ABA Banking Journal - September 2009 - (Page 20)
COVER STORY/PAY IN THE SPOTLIGHT The four-letter word that colors the compensation debate. . . . . . . . . . . . . . . . p. 23 Bank boards assess changing pay dynamic . . . . . . . . . . . . . . . . . . . . . . p. 27 The sin E xecutive compensation has been controversial in Corporate America for years, now, but talk to the man on the street about it today, and you’ll likely see a kneejerk case of apoplexy, especially if you link the word “banker” to it. Many bankers feel that their compensation—indeed their industry—has been tarred unfairly by a very broad brush. But in an age when “bank” is used to describe everything from investment bank behemoths to single-office community banks, it’s hard to keep the tar off, and to keep the tar from turning into law. “I understand the angst reverberating through the country today,” says banker Ted Awerkamp. “But from a community bank perspective, why have a board of directors if they are going to legislate caps and fences?” The truth is, says Awerkamp, president and CEO of $1.7 billion-assets Mercantile Bancorp, Quincy, Ill., “community bank shareholders aren’t paying crazy numbers” to executives. Unfortunately for banks like Mercantile, they live in an age of distrust, and Congress is going to at least mandate looks over the shoulder for many, and has already mandated stronger involvement for TARP banks. Compensation should be a matter of board decision, agrees Charles Elson, professor at the University of Delaware and director of its John L. Weinberg Center for Corporate Governance. “To actually have the government take a role in management bothers me,” says Elson. “If you want long-term economic growth, to have the fuel of that growth directed by government is not productive.” But that’s not the way things are headed in Washington. We explore this in this opening section, and take deeper looks at two facets—risk and corporate governance—in the two sections that follow. By Steve Cocheo, executive editor 20 SEPTEMBER 2009/ABA BANKING JOURNAL of wages? TARP banks and compensation In some ways, TARP has been a bait-and-switch game. Bankers were urged to sign up in the earliest days. Only months later did the restrictive compensation limitations of being a TARP bank arise. “If you are a TARP bank, you are kind of … toast,” says compensation consultant Susan O’Donnell, Boston-based managing director for the Pearl Meyer & Partners consultancy. The oversight of the “Pay Czar” is only the overlay of federal limitations imposed on the 400-odd institutions for taking government money. These banks, in the interim final regulations issued in June, face the “TARP 12,” a set of proposed requirements. These include: senior executive pay limitations; establishment of wholly independent compensation committees; submission of executive compensation to a nonbinding shareholder vote (the “say on pay” concept); and in some circumstances, “clawbacks,” where the government seizes paid earnings (allegedly not earned). O’Donnell notes that as of mid-August, there have already been more than 100 TARP-based say-on-pay proposals. In no cases did the shareholders’ vote result in a nonsupportive outcome, she says, but many came close. “A 60% ‘yes’ result is not great,” says O’Donnell. “It means that 40% of your shareholders don’t like what you are doing.” There are concerns that this is already reducing the incentive component in executive compensation, and shifting pay packages more towards straight salary. “That’s clearly in conflict for what’s best for the organizations, and for their shareholders,” says John Koelmel, president and CEO of First Niagara Financial Group, Inc. The $9.6 billion-assets company, which is growing into a regional powerhouse from an upper New York State base, took TARP funds but repaid them early, and Koelmel is grateful his bank got out before it affected compensation strategy. His own package, he points out, is heavily weighted towards compensation based on performance over time. Subscribe at www.ababj.com Odds are strong that executive compensation for bankers will evolve as post-crisis anger and angst focus on risk and corporate governance
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