Pub. 7 2017-2018 Issue 5

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S March • April 2018 23 T he world of community and re- gional bank directors has certain- ly evolved over the last five years. While the economic downturn in 2009 triggered some changes, a good number of these were already underway. The role of bank directors has been evolving for years, but changes in the compensation structure for directors has shifted more gradually. Setting the Stage The first big shift for bank directors was focused around the level of engage- ment required. The days where a bank director simply showed up for a monthly meeting, listened to management, col- lected their fees, and vanished until the next meeting are long gone. Like many businesses, tough times required extra work and banking was not immune. Di- rectors suddenly had to deal with things like TARP, poor company performance, management changes, etc. An increased understanding of banking, credits, reg- ulation, and director liability became high priorities. Director expectations increased significantly and you were ei - ther up for the challenge or chose to end your tenure on the board. Unfortunately, what we didn’t see at this time was an increase in director compensation. Poor bank performance seemed to influence a general “flat line” in director compen - sation from 2009 – 2012. Therefore, di- rectors were working harder and longer, but the resulting pay was not increasing. The Shift Begins We finally saw an increase in director compensation levels around 2012 and this trend has continued. Blanchard Consulting Group’s director compen- sation survey of 107 community banks (completed in early 2017) showed that 32% of banks increased director com- pensation in 2016 and 31% planned to increase director compensation in 2017. The median increase in total director compensation for 2016 was 16%, up from 10% in 2014. This clearly shows that director compensation has started to catch up to the increase in work-load and expertise required. In fact, 90% of our survey participants feel that they were fairly compensated for the time they spend on board activities. The biggest movement in director compensation has come in the form of increased retainers and fees for committees and chair positions. An average community bank director’s total compensation levels now range from approximately $15,000 to $55,000 or more depending on the asset size and classification (public vs. private). The general philosophy surrounding direc- tor compensation focuses on paying directors appropriately for the time and expertise provided. Basing director compensation on bank performance is discouraged, because directors need to be focused on making the correct long-term decisions for the bank and shareholders. Short-sighted decisions focused on short-term performance are discouraged. Why an Increased Emphasis on Retainers? The shift in the type of director re- quired to serve on the board has created a shift in the format of pay for directors. Instead of focusing on per meeting fees and requiring attendance to receive the fee, many boards have moved to paying a large portion of director compensation through retainers. The per meeting fees still exist, but the amounts generally range from $500 to $1,000 depending on the size of institution and other vari- ables. Today, directors are expected to be engaged, put time in reviewing materials, receive outside education, and provide their insights even if they miss a meeting. As such, the emphasis has moved to paying an appropriate amount for board service as a whole. If you have the right directors, attendance/ participation will not be an issue and each director will clearly “earn their keep”. Paying a retainer is much easier to administer and provides a clear link between the amount of pay that is pro- vided for director service. Retainers are frequently provided in cash, but are also a great way to provide equity to What’s New With Director Compensation? directors. Equity grants (if used) are typically provided in the formof full-val- ue shares (not stock options) with very short or immediate vesting provisions. Committee and Chair Fees The other big change in director compensation surrounds increased fees for service on committees and for chair positions. Once again, the reasoning for such changes is simple. Serving on the committee requires additional time and expertise and these directors deserve to be paid appropriately for this additional work. Chair positions add an extra ex- pectation and expertise, so they should receive a “bump up” in pay as well. The Blanchard Consulting survey found that committee fees range from$200 to $600 per meeting depending on size of insti- tution and the type of committee. The additional chair fees vary by asset size and type of committee, but generally fall in the range of $2,000 to $3,000. Summary and What’s Next? Bank director compensation is far from rocket science. At the end of the day, a bank needs to determine a fair to- tal compensation level for directors and structure the pay program accordingly. Whether you pay via retainers, equity grants, per meeting fees, chair fees, etc. doesn’t matter. Just be sure you model out projections (per director and in total) and differentiate each director’s compensation based on work-load and expertise required. Market data is avail- able via the Blanchard Consulting Group (BCG) Director Compensation survey and other industry sources. Our firm can help your bank analyze the data and determine where to position the board of directors’ compensation package in order to meet the goals of the bank and shareholders. n Kristen can be reached at (314) 394-3374 or kristen@blanchardc.com. About the Firm: Blanchard Consulting Group is a national compensation consulting firm with offices in Atlanta, GA; Minneapolis, MN, and St. Louis MO. Our mission is to deliver independent compensation guidance to community and regional banks to help them attract, motivate, and retain key employees and directors. With an exclusive focus on the banking marketplace since 2000, our lead consultants have a unique industry perspective and expertise to offer our clients. We work directly with Board of Directors, Executive Management, and Human Resource depart- ments on all facets of director, executive, and staff compensation programs. More information can be found at www.blanchardc.com. BY KRISTEN KOSTNER, SENIOR COMPENSATION CONSULTANT, BLANCHARD CONSULTING GROUP