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Attracting Quality Developing Loyalty
Embracing Leadership
1255 West 15th Street, Suite 830; Plano, TX 75075 / www.bcc-usa.com
Compensation Hot Topics: Being Prepared for Boomers to
Millennials
Presented by: Kathy Smith, President
Capabilities, Products & Services
♦ Compensation Consulting ♦ Executive & Director Benefits Plans ♦ Succession Planning ♦ Benefit Expense Offset/BOLI ♦ Long-Term Care & Disability Income Planning ♦ Administrative Services
Trends in Compensation
More emphasis on
incentive compensation to retain and reward key personnel
More bonus deferrals in light of the
Fed guidance
Stock Options and
Restricted Stock are
certainly still viable
Increased interest in Phantom
Stock Plans and Stock
Appreciation Rights Plans
Clawback provisions
implemented with incentive
plans
Longer term incentive
plans
Challenges In Delivering Compensation
♦ Structuring Components of Compensation that are attractive to key employees, while assuring the bank has appropriate retention and reward features.
♦ Employees have varying concerns with the delivery of compensation that is dependent upon where they are in their career cycle.
♦ Retention strategies that work for senior executives are not as effective for younger employees
Compensation Interests by Generation
MILLENNIALS: • Emphasize current pay
• Incentives being paid out in
short time frames
• Ability to financially handle big ticket purchases is rewarding
GEN X: • In addition to current
compensation & incentives, the opportunity to accumulate wealth that pays while still in mid-career is attractive
• Planning for delivery of deferred compensation around the time children will enter college
BOOMERS: • Compensation that
addresses post-retirement needs becomes more critical and attractive
• Caring for parents as well as children is a challenging dynamic
Different Elements of Executive Compensation are Used to Achieve Different Objectives
Employment/CIC Agreements
Long-Term Wealth Accumulation
Mid-Term Deferred Incentives
Equity-Based Plans
Short-Term Deferred Incentives
Annual Cash Incentive
Standard Benefits
Benefit Expense Offset/BOLI
Attractive to Millennials
Different Elements of Executive Compensation are Used to Achieve Different Objectives
Employment/CIC Agreements
Long-Term Wealth Accumulation
Mid-Term Deferred Incentives
Equity-Based Plans
Short-Term Deferred Incentives
Annual Cash Incentive
Standard Benefits
Benefit Expense Offset/BOLI
Attractive to Gen-Xers
Different Elements of Executive Compensation are Used to Achieve Different Objectives
Employment/CIC Agreements
Long-Term Wealth Accumulation
Mid-Term Deferred Incentives
Equity-Based Plans
Short-Term Deferred Incentives
Annual Cash Incentive
Standard Benefits
Benefit Expense Offset/BOLI
Attractive to Boomers
Different Elements of Executive Compensation are Used to Achieve Different Objectives
Employment/CIC Agreements
Long-Term Wealth Accumulation
Mid-Term Deferred Incentives
Equity-Based Plans
Short-Term Deferred Incentives
Annual Cash Incentive
Standard Benefits
Benefit Expense Offset/BOLI
Annual Cash Incentive Plan (ACIP)
Plan Highlights
♦ Employees selected by bank
♦ Discretionary or scorecards to measure performance bank wide branch wide department wide individual
♦ Design affordable plan
Different Elements of Executive Compensation are Used to Achieve Different Objectives
Employment/CIC Agreements
Long-Term Wealth Accumulation
Mid-Term Deferred Incentives
Equity-Based Plans
Short-Term Deferred Incentives
Annual Cash Incentive
Standard Benefits
Benefit Expense Offset/BOLI
Deferred Cash Incentive Plan (DCIP) ♦ Eligibility
Available to all senior and junior officers
♦ Term Five year deferral plan with officer receiving payment early
in sixth year of each deferral (January or February)
♦ Specifics Additional cash compensation, often percentage of salary Payable in short-term, five years Deferred amounts may earn at the bank’s ROE Forfeited if they leave the bank (“golden handcuffs”) Plan is flexible with multiple variations Can be exempt from 409A if payout is structured properly
Different Elements of Executive Compensation are Used to Achieve Different Objectives
Employment/CIC Agreements
Long-Term Wealth Accumulation
Mid-Term Deferred Incentives
Equity-Based Plans
Short-Term Deferred Incentives
Annual Cash Incentive
Standard Benefits
Benefit Expense Offset/BOLI
Equity Sharing Plans for Key Bank Executives
Stock Plans for Key Bank Executives
Restricted Stock
“Real” equity because actual
stock certificates are involved
Stock Options
(ISO & NSO)
Stock Appreciation
Rights (SAR)
Phantom Stock (PSU)
“Synthetic” equity because no actual stock certificates
are involved
Stock Appreciation Rights Phantom Stock
Stock Appreciation Rights
Future Appreciation
Current Equity Value
Future Appreciation
Current Equity Value
♦ Phantom Stock provides both current grant value and future appreciation to the plan participant; key executive or director.
♦ Stock Appreciation Right Plans provide only future appreciation to the plan participant; key executive or director
♦ PS Plans are more generous and therefore more costly than SAR Plans
Different Elements of Executive Compensation are Used to Achieve Different Objectives
Employment/CIC Agreements
Long-Term Wealth Accumulation
Mid-Term Deferred Incentives
Equity-Based Plans
Short-Term Deferred Incentives
Annual Cash Incentive
Standard Benefits
Benefit Expense Offset/BOLI
Long-Term Wealth Accumulation Plans ♦ Objective
Provide key senior executives a supplemental retirement “stream of income” at retirement
♦ Method Formula driven Ensure “change of control” is a positive impact to the
executive Offset IRS caps on qualified plans Usually has vesting schedule prior to retirement
♦ Example Traditional Salary Continuation Plan Supplemental Retirement Plans (SRPs) Phantom Stock Plans/SARs may be used in lieu of
SRPs
Compensation for Directors
♦ There are various forms of compensation and benefits for directors: Cash Compensation
Monthly Board Fees Annual Retainer Committee Fees
Traditional Fee Deferral Plans Fee Continuation Plans Phantom Stock/Stock Appreciation Rights Plans Stock Options/Grants/Warrants Long-Term Care Benefits Bank-Owned Life Insurance Estate Planning
Benefit Expense Offset/BOLI
Recovering the Costs of Deferred Compensation and Other Executive
Nonqualified Benefit Plans
What are the Two Most Common Ways of Paying these Executive Benefit Plan Costs?
Pay out of current
increased earnings
If the bank has unutilized Bank-Owned Life Insurance
(BOLI) capacity, use additional BOLI as a source of incremental earnings to
cover the costs
A Paradigm Shift
Bank-Owned Life Insurance
Traditional Retail
Life Insurance
Cash Surrender
Value
Death Benefit
Death Benefit Cash Surrender Value
Pro Forma Income Statement
(1) (2) (3) Alternative First Year
Asset Placement: $2,750,000 Asset BOLI Gain / (Loss) Due to BOLI Income Income First Year 2.00% 3.29%
Gross Income 55,000 90,400 35,400 Load / Surrender Charges 0 0 0 Income Tax (38.9%) 21,395 0 21,395
Net Earnings Impact 33,605 90,400 56,795
Tax Results of Alternative Assets vs BOLI
(1) (2) (3) (4) (5) (6) Annual Annual Annual Annual Annual Cumulative After-Tax BOLI Alternative Net BOLI Bank Bank
Year Expenses Gain Asset Cost2 Gain Impact Impact
1 (37,282) 90,400 (33,605) 56,795 19,513 19,513 2 (37,665) 90,836 (34,016) 56,821 19,156 38,669 3 (39,785) 91,117 (34,431) 56,686 16,901 55,570 4 (42,024) 93,616 (34,852) 58,764 16,740 72,310 5 (44,390) 95,579 (35,278) 60,301 15,912 88,222 6 (46,888) 97,546 (35,709) 61,837 14,949 103,171 7 (49,528) 100,590 (36,145) 64,444 14,916 118,087 8 (52,317) 103,836 (36,587) 67,249 14,933 133,020 9 (18,988) 107,674 (37,034) 70,640 51,652 184,672 10 (53) 111,496 (37,487) 74,009 73,957 258,629 11 1,588 118,042 (37,945) 80,097 81,685 340,314 12 3,320 121,188 (38,409) 82,780 86,100 426,414 13 5,151 124,042 (38,878) 85,164 90,316 516,729 14 7,085 126,810 (39,353) 87,457 94,542 611,271 15 9,129 129,675 (39,834) 89,841 98,970 710,241 16 11,288 131,798 (40,321) 91,477 102,765 813,006 17 13,568 134,193 (40,813) 93,380 106,948 919,954 18 15,978 136,430 (41,312) 95,118 111,096 1,031,050 32 0 54,293 (16,323) 37,970 37,970 3,343,777 33 0 54,165 (16,523) 37,642 37,642 3,381,419 34 0 54,013 (16,725) 37,288 37,288 3,418,707 35 0 609,492 (16,929) 592,564 592,564 4,011,271
(295,927) 4,307,198 4,011,271
Different Elements of Executive Compensation are Used to Achieve Different Objectives
Employment/CIC Agreements
Long-Term Wealth Accumulation
Mid-Term Deferred Incentives
Equity-Based Plans
Short-Term Deferred Incentives
Annual Cash Incentive
Standard Benefits
Benefit Expense Offset/BOLI
Employment/Change in Control Agreements
Key Provisions
♦ Term (length of contract)
♦ Duties, responsibilities and reporting lines
♦ Compensation elements
♦ Severance triggers
♦ Severance payments
♦ Change in control related provisions
♦ Post-employment obligations
Coordination of Benefits
♦ Lack of coordination of benefits may lead to unintended results
♦ Common coordination concerns
Impact of overall compensation in determining retirement benefits
Impact on severance payments made in connection with a change in control
♦ Key areas for coordination
Employment/change in control agreements
Supplemental retirement benefits
Incentive plan payments
Equity grants
QUESTIONS?
