Why CEO compensation rose in 2020 despite the fact that financial institution income fell

Take a look at the 2020 bank boss salary packages and a headline topic emerges: Overall compensation went up, although bonuses went down.

However, if you pull back a shift, you will find that in a year of distress and uncertainty, board members and compensation committees relied less on numbers and formulas than on their perception of how well CEOs have run their banks through the pandemic. This has helped limit the size of the bonus cuts.

It's called discretion and it played a huge role in 2020 salary results, said Kelly Malafis, founding partner of Compensation Advisory Partners, a consulting firm that reviewed and analyzed the salary history of CEOs at 60 major and regional US banks that run their annual proxy Had statements submitted before April 10.

Some companies that had discretion built into their bonus plans – meaning they were able to factor in hard-to-measure factors like employee engagement and customer satisfaction – have been able to use a more holistic approach to determining the CEO's bonus payment, Malafis said.

Others looked at measures using fully formulaic methods like relative performance to determine their results and, in most cases, upwards results, increasing the bonus payment, she said.

"While the bonuses have decreased [overall], they could have decreased more," Malafis said.

This factor, combined with higher pay with long-term incentives and lower pay increases, resulted in a mean increase in total direct CEO pay of 8.9% from 2019 to 2020, the analysis said.

Executive compensation gets a lot of attention in a normal year, but interest was even bigger this spring as boards of directors and compensation committees between rewarding CEOs for their leadership during the pandemic and considering the economic turmoil, the health crisis, the individuals and businesses was inflicted across the country.

Banks were financially hurt by the pandemic. Fearing a wave of credit losses as the pandemic stifled the economy, companies staked billions in reserves to cover potential non-performing loans. As a result, net income at commercial banks and savings banks, which the Federal Deposit Insurance Corp. were insured, up 35.9% from 2019, while the average return on investment fell from 1.29% in 2019 to almost half of 0.74% last year.

Banks' share prices also suffered, fueling for three quarters of the year until they began rising again in December on news that COVID-19 vaccines would be available.

Making decisions about CEO compensation in such circumstances was "uncharted territory" for all sectors of the economy, said Lisa Edwards, president and chief operating officer of Diligent, a governance software company that tracks compensation trends for Russell 3000 index companies.

"Given the pandemic and last year's need to save money in the face of the pandemic, the pay has certainly been scrutinized," Edwards said. "We have seen a number of companies announce cuts, particularly cuts in CEO compensation."

For many large and regional banks, the uncertainty surrounding the pandemic and its impact on the industry has, by and large, meant that "boards and committees are waiting" to make decisions about incentive plans for 2020, Malafis said.

That way, they could take into account the full year financial performance and less easily quantifiable factors, she said.

The result: of the 60 banks analyzed, 60% reported an increase in total CEO compensation compared to the previous year, while 38% recorded a decrease. Only one CEO – JPMorgan Chase's Jamie Dimon – saw his salary package remain unchanged at $ 31.5 million.

Compensation for CEOs at Bank of America, Citigroup, and Wells Fargo declined from 2019, while at least two regional bankers saw compensation as their businesses grew through acquisitions. The companies surveyed ranged in size from JPMorgan, with assets of $ 3.4 trillion, to Independent Bank Corp. with a net worth of $ 13.2 billion in Rockland, Massachusetts.

The year-over-year increase was largely due to increased premiums for long-term incentives, the analysis found. 70 percent of banks have long-term incentives that are given to executives based on the future performance of a company.

At the same time, 59% of banks are cutting annual bonuses that are given for short-term benefits such as higher profits and improved stock prices. Thirty-six percent of the banks we analyzed raised bonuses, and five percent kept them flat.

Of the 39 companies that made changes to their bonus and long-term incentive plans, 26 or 67% applied or added discretion to determine bonus payments. This was the result of the analysis. In almost all cases, according to Compensation Advisory Partners, the discretion resulted in upward adjustments to the bonuses.

Meanwhile, changes to pending long-term incentive plans tied to financial metrics were far less common – only in 13% of the companies analyzed, Malafis said.

"Applying discretion and taking into account all the factors of 2020 – the pandemic, leadership, and the ability to turn and navigate – many banks have tried to find that balance, so adjustments to bonuses have been quite common," said Malafis. "It's about balancing overall performance and key skill retention with shareholder focus, and it has been a delicate balance."

There could be even more discretion on bonus payment for 2021 as the timing of a full economic recovery remains unclear and it is difficult to set financially sound performance targets, said Shaun Bisman, principal at Compensation Advisory Partners.

However, don't expect the increasing reliance on discretionary factors to determine CEO compensation to be a permanent result of the pandemic, he said.

"I would imagine that two or three years from now the plans would look very similar to what they did before COVID," Bisman said. "The overall structure will not change dramatically."

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