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Performance-Driven Retirement Plans: Are They Right for Your Bank?

By: David Shoemaker, Ken Derks | January 5th, 2015

Bank boards do not like to lose executive talent to competing banking organizations. Developing a compensation plan that is aligned with shareholder interests and retains key executives continues to be an important objective for compensation committees. Compensation committees need to evaluate a variety of compensation strategies to determine which will be the most effective at retaining and recruiting key high performing lenders and executives. While offering competitive salary and performance-based annual bonus amounts are a given, providing additional long-term incentives and/or retirement benefits can be the missing component. Equity plans provide an element of longer-term compensation, but are not available in many privately-held banks and, even where offered, can be complemented by other types of long-term incentive plans.

According to the American Bankers Association 2013 Compensation and Benefits Survey, 64 percent of respondents offered some kind of nonqualified deferred compensation plan for top management (CEO, C-level, executive vice president). (See our article, “Is Your Compensation Plan Generous Enough?”) Choosing the right retirement plan must incorporate the compensation committee’s overall compensation philosophy and bank objectives.

This article will focus on performance-driven retirement plans, a type of defined contribution nonqualified plan. Long-term incentive plans that are performance driven are generally well- received by shareholders. When such plans are properly designed, if the bank’s shareholders do well, so will the executives.

As an example, let’s assume the bank desires to implement a performance-driven retirement plan for a key lender who is 35 years old. Let’s also assume that if the lender meets both department and individual target goals along with the bank-wide net income goal, the lender will receive an annual grant of 10 percent of salary. The bank will cap the grant at 20 percent of salary if maximum performance goals are attained. For this individual, assume the annual contribution is based on a combination of loan growth, deposit growth and bank-wide net income. The goals and the weighting of each goal will vary by officer.

Assuming normal retirement age of 65, and 10 percent of salary contributions each year, the executive is projected to be credited with almost $400,000 in bank contributions. With interest added to the account, the retirement benefit is expected to be almost $80,000 per year for 15 years, a total benefit of $1.2 million. The payments are contingent on the executive not taking a job where he or she competes with the bank after retirement.

This type of arrangement is documented in a legal agreement between the bank and the executive. The agreement must comply with IRC Section 409A and should address various agreement terms and conditions including:

  • Early voluntary termination
  • Disability
  • Change in control
  • Pre-retirement death
  • Death during payout
  • Non-compete and non-solicitation of customers and employees
  • Holdbacks
  • Qualifiers such as satisfactory performance evaluations and credit quality
  • Form (number of years) and timing (age or date) of benefit distributions

It is critical that bank-wide goals along with department and individual goals be linked to the bank’s budget and overall strategic plan. The goal setting process is typically the most challenging step in designing the plan. Some banks use moving averages (such as the bank’s three-year average net income) and other longer-term measures to determine executive performance and bank contributions.

Rewarding executives with a meaningful compensation package tied to long-term shareholder return is a balancing act. While there is not a one-size-fits-all approach for designing and implementing this type of plan, the facts and circumstances of each bank will dictate the best design after taking into account the bank’s culture and compensation philosophy.

Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc.

David Shoemaker, CPA/PFS, CFP®, is a principal of Equias Alliance, which through consultants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOLI). To learn more, contact David Shoemaker at 901-754-4924 or dshoemaker@equiasalliance.com.

Ken Derks is a principal of Equias Alliance, which through consultants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOLI). To learn more, contact Ken Derks at 469-252-1037 or kderks@equiasalliance.com.

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