERFORMANCE REVIEW
SALARY GRADE/RANGES
EMPLOYEE OBJECTIVES
NON-INCUMBENT SPECIFIC INCUMBENT SPECIFIC © Wipfli LLP
15
Example Annual Incentive Targets Example Targets Tier
Position
As % of Salary
I
CEO
30%
II
Executive Management
25%
III
Department Managers and Commercial Bankers
20%
IV
Staff Support Managers
10%
V
Employees
5%
© Wipfli LLP
16
Performance Measures
Can be measured and quantified
Are tied to strategic plan
Use absolute and/or relative goals
Use “gates”/qualifiers to manage risk
Balance bank, team, and individual
Keep it simple and understandable
© Wipfli LLP
17
Calculation and Verification of Performance and Rewards
Determine what data or reports will be utilized to calculate incentives.
Identify position that gathers and calculates payouts.
Verify results and payout calculations.
Consider incorporating risk-sensitive provisions, i.e. “claw backs,” deferral of payment.
Have board approve results and payments. © Wipfli LLP
18
Stress Testing
Run “what-if” scenarios for all incentive arrangements.
Test scenarios against YTD results periodically.
Adjust accounting accruals periodically to reflect likely outcomes.
© Wipfli LLP
19
Plan Documents
Develop plan documents that clearly present plan features and provisions, including plan period, timing of payments, performance thresholds, expectations, etc.
Reserve and protect rights of the bank.
Do not alter the employment at-will status.
© Wipfli LLP
20
Compensation Risk Assessment
Inventory all compensation arrangements.
Identify risks associated with each plan.
Conduct a team risk assessment.
Present review findings to compensation committee and/or board of directors.
Modify incentive arrangements as needed.
© Wipfli LLP
21
Conclusions
Total compensation should be competitive and aligned with the compensation philosophy.
Incentive compensation must be carefully balanced with bank’s risk tolerance and is but one component of total compensation.
Sound incentive compensation policies assist in managing risk, not eliminating it.
© Wipfli LLP
22
Questions
Julia Johnson Senior Manager, Talent Management [email protected] 920.662.2876 www.wipfli.com © Wipfli LLP
23
www.wipfli.com/fi © Wipfli LLP
