Now more than ever, banks must find creative ways to attract and retain executives with the specialized knowledge and experience to meet new technological and regulatory challenges. Recruiting and retaining these executives is particularly important for locally owned banks who often find themselves competing with larger, regional or national institutions for sought after C-suite execs. To compete, locally owned banks should consider developing lucrative executive compensation plans.
A competitive executive compensation plan that benefits both the executive and the bank includes elements that directly reflect the bank's long-term success, like stocks or cash bonuses, while also linking compensation to better performance and creating multi-year accountability. This means offering both cash and equity incentives conditioned on both short-term and long-term benchmarks. Cash and equity incentives may be structured so that to receive the award, the executive must remain with the bank for a fixed number of years, and the bank must meet specific financial targets. Including both short-term and long-term benchmarks, along with lucrative incentives, increases the likelihood that an executive will remain with the bank, while also promoting the success of the bank.
Cash incentives can be structured in a myriad of ways. Again, these bonuses can be awarded on a time basis (for example, on the executive's third anniversary of employment) or the attainment of enumerated specific financial targets of the bank (for example, attainment of a certain amount of assets under management and products sold). If a bank is preparing for an acquisition and wants an executive to remain with and lead the bank through the transition, a change in control agreement may be appropriate whereby the executive will receive a cash bonus, possibly based on a percentage of the sale, when the acquisition of the bank closes.
Equity incentives may include stock options, restricted stock, restricted stock units, phantom stock or some combination of these incentives.
A quick synopsis of the various types of incentives are as follows:
- A stock option provides an executive with the right to purchase bank stock at a specified price for a certain period. If the stock price is higher on the date the executive exercises the option than it was on the date the option was granted, the excess value of the stock is unrestricted compensation to the executive. Stock options are incentivizing for executives of banks that expect substantial growth.
- Restricted stock is the current transfer of bank stock to the executive, subject to the right of the bank to get the stock back if certain conditions are not satisfied. The bank may grant shares conditioned on years of service or performance-based metrics. Once the condition is met, the bank no longer has the right to get the stock back, and the executive is the beneficial owner of the stock with no restrictions.
- A restricted stock unit (RSU) represents the executive's right to receive a share of the bank's stock after the executive meets the time or performance-based conditions set forth by the bank. No actual shares are issued until the RSU vests. The award is instead an unfunded and unsecured promise by the bank to deliver shares in the future. At the bank's discretion, RSUs may be settled in stock or in cash equal to the value of the bank's stock. Unless and until the bank delivers the shares, the executive is not the beneficial owner of the shares underlying the RSUs and therefore is not entitled to voting, dividends, or other shareholder rights.
- Phantom stock is essentially the same as an RSU, but phantom stock is only payable in cash. The bank makes an unsecured, unfunded promise to make a cash payment to the executive, subject to conditions set by the bank, at a predetermined time in the future equal to the value of a specified number of bank shares.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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