Compensation Plans for Texas Banks
Published by Texas Bankers Association, August 2016
Compensation plans for Texas banks
Privately held banks, including Subchapter S banks and mutuals, are no different than publicly traded banks in their efforts to provide meaningful compensation plans for their key officers. Privately held banks must compete with public banks when attracting and retaining key officers and producers. Publicly held banks typically offer restricted stock or incentive stock options to key employees. This is much more difficult for privately held banks due to a lack of available shares or illiquidity of the stock. Therefore, privately owned banks competing for talent often require more creativity. While some privately held banks offer stock options, restricted stock or restricted stock units (RSUs), these types of plans are uncommon. Privately held banks that want to provide rights of ownership to executives often use synthetic equity such as Phantom Stock Plans (PSPs) and Stock Appreciation Rights (SAR) plans. While these plans have an earnings impact to the bank, they do not have a per-share dilution as no actual shares are issued.
These types of plans are used toattract and retain key executives:
- Supplemental executive retirement plans (SERP)
- Deferred compensation plans (DCP)
- Performance-Based Defined Contribution Plans (PDP)
- Split dollar plans
- Survivor-income plans/death benefit-only plans
Proper balance between making the plan attractive to executives but not excessively expensive to the bank are significant factors when designing the benefit plan. Nonqualified plans can be customized to each executive, avoiding a cookie cutter approach by allowing flexibility in the amount of the benefit, vesting schedule, noncompete provisions, timing of payments and duration of payments. The plan must also provide a fair benefit upon death, disability and change in control. Payment terms can be customized to fit the executive’s needs, yet remain compliant with IRC Section 409A of the tax code.