Rewarding the Rainmakers: How to Attract, Retain, and Compensate Directors and Key Executives

By Sellers, Bob L. | ABA Banking Journal, October 1995 | Go to article overview

Rewarding the Rainmakers: How to Attract, Retain, and Compensate Directors and Key Executives


Sellers, Bob L., ABA Banking Journal


How to attract, retain, and compensate directors and key executives

One of the most critical issues facing banks today is the selection and maintenance of quality directors and key executives. Good "rainmakers"--those whose performance most critically effects the performance of the bank--are rare and should be compensated for their work. Attracting and keeping the right directors and key executives begins with the performance of the bank, but your bank cannot be a high-performing institution without them. So which comes first? It's the chicken and the egg question once again.

One key to high performance is having an incentive-driven system which rewards the effort and performance of those who have the responsibility for running the bank. A high-performing bank is generally defined as one that earns at least 1.00% ROAA, and preferably 1.25% ROAA or better. Many of the banks we represent perform at the 1.5% to 1.75% ROAA level year-in and year-out. How do they achieve this level, and, more importantly, how do they continue doing it year after year?

Giving directors what they deserve

Most of the high-performing banks we are identified with have a tremendous and tangible appreciation for the quality performance of their board of directors. First of all, recognizing quality performance entails having a reward system that pays the directors adequate and fair director fees through a system we refer to as a Directors' Performance Adjusted Plan (DPAF).

Under a DPAF program director fees are based on three primary elements: the size of the institution, the performance of the institution, and the size of the board of directors. Obviously, the fewer directors a bank has, the larger the base directors' fees should be, because the work is spread among fewer directors.

The DPAF is based on a sliding scale tied to the bank's ROAA, so the directors' fees fluctuate with the ROAA. If a bank's ROAA goes from 1.00% to 1.25% then the DPAF automatically adjusts the annual compensation of the director to coincide with the performance of the bank. For example, a director under a DPAF program, with the bank earning a 1.25% ROAA, may receive an additional $2,400 in annual compensation. If the ROAA increases to 1.50%, then the director's fees would be adjusted an additional $4,800 per year. In other words, the directors will be paid in direct proportion to shareholder profitability. If the profits go up, then the directors' fees will be higher. If the profits do not go up, then the directors' fees will remain static. The system meets the regulatory test of safety and soundness and rewards the director for the excellence of his performance and that of the institution.

Secondly, the directors should have a stock option plan, a non-statutory or nontax-qualified plan which requires no shareholder approval. This provides the directors with a stock option at today's price which does not have to be exercised for a period of ten years. This is an extremely motivational tool for directors.

We can provide a third benefit for the directors by allowing the directors to defer their own fees. Many of our directors, because of their financial success in their own businesses, are in the very highest personal tax bracket. Therefore, providing a method of deferring their fees enables them to put aside significant amounts of money without paying tax currently on the proceeds and the gains. This directors' deferred income program (DDI) does not in any way interfere with any directors' company pension, profit sharing, 401(k), ESOP, or iRA plan that they might have. He or she can participate in the bank's DDI plan in addition to any other tax-qualified plans which he or she may have in effect in their own companies.

Finally, after we have the compensation and the reward system on target, the bank's CEO and management needs to make sure the directors are appreciated. Lawyers say the only thing people have to sell is time, and this rings true with regard to your directors--their most valuable commodity is time. …

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