inform. educate. connect. Issue #7 - February 2010

Compensation Benchmarking in a Down Economy  

By Gayle Appelbaum, Amalfi Consulting

This is an impossible time for human resources professionals. In the face of all of the legislations, regulatory guidance, economic volatility, and general industry challenges, how do you effectively benchmark compensation? 

The prolonged market downturn has had a significant impact on salary increases and especially on the size and prevalence of performance-based payouts in the banking industry as a whole. As a result, it can be difficult to establish baseline market compensation levels in years when performance-based payouts (e.g., bonus and equity awards) in the market are non-existent or substantially lower than in more “normal” years. 

Given the current challenges of the banking sector, the actual compensation paid to proxy executives may not be suitable as the only data to use in the benchmarking process, especially for compensation beyond base salary. When using peer proxy data to benchmark executive compensation, it is important to also pay attention to the incentive award opportunities as reported in proxy statements. Target and maximum award opportunities for each proxy executive are often reported in the proxy Grants of Plan-Based Awards table as well as the Compensation Discussion and Analysis (CD&A). The data is more prevalent for cash incentives than for long-term incentives (equity) but provides invaluable information when establishing executive compensation and designing variable compensation plans. 

Once the custom peer group is set and the data is gathered, additional financial modeling may be required to conduct a complete analysis. For instance, this data can be used to calculate total compensation assuming achievement of target and maximum performance levels. This requires a more complicated process than in past years.

The market downturn has impacted industry compensation surveys as well. The trend in recently published surveys has been fewer positions reported and fewer incumbents in each position. Furthermore, it seems that many compensation surveys have seen lower participation rates from smaller organizations. As a result, the data cuts for smaller banks report fewer incumbents or are no longer available for many positions. The reduction in participation has likely been a result of cost, lack of time to participate, and the absence of motivation to review current compensation. Perhaps some organizations feel that compensation seems stagnant so why take the time and spend the money to participate? On the contrary, compensation is anything but stagnant and surveys continue to provide relevant information for most banks. 

When benchmarking specific positions in an organization, be mindful how each is compared to market within the industry, making sure that positions are benchmarked by function and responsibility, rather than by title. Also be aware that some positions have a higher perceived intrinsic value in today’s marketplace. For instance, many mortgage lenders had a successful year in 2009, while many commercial real estate lenders struggled; this would be reflected in survey data.  Additionally, there has been an increased demand for risk managers, workout specialists and business development officers.

When proxy statements are published this year with 2009 information, it will be the first time that the data allows us to truly differentiate between TARP and non-TARP banks. It will be critical to look at both types of institutions as trends may vary significantly between the two groups. Following Treasury’s Interim Final Rules (IFR) released June 15, 2009, TARP participants may have taken various actions in response to the restrictions on compensation for select individuals. It will be imperative to review the compensation tables as well as the CD&A for context to see which officers at a peer bank were affected by the TARP and the exact effect. It will also be interesting to see what impact TARP has had on organizations that paid back their funds in 2009. How will all of this affect each of the various elements of compensation?

In performing effective benchmarking, it is also critical to keep in mind the value of the individuals to the organization. Today strong leadership is as important as ever, and individuals with other specialized skills may also be in high demand. Now more than ever, benchmarking and the resulting compensation decisions, should not be a purely mathematical exercise. It is critical to weigh all qualitative factors when valuing positions. It is also essential to keep your eyes on the future; while employees may be relieved to have a job today, when the market improves, they may have plenty of other opportunities.

<back to February 2010 HR & Training Digest>