Chief executive officers at community banks want more equity, not more cash.
This is particularly true of community bank CEOs, who say that including equity in pay packages incentivizes them to create long-term shareholder value, aids management retention and prepares them to join the board.
While this shouldn’t come as a huge surprise, the message may be lost on some directors of these banks.
In Bank Director’s 2019 Compensation Survey—sponsored by Compensation Advisors—54 percent of CEOs said their bank should offer equity or increase the amount of equity they already provide. Directors didn’t feel as strongly about this: Only 19 percent said offering or increasing equity was a priority. They saw equity as one of a number of potential improvements, along with other options like non-equity long-term compensation, cash incentive and higher salary.
The board of directors at Talladega, Alabama-based FirstBanc of Alabama added stock grants to the compensation plan for President and CEO J. Chad Jones in 2017, after discussing how to incentivize and retain executive management. The board granted Jones 3,000 shares—1,000 of which were unrestricted and granted immediately, with the remainder consisting of restricted stock transferred over time.
“It has raised my eyebrows,” he says. “It certainly helped me focus on how to drive the stock and dividends.”
Adding the equity incentive “very minimally” diluted existing shareholders but allows Jones to benefit from the upside he creates. The board also approved a block of shares for other C-level officers, with which Jones can implement a similar equity grant program for them.
Jones added that increasing his salary beyond a certain point offered diminishing returns for him and higher expenses for First Bank of Alabama, which has $548.6 million in assets.
“You can give me 5 percent to 10 percent pay increases each year for the next 25 to 30 years. At that point in time, what good has it done?” he says. “I love the compensation side, don't get me wrong, everyone does. But … if [the board] continues to increase my pay 5 percent and I'm the highest paid individual in this company, it doesn't make sense for [them] to continue increasing my pay.”
Interest in and demand for equity-based compensation is expected to rise as competition for qualified executives remains stiff and a new generation of talent assumes the top spot, says J. Scott Petty, a partner at executive search firm Chartwell Partners. He says community bank boards should use it as a retention tool.
“In general, more and more CEOs want equity as a part of their compensation package,” he says. “It’s the ultimate alignment of the goals of the board and how the CEO is going to achieve those goals.”
Succession planning at First National Bank of Kentucky changed President and CEO Gregory Goff’s perspective on equity incentive compensation. He plans to retire soon from the Carrollton, Kentucky-based bank, which has $124.5 million in assets, and says he wishes he had opportunities to accumulate equity throughout his career.
“It’s one area of the bank where I didn’t push much—I did my job and went home,” he says. “I ran it like I owned all of it. But now I have no reason to stay here.”
He says the board of directors looked at different incentive compensation structures several times, but could never get comfortable with the dilution from awarding equity or alternatives like bank-owned life insurance. He says the board discussed adding him as a director after he retires, but his lack of equity makes him less interested in a seat.
When Jeffrey Rose interviewed with the board at Davenport, Iowa-based American Bank & Trust in 2016, he told them he wanted to make a bet on himself. Rose says he had been paid a salary and a bonus for turning around banks before, and it “wasn’t enough.” As president and CEO of American Bank & Trust, he hoped to capture some of the upside he created as he helped turn the bank around.
At the $366.2 million asset bank, Rose has the option to purchase a set number of shares each year at a predetermined price. The program is “very simple, very clean,” and the shares fully vest after he purchases them.
American Bank & Trust is taking the equity compensation philosophy one step further, having recently decided to compensate the board with stock instead of cash, too. Rose says the decision generated extensive discussion, but will help long-time directors become more invested in the bank and serve as a positive signal to local shareholders.
It’s tempting for a board to shy away from granting equity to executives—especially if the bank is closely held—but the benefits from doing so can outweigh the costs.