Grant Thornton LLP is publishing a series of surveys based on proxy filings of SEC registrants by industry, including the financial services industry. The survey will present the most recent executive compensation data reported for the financial institutions’ top executives and will group the institutions into these two categories:
Small to mid-size financial institutions (total assets of $1 billion–$10 billion)
Mid-size to large financial institutions (total assets of $7 billion–$20 billion)
This article summarizes some of the survey findings related to CEOs in financial services and discusses insights other organizations can apply to their executive compensation programs.
Over the past few years, regulatory agencies and the public have applied immense pressure to the financial services industry regarding perceived excessive levels of executive compensation. However, executive compensation programs should vary based on each institution’s size, strategy and philosophy. The survey covers the top six executive positions at financial institutions of varying size, focusing on executives’ total direct compensation (salary plus annual and long-term incentives) and equity plan type (performance equity versus options versus full-value stock awards).
The median total direct compensation for CEOs increases significantly as small to mid-size local financial institutions grow to large regional or national institutions. According to the survey, median total direct compensation for CEOs is $844,185 among institutions with total assets of $1billion–$10 billion, compared to $2,219,211 among institutions with total assets of $7 billion–$20 billion.
If we look at incentives, the use and value of annual incentive and equity compensation increase progressively as well. Average annual incentive awards increase from 57% of salary for small to mid-size companies to 97% of salary at large, mature companies. Similarly, average long-term incentive awards increase from 91% of salary at small and mid-size companies to 148% of salary in the large companies.
Most industries are characterized by increases in “at risk” compensation, as companies place more compensation at risk to support a link between pay and performance. This link is critical for emerging and mature public companies, with scrutiny by shareholder advisory groups influencing the voting patterns of the companies’ shareholders and institutional investors.
Nearly all companies have implemented a portfolio of equity-based incentives as their long-term incentive strategy. A typical equity-incentive portfolio includes restricted stock with service-based vesting, stock options and performance-based equity incentives.
As companies grow, they use performance-based equity more frequently, according to the survey. Performance-based equity was offered to CEOs at small to mid-size financial institution only 32% of the time and to CEOs in the largest institutions 57% of the time. Note that these statistics related to prevalence, particularly in the larger institutions, are much lower than in general industry, as financial services institutions have been under significant scrutiny regarding top executive compensation plans, especially plans that may be perceived as encouraging risk. Of those institutions awarding performance-based equity, common performance metrics include efficiency ratio, growth in earnings per share and return on assets.
Lastly, the use of full-value stock awards with service-based vesting is still widespread in this industry, much more so than in general industry. Small- to mid-size companies continue to use full-value stock awards as their most common equity vehicle, and 69% of the larger companies use them as well.
How the survey applies to you
Every SEC registrant should annually review its compensation programs and assess the structure and type of incentive plans it uses. As the survey found, companies should also incorporate more at-risk compensation in their equity programs as they grow and consider using performance-based equity to link pay and performance. If your equity plan hasn’t been reviewed in the past year or doesn’t mix a balance of grant types, now is the time to have it reviewed and implement changes.
The proxy survey will be published in November 2015. It will cover five additional positions and provide detail related to competitive base salaries, market total cash and total direct compensation, and discuss annual and long-term incentive opportunities and plan structure. Please contact Eric Myszka or Eric Gonzaga for a free copy of the survey when it’s released, and watch for Grant Thornton’s proxy survey covering medical device and biopharmaceutical companies.
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