Academic journal article ABA Banking Journal

How Is Your Board's Pay IQ: Regulators Look at Compensation as Part of Governance

Academic journal article ABA Banking Journal

How Is Your Board's Pay IQ: Regulators Look at Compensation as Part of Governance

Article excerpt

[ILLUSTRATION OMITTED]

Which of these two bank CEOs' board-approved compensation practices will more likely pass regulatory muster?

* The CEO of Bank A receives a supplemental executive retirement plan granting 25% of base day and bonuses for life. He has an employment

contract renewable annually, with severance at 1.5 times base salary, and he receives a monthly auto allowance.

* The CEO of Bank B receives 70% of base, less offsets, for 20 years. He also has a three-year contract giving severance of 2.9 times base, and he has use of a bank car, a club membership, and a supplemental life policy.

Actually, this is a trick question posed by Arthur Warren, head of Arthur Warren Associates, a bank executive compensation and benefits consultancy. So long as both Bank A and Bank B, cited above, are being run by boards with a good handle on compensation; with a Compensation Committee that knows what it is about; and so long as the mix is appropriate to the market and bank condition, regulators won't target either package.

Warren's point: Regulators' prime focus in the compensation area has been on governance. Regulators, Warren said during a recent ABA telephone briefing, don't apply strict rules but allow each board to pay executives on the basis of the board's risk appetite, market conditions, and other factors.

When a bank receives examiner criticism concerning compensation, he said, it is often a proxy for ineffective board governance; weak management; or excessive risk taking.

As an example, Warren pointed to a board he's working with that dropped its incentive pay plans. Instead, it adopted a plan pegged to how banks in its peer group were paying. …

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