Bank & Thrift - Industry
Research & Analysis: Paid in full: Executive compensation for 2005 July 05, 2006 9:39 AM By Shannon Fitzgerald

2005 was a year of hurricanes, a new pope and a couple of in-love cowboys. It was also a year that bank executives got paid very well.

Executives from banks with assets between $5 billion and $15 billion saw a 10.0% increase to their cash compensation (base salary plus annual incentive) and a 13.7% increase to direct compensation (base, incentive and equity), according to data from Clark Consulting, a firm specializing in executive compensation. Executives from the banks with over $15 billion in assets saw a mere 3.0% rise in base salary but an 8.2% increase in total direct compensation, including an 18.2% increase in equity.

Indeed, equity has long been an area where executives can really make their bones. As salary and bonus caps increasingly make their way into the corporate conversation, friendly boards can make it up to the executive team by giving slugs of equity, a practice that when done prudently, is generally met with approval by investors.

"I pay attention to ownership of stock by executives more so than what their base compensation is, because … in this consolidating business, I want them to be on the same page with me," Mendon Capital Advisors President Anton Schutz told SNL Financial. "I like them to think ownership is more important than their base salary."

PL Capital's Richard Lashley told us that he evaluates the company's performance and how reasonable the compensation is relative to the company's size. "Part of the problem is there's a direct correlation between the size of the company and the size of executive compensation … so there's a perverse incentive to do deals and grow," Lashley told SNL. "So we dislike growth for the sake of growth, and no executive will ever admit that he's growing the bank in order to increase his [or her] own compensation. … But it's very clear that a lot of people do deals just to get bigger and then they want to be rewarded for running a bigger company."

Lashley also pointed out that when it comes to compensation, the more meaningful measure isn't size but comp as a percentage of expenses. He added, "We don't like a completely open-ended compensation even if it's for equity, the days of guys getting 2% of the net income of the company for the rest of their lives."

There wasn't a huge difference between 2004 and 2005 in terms of compensation trends. In 2005, "you saw strong compensation being paid, based upon good bank results," Todd Leone, a managing director specializing in banks for Clark Consulting, told SNL. He noted that equity was somewhat flat over the course of the year as companies reset equity, and, as we started to see in 2004, equity programs are now deploying multiple types of equity and more performance-based vesting and grants.

2005 was also something of a transitional year in that it was the last year before the SEC's potential regulatory changes in compensation disclosure, something Clark has been telling its clients represent "the most significant changes in compensation disclosure for public companies in 14 years." Essentially what it means is that the amount of information that a company is required to disclose in its proxy is much greater and includes a "Compensation Discussion & Analysis" — but more on that later.

In calculating our overpaid and underpaid CEOs, we noticed that thrifts took the top three spots on our overpaid list, but banks made up the majority. On the underpaid list, which was also made up of 15 names, the (lack of) wealth, so to speak, was spread a little more evenly among the banks and thrifts.

And for what it's worth, we also noticed that 40% of the CEOs on our overpaid list were named William.

The methodology we used compared the CEO's compensation with the bank's performance, measuring both over the last three fiscal years to reduce the impact of one-time events and stock option grants. Both financial and shareholder return each counted as 50% of the total ranking, and the more recent financials received a greater weighting to reward turnarounds and steady performance.

The financial component evaluates how well the company was run from a profitability standpoint, using a three-year weighted average return on assets and average equity, as well as EPS growth. The yearly data was weighted by 1/2, 1/3 and 1/6, descending historically. The three metrics were normalized against the industry medians to account for differences between banks and thrifts and then ranked individually. Then the three equal-weighted metrics were summed and ranked in order of descending profitability.

The shareholder return component evaluated how well the shareholders have been rewarded and was measured using the three-year total return, normalized by industry versus the total return of the SNL Bank Index or SNL Thrift Index. The resulting excess returns were then ranked in descending order.

Then the financial and shareholder return rankings were summed and ranked by overall performance. This performance ranking compared the relative CEO compensation, taking into consideration the size of the institution. We size-adjusted the compensation by taking the square root of the ratio of total assets to that of the company's corresponding industry peers to arrive at a scaling factor. The CEOs' three-year average option-adjusted compensation was multiplied by the scale factor to arrive at its size-adjusted compensation, and then all were ranked from highest to lowest.

Then we compared the performance and compensation rankings to each other, so the CEOs of top performing companies that have low-ranking compensation are considered relatively underpaid, while the CEOs of lower performing companies with high ranking compensation are considered relatively overpaid. We also excluded companies where the CEO had not been in the role for at least the last three proxy filings, companies which are MHCs, or companies involved in a merger (more on that later).

The Overpaids

Topping our list of overpaid executives is NewAlliance Bancshares Inc. 's Peyton Patterson. The New Haven, Conn.-based thrift spent 2005 executing on two separate acquisitions with its twin pick-ups of Alliance Bancorp of New England and Cornerstone Bancorp and also instituted a 10% buyback plan . In March 2005, the company asked shareholders to approve a stock-based compensation plan, which meant that Patterson, on top of a combined salary and bonus of $1.2 million, picked up an additional $10.9 million in long-term compensation, primarily in restricted stock, and when adjusted for options, went home with a cool $21.2 million that year. Meanwhile, NewAlliance's stock didn't fare quite as well, dipping down 4.97% for that year.

Alfred Camner of Coral Gables, Fla.-based BankUnited Financial Corp. brought in $4.5 million in total compensation in 2005, which was the third year in which most of his take-home pay was performance-based. According to the thrift's Dec. 27, 2005, proxy , Camner's compensation was restructured in 2002, and the executive agreed to forego $300,000 in salary in each of 2003, 2004 and 2005 "and to accept instead the opportunity to earn performance-based cash compensation," which also meant that his 2005 compensation was some 5% lower than 2004. An Oct. 24, 2005, filing detailed Camner's quarterly cash compensation performance goals, including total deposits and loan balances at quarter-end, diluted earnings per share, net income and residential and consumer loan production. In May 2005, BankUnited elected to accelerate the vesting of two of Camner's stock option grants, and later that year, Camner disclosed his beneficial ownership of 10% of the company's outstanding stock. 2005 wasn't quite as good a year for BankUnited share price, which lost 16.84% over the course of the year, hurt in part by a sizeable second-quarter charge related to prepaying some long-term debt that contributed to a 46% dip in EPS for the year. Better results come when looking at the company's three-year total return through 2005, though, which was 43.47%.

Third on our list was Paul Pantozzi of Provident Financial Services Inc. , who earned over 38% less than he did in 2004, when he earned over 70% less than he did in 2003. Provident had a challenging 2005, plagued by margin compression and declining interest income. According to the thrift's proxy , filed March 21, 2006, Provident's compensation committee evaluated the company's EPS, efficiency ratio and ROAA, as well as the success of the company's operations and execution of business plan and, based on those results, "determined that the chief executive officer receive no increase to his base salary." Pantozzi did get an annual incentive award of $265,275, compared to his bonus of $675,150 the year before.

TD Banknorth Inc. 's Bill Ryan got zilch for a bonus in 2005, since the Portland, Maine-based bank didn't achieve its operating targets. Indeed, TD Banknorth was dealing with the Hudson United acquisition and twin balance sheet restructurings, the first in the first quarter, resulting in a $38 million charge, and the second in the fourth quarter, resulting in a $29.3 million charge. Additionally, the bank had several meaningful after-tax impacts from the amortization of identifiable intangible assets. Still, with a slight increase to base salary and no bonus, Ryan's long-term compensation of $7.6 million got him a fourth-place nod on our list.

Whitney Holding Corp. had both an acquisition (First National Bancshares, announced in July of '05) and hurricanes to deal with, ending the year with its shares down 8.11%. However, the bank also had 4.49% EPS growth and a 37% three-year return. Whitney's proxy , filed March 22, 2006, showed that in 2005, the bank's compensation committee "embarked upon a process to ensure that the total compensation package available to the chief executive officer … will be more closely aligned with the company's financial performance by ensuring an increased percentage of total compensation opportunity is directly linked to annual performance." CEO William Marks received total compensation of $3.5 million, about half of which was total annual comp and half of which was long-term comp — and all of which was 31% more than last year's compensation.

Citizens Banking Corp. , which had a challenging final quarter in 2005 due to a significant drop in fee income, saw its stock decline some 19% over the course of the year. CEO William Hartman increased his total comp by almost 72%, much of which came from long-term comp of $463,731 — significantly greater than the $16,902 in 2004. Hartman recently added to his empire when Citizens announced on June 27 of this year that it was acquiring Owosso, Mich.-based Republic Bancorp Inc. for approximately $1.05 billion.

In the second quarter of 2005, Investors Financial Services Corp. CEO Kevin Sheehan said that interest-rate pressures and market-sensitive revenue challenges would prevent Investors Financial from meeting its growth rate targets for 2005 and 2006 and, subsequently, faced a lawsuit over it. Investors Financial shares dipped over 26% for 2005, although the bank's three-year return is over 35%. Sheehan's total compensation of $3.0 million was 19% lower than 2004's comp.

Like many of its peers, BOK Financial Corp. struggled with its margin in 2005; the company also entered Arizona with the small acquisition of Valley Commerce Bancorp. BOK has a three-year total return of 49.80% and had 12.31% EPS growth in 2005. CEO Stanley Lybarger received total compensation of $3.4 million, which included some $2.3 million of long-term compensation.

It's likely that Irwin Financial Corp. is glad that 2005 is a thing of the past. In the second quarter, the Columbus, Ind.-based bank reported a net loss, stemming from "critical issues in [its] mortgage banking line business," which lost $9.2 million that quarter. The bank also revealed that it was involved in a number of legal proceedings , including one related to employee fraud. Later in the year, Irwin restated financials lower for 2004 and the first half of 2005. Irwin shares ended the year down 24.55%, while EPS growth for 2005 was a negative 71%. As detailed in the bank's March 17, 2006, proxy , Miller received no short-term bonus in 2005, "based on the company's performance." Miller's $886,455 total compensation for the year included $216,289 in corporate air travel.

Northern Trust Corp. had over 16% EPS growth in 2005, along with a three-year total return of over 55%. CEO William Osborn got on our list with total compensation of $6.4 million and options-adjusted comp of $10.8 million.

Rounding out the bottom five of our overpaid list is TCF Financial Corp. 's William Cooper, who retired at the end of 2005 and walked away with $19.8 million. First Republic Bank , which had a three-year total return of almost 187% and 20.93% EPS growth in 2005, gave CEO James Herbert $5.0 million, or 32% more than he received in 2004.

Commerce Bancorp Inc. 's Vernon Hill, who amended his employment agreement in March of this year to reduce his base salary and make total compensation more incentive-based, took no bonus in 2005, resulting in a 76.95% reduction in total comp from 2004. Bank of New York Co. Inc. 's Thomas Renyi took home $8.2 million, which was nearly 10% lower than the year before. Finally, Westamerica Bancorp. 's David Payne had the same salary and bonus as he had in 2003 and 2004, but his long-term comp was only $21,039, compared to nearly half a million the year before, making his total package 35% lower.

I'm thinking of a master plan

There's a very special group of executives who are noticeably missing from both of our lists, but we felt deserved a list of their own. Many of these executives did quite well in 2005 and might have made an appearance on our overpaid list simply based on their compensation. However, during 2005 or since, executives at North Fork Bancorp. Inc. , Texas Regional Bancshares Inc. , AmSouth Bancorp. , Commercial Capital Bancorp Inc. and Golden West Financial Corp. sold their companies and will end up with even bigger checks.

The Underpaids

Pacific Capital Bancorp CEO William Thomas got a raise to $425,000 on March 1, 2005, according to the Santa Barbara, Calif.-based bank's April 11, 2006, proxy . However, the board "moderated their overall assessment of the CEO's [high performance incentive plan] due to not meeting the efficiency ratio and software conversion goals." As such, Thomas's bonus was $30,000 less at $270,000. The executive's total comp of $1.12 million, which was almost 67% greater than he got the year before, along with the bank's three-year return of 101% and EPS growth of 11.46%, got him to the top of our underpaid list.

One reason FirstFed Financial Corp. 's Babette Heimbuch may have ended up on our list is that the thrift's executives do not receive perquisites or other personal benefits. "The company maintains an egalitarian culture, and officers operate under the same policies and procedures as other company employees," FirstFed stated in its most recent proxy , filed March 15, 2006. Heimbuch pulled down total compensation of $998,194, some 7% greater than the year before.

Corus Bankshares Inc. CEO Robert Glickman took home a million bucks in 2005, equally divided between salary and bonus. Of course, he also held a 21.6% stake in the company as of Feb. 21, 2006, so we think he's probably doing okay.

Despite a tepid fourth quarter in 2005, Downey Financial Corp. had an extremely strong year, posting EPS growth of 102.6%. CEO Daniel Rosenthal had both a raise in base pay and larger bonus, bringing his total comp to $1.5 million.

It's no real surprise that Washington Federal Inc. 's Roy Whitehead is somewhere on our underpaid list. The Seattle-based thrift's model is based, in part, on keeping expenses incredibly low, and at the end of 2005, Washington Federal's efficiency ratio was 18.10%. Whitehead's total compensation of $436,550 was mostly salary — the bonus was only $24,815 — and the whole package was nearly 25% less than what Whitehead got in 2004.

Zions Bancorp. 's Harris Simmons made $80,000 more in combined salary and bonus than he did in 2004, but where he really hit it big was in his long-term compensation, which moved up to $951,301 from $339,955 the year before, making Simmons's whole package a 46% increase over the 2004 compensation.

Ronald Hermance from Hudson City Bancorp Inc. saw his annual bonus nearly double in 2005, but his long-term comp was nearly a quarter of that in 2004, since "equity compensation … was vesting from prior awards," according to the thrift's April 28, 2006, proxy — making his total comp at $3.2 million some 3.2% lower than the year before. Hudson City turned in EPS growth of 20% in 2005.

Fulton Financial Corp. CEO Rufus Fulton snagged a total compensation package of almost $1.4 million in 2005, up almost 40% from the year before. BankAtlantic Bancorp Inc. 's Alan Levan saw his earnings per share decline by more than 17% in 2005, but managed to bring home $1.2 million in total compensation or $1.6 million in options-adjusted comp.

First Citizens BancShares Inc. does not give bonuses to its executives, preferring instead to reimburse them for club assessments and give other "personal benefits." For example, according to the bank's March 17, 2006, proxy , the company decided to "provide, install and maintain security systems in the homes" of CEO Lewis Holding and his lieutenants "which will be connected to FCB's security network." Holding was also able to bring $1.1 million in total compensation into his newly secure home.

Making up the final five of our underpaid list was Sovereign Bancorp Inc. CEO Jay Sidhu, who received no bonus in 2005 since certain performance targets weren't met. He was granted 78,051 shares of restricted stock in light of his "significant contributions to Sovereign during 2005, however, including the substantial efforts of Mr. Sidhu in connection with Sovereign's pending transactions with Banco Santander Central Hispano SA and Independence Community Bank Corp. , as well as external factors adversely affecting Sovereign during the year, including the interest rate environment and the defense of the company and the Santander and Independence transactions against Relational Investors LLC." Additionally, his long-term compensation, which included over 87,000 options and some more restricted stock, meant that Sidhu's total compensation was actually almost 9% greater than in 2004.

Keeping Sidhu company are Hancock Holding Co. 's George Shloegel, who had total comp of $1.0 million; Santander BanCorp 's Jose Ramon Gonzalez, who snagged $1.4 million; Park National Corp. 's C. Daniel DeLawder, who increased his take-home by more than 17% in 2005, to $941,148; and Gary Geisel from Provident Bankshares Corp. , who brought in $888,783 in total compensation, nearly 50% over what he got in 2004.

What can we expect in 2006?

The SEC's proposed proxy changes are expected to become final no later than August and are essentially made up of two components. First, there's the mandatory compensation discussion and analysis portion, the CD&A, which replaces the existing compensation committee report. The compensation committee report was "furnished" to the SEC, whereas the CD&A will now be filed, meaning it carries a higher liability standard and the CEO and CFO will have to sign off on it. Secondly, the current proxy regulations generally require three tabular disclosures, while the proposed changes will have at least eight.

"The change to proxy reporting is arguably one of the biggest things going on in the industry right now. The amount of work to perform to comply with the proposed changes is significant," Clark's Leone told SNL. "People haven't completely understood yet that the CD&A is a filed document which carries liability and that the CEO and CFO have to sign off on it. An interesting twist on that is as you get to the bigger organizations, the comp committee is running a lot of these decisions and the CEO isn't in the room. So how can the CEO sign off on something he wasn't there to preside over?"

The new tables must include not just summary compensation but also grants of performance-based awards, other equity awards, outstanding equity awards at fiscal year-end, option exercises and stock vesting, retirement plan potential annual payments and benefits, nonqualified defined contribution and other deferred compensation, as well as a table for director compensation, similar to the current summary compensation table for directors — for the first time. This also spells out what an executive would get if he or she voluntarily left the company, involuntarily left the company or in the event of a change in control.

Not only is the director compensation going to be more transparent, but the company's next three highest paid executives after the CEO and CFO whose total compensation exceeds $100,000 must be disclosed (this contrasts with the current rule where disclosure is only mandatory for total cash comp that exceeds $100K). The new rule will impact companies that previously only reported a few of the top executives.

Additionally, the perquisite threshold will be lowered from $50,000, or 10% of cash compensation, to $10,000.

"We've never had a period of change that has impacted executive compensation like we've had in the last four years," Leone remarked. "Beginning with Sarbanes[-Oxley] in 2002, then we had the stock exchange governance rules go into place, continued with stock option expensing with FAS, we've had 123R, see legislation impacting all deferred compensation through Section 409A, and now we have the proposed SEC proxy rule changes."

Just as industry conversation in the last few years has touched quite a few times on the possibility of SarbOx directly driving consolidation, the new proxy regulation could have a similar impact. "I've got CEOs who retired in the past year and they're going, 'Oh, it's a great time to retire. All of this regulation has gone overboard,'" Leone said, noting that clients are easily spending six figures or more just to comply with the recent regulations. "And tack that onto their 404 compliance that's going on and its just adding a lot of money to do business in corporate America. These regulations are clearly intended to curb abuses that occurred at a few organizations. That by itself it a positive development — transparency is the best form of disinfectant. However, when viewed under the amount of regulatory changes companies have had to comply with, people are questioning if collectively the regulations have gone too far."

Another effect is that while it used to be that serving on the audit committee was an arduous and time-consuming task for any board member, "the comp committee's task is now at the same level with these current regulations," Leone said.

While the new regulation could be a huge burden for the banks, investors are pleased with the idea of greater transparency. Both Schutz and Lashley expressed their approval.

Lashley said he is "absolutely in favor of those disclosures" because in his view, institutional investors tend to default to the proxy analysis firms "and they have these cookie cutter guidelines about percentage of market cap, percentage of compensation expense … and all you do if you're a company is you pre-clear your plans with ISS, pay them a little fee, they pre-clear the plans and then they tell you whether they stay within the guidelines and you're done."