Annual Convention Compensation Strategies in an Evolving - PowerPoint PPT Presentation

California Bankers Association 126 th Annual Convention Compensation Strategies in an Evolving Environment May 4, 2017 Dan Wetzel Bob Gotelli Managing Director SVP, Director Human Resources Pearl Meyer Bank of Marin

Discussion Items ▪ Market Trends • Base Salaries • Annual Incentives • Long-term Incentives • Goal Setting • Change-in-Control Benefits ▪ Regulatory Environment 2

Current state ▪ Strong market performance, declining unemployment, rising rates ▪ Salary budget increases remain flat – 3% per year Change through March 2017 300% One Year Three-Year 43% 41% 33% 27% 21% 3% 3% -13% -38% KBW Index NASDAQ Salary Budget CA Fed Discount Increase Unemployment Rate Rate 3

Compensation Expense - CA Banks ▪ Compensation expense per assets declining ▪ Expense per FTE increasing 4% per year Salary + Benefits Expense 1.75% $120,000 1.70% $100,000 1.65% $80,000 1.60% 1.55% $60,000 1.50% $40,000 1.45% $20,000 1.40% 1.35% $0 Compensation Expense / Assets Compensation Expense / FTE * Source: SNL Financial 4

Base Salaries Looking Ahead… ▪ Proactively evaluate base salaries • 50%* evaluate salary bands annually • 27%* evaluate as needed ▪ Adjusting at-risk positions (biggest salary movements*) • Loan Servicing Officer • Product Managers • Mortgage Loan Officers (commissioned) • Controller (assistant controller) • Commercial Loan Officers • Benefit Specialists • MIS Manager * Source: 2016 CBA Compensation & Benefits Survey 5

2017 Anticipated Executive Salary Increases ▪ Executive salaries at larger banks are expected to increase 3-5% 2017 Anticipated Salary Increases Assets <$3B Assets >$3B 5.0% 4.0% 3.5% 3.0% CEO Direct Reports Source: Pearl Meyer “2017 Looking Ahead to Executive Pay Practices Survey” 6

Annual Incentives 7

Annual Incentives – Market Perspective ▪ Most employees with base salaries over $100K are eligible for incentives Annual Incentives* 73% Top Executives 24% 78% Salary $100K-$150K 14% 64% Salary $50K-$99K 8% 55% Salary <$50K 4% % Eligible Target % of Salary Source: 2016 CBA Compensation & Benefits Survey 8

Annual Incentives – By Employee Group Formal Plans Receiving Incentives 100% 90 to < 100% 80 to < 90% 3% 5% 8% 11% 22% 3% 8% 3% 15% 3% 37% 18% 8% 32% 42% 76% 64% 54% 49% 45% 42% 34% 29% Executive Management Exempt Non-Exempt Executive Management Exempt Non-Exempt Nearly 90% ▪ Nearly all executives and managers participate and receive an annual incentive ▪ Participation decreases among other exempt and non-exempt employees 9 Source: 2017 Pearl Meyer Compensation Planning Survey

Annual Incentives Looking Ahead… ▪ Banks are expecting 2017 annual incentives payouts to be equal to or higher than last year Expections: Executive 2017 vs. 2016 Annual Incentives 5% Considerably higher 5% 85% 36% Somewhat higher 24% 49% About the same 41% 2% Somewhat lower 15% 2% Considerably lower 7% Banks All Companies 10 Source: Pearl Meyer “2017 Looking Ahead to Executive Pay Practices Survey”

Long-term Incentives 11

Overview of LTI Vehicles ▪ Full-Value Stock Awards • Restricted Stock Awards (“RSAs”) • Restricted Stock Units (“RSUs”) ▪ Performance Shares / Units • Tied to threshold, target and stretch goals and payout opportunities • Performance conditions unrelated to share price (operational metrics) and/or conditions tied to the company’s stock price (market -based) • Absolute perspective, relative perspective, or combination thereof ▪ Stock Appreciation Awards • Stock Options or Stock Appreciation Rights (“SARs”): - Service-based vesting, and/or • Performance-based conditions ▪ Other Awards • Long-term Cash Incentive 12

CEO LTI Awards Public CA Banks ▪ Performance contingent Performance Contingent award usage doubled over 30% the past year • Shareholder response • Alignment with performance 14% 11% 5% 0% 0% 2010 2011 2012 2013 2014 2015 Stock Options Restricted Stock 74% 80% 76% 67% 67% 63% 68% 60% 67% 58% 58% 57% 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Source: California Banks Assets $500M to $10B (n=29) 13

LTI – Market Perspectives ▪ Among public California Banks, long-term incentive awards to senior executives continue to increase in prevalence Long-term Incentives % Receiving CA Public Banks 79% 79% 79% 78% 72% 71% 70% 68% 66% 62% 60% 60% 2010 2011 2012 2013 2014 2015 CEOs CFOs Linear (CEOs) Linear (CFOs) Source: 2016 CBA Compensation & Benefits Survey 14

LTI Looking Ahead… ▪ Anticipated changes to LTI program include revising performance metrics and award mix 2017 Anticipated LTI Program Modifications Banks All Companies 38% Change Performance Metrics 40% 26% Change LTI Mix 33% 12% Shorten Vesting Period 11% 12% New Holding Requirements 6% 12% Implement Minimum Vesting Periods 4% 9% Lengthen Vesting Period 6% 6% Add Double Trigger CIC 9% 6% Increase Ownership Guidelines 4% 3% New Realizable Value Caps 1% 0% Eliminate CIC Discretion 1% 0% New Ownership Guidelines 11% Source: Pearl Meyer “2017 Looking Ahead to Executive Pay Practices Survey” 15

Goal Setting 16

Defining Performance ✓ Incorporate balanced performance metrics ✓ Set realistic targets ✓ Avoid entitlements ✓ Are simple and focused ✓ Support overall corporate objectives ✓ Are self funded 17

Dynamic Tension ▪ Selection of metrics should consider: • Long-term strategic plan • Balance with short- term incentive (“STI”) goals (i.e. “dynamic tension”) Growth Goals Revenue Assets, Loans, Deposits Short- Long- Earnings / Term Term Return Goals Incentive Incentive Net Income, EPS Plan Plan ROAA, ROAE Total Shareholder Return Quality / Safety / Efficiency Goals 18

The Goal Setting Process: Time Spent ▪ 53% of banks spend 6 US Banks hours or less on measure selection & calibration < 2 10 Hours Hours, or More, 15% 17% 8 to 10 2 - 4 Hours, Hours, 12% 20% 6 to 8 Hours, 4 - 6 18% Hours, 18% Based on a recent survey conducted by Pearl Meyer. Includes responses from 78 banks. 19

The Goal Setting Process: Influence ▪ For most companies, measure selection is driven by the annual budget Based on a recent survey conducted by Pearl Meyer. 20

The Goal Setting Process: Considerations ▪ Fewer than 50% of companies always consider peer performance and market expectations Based on a recent survey conducted by Pearl Meyer. 21

Prevalent 2015 Annual Incentive Metrics ▪ For executive teams, most banks utilize multiple performance metrics in annual incentive plans Prevalent Annual Incentive Metrics Prevalent Annual Incentive Metric Categories 53% 100% 49% 39% 35% 57% 55% 27% 24% 18% Balance Sheet Earnings Quality Metric Pre-tax / Net Loans Deposits ROAA Eff. Ratio ROAE NPAs/Assets Net Income * Source: West Coast Banks 22

Prevalent 2015 LTI Metrics ▪ For executive teams, most banks utilize absolute financial performance goals ▪ TSR goals are generally balanced with absolute financial goals Banks are reconsidering Long-term Incentive Performance Metrics the use of rTSR 46% 25% 25% 21% 21% 18% 7% Quality EPS ROA ROE Regulatory Relative Relative Rating TSR Financials * Source: West Coast Banks 23

LTI Plans & TSR Goals ▪ Most Participants are satisfied with plans Performance-Based LTI TSR-Based LTI US Banks US Banks Very Mgmt/Board Mgmt/Board Differ 8% Satisfied Dissatisfied Differ 11% 10% Satisfied 3% 67% Somewhat Dissatisfied 3% Somewhat Satisfied 22% Somewhat Satisfied 20% Satisfied 56% ▪ Among general industry companies, there was a higher level of dissatisfaction with relative TSR plans Based on a recent survey conducted by Pearl Meyer. Includes responses from 78 banks. * Source: West Coast Banks 24

Incentive Plan Leverage ▪ Annual Incentive Plans ▪ Long-term Incentive Plans • 64% set threshold above 0% • 30% set goals as all or none • Highest stretch payout 250% • Highest stretch payout 200% Annual Incentive Leverage Long-term Incentive Leverage 150% 150% 172% 150% 100% 100% 100% 50% 50% Threshold Target Maximum (Stretch) Threshold Target Maximum 25/50th Percentile 75th Percentile (Stretch) 25

Goal Setting Rule of Thumb… ▪ A rule of thumb for prevalence of plan Efficiency Ratio Prevalence performance goals 2003 - 2016 • Threshold 100% achieved 80% Threshold • Target 40-60% Prevalence of Achievement 80% • Maximum / stretch 10-20% Target 60% 40% Maximum 20% 0% Efficiency Ratio 26