Bank boards and compensation committees face a tall order these days: how to sufficiently reward CEOs for steering their companies through the pandemic recession yet avoid a public relations backlash for handing out big raises when so many businesses and people are suffering.
The boards of the four biggest banks have already made the tough calls. CEO compensation for 2020 declined at Bank of America, Citigroup and Wells Fargo and remained flat at JPMorgan Chase. Several regionals increased their top executives' pay, but experts predict a number of others that are still to report will follow the lead of the megabanks.
What’s happened at large banks “is extremely reflective of the overall banking environment,” said Laura Hay, managing director and head of the national banking industry team at Pearl Meyer, an executive compensation consultancy. “This is going to be a down year from last year.”
“What the directors are really dealing with is how do you balance the fact that stocks went down and earnings are down and all the operational metrics are not where they need to be with the leadership that CEO provided during this time?” Hay added. “Where I think most are landing is, ‘Hey we’ve worked hard, but it’s not going to be sufficient.’ They aren’t just saying, ‘Oh well, they’ve done well, so we’re going to pay out anyway.’ They’re having to find a happy medium.”
Attention to bank CEO pay has often been intense, particularly in the years following the financial crisis. Back then, the decision about whether to trim CEO pay packages was perhaps easier for boards to make because the industry was blamed for the economy’s downfall.
As a result, overall compensation took a hit. The average CEO package at publicly traded banks bottomed out in 2009 before rising 34% the following year, according to a University at Buffalo School of Management analysis of regulatory filings.
The spotlight is back amid a global health crisis that has put at least 10 million people out of work. While the number of reported coronavirus cases has plummeted since January and the logjam in vaccine distribution is easing, uncertainty about the risk posed by new variants makes the economic recovery hard to peg.
Since last spring, 25% of Russell 3000 Index companies have adjusted executive pay in response to the turmoil, by either reducing or deferring salaries and adjusting or suspending incentive plans, according to the governance software firm Diligent. Overall, bank compensation packages for 2020 are likely to be “more muted” compared to other industries given the increased level of scrutiny that banks receive, Diligent CEO Brian Stafford said.
“That [scrutiny] has to be part of the calculus for the boards,” Stafford said. “You’ve got executives who’ve worked harder than they’ve ever worked … but there is the reality and humility of unemployment being higher than it’s been in some time and you have to make sure compensation for CEOs doesn’t miss the reality of the fact that many people are struggling.”
Boards rely heavily on financial performance to make decisions about compensation, and financial performance was down this year. At Bank of America and Wells Fargo, net income dropped 34.7% and 83%, respectively. As a result, the pay package for BofA’s Brian Moynihan shrank 7.5%, and that of Wells Fargo’s Charlie Scharf declined 11.6%.
At Citigroup, former CEO Michael Corbat’s 2020 compensation fell 20.7% to $19 million. Citi’s board said it reduced Corbat’s incentive compensation award based on “its assessment of his performance” related to risk and control deficiencies identified by federal regulators that resulted in a pair of consent orders last fall and a $400 million civil money penalty.
Corbat’s pay cut also reflected a “one-time shared responsibility adjustment” that affected the entire executive management team as a result of those risk concerns, the board said.
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Meanwhile, the board of directors at JPMorgan kept CEO Jamie Dimon’s $31.5 million package unchanged. In a filing, the board said its independent members made the decision based on the company’s “strong performance in 2020 and over the long term.” Still, net income dropped 20% to $29.1 billion, and the return on tangible common equity slipped 5 percentage points to 14%.
The big banks have not yet disclosed 2021 compensation plans.
At Meridian Compensation Partners, bank clients want to know three things: what are other banks doing, what should they be thinking about as they determine bonuses for 2020 and how should they structure pay packages for 2021, partner Susan O’Donnell said.
“This year is very much a delicate balance,” O’Donnell said. “It’s a balance between rewarding people for what was clearly an unprecedented, uniquely challenging time and how they responded to that with the recognition that it’s a recession and a once-in-a-century pandemic that has created all of this pain and suffering.”
For the next two months, the focus in the banking industry will shift to regionals as they file proxy statements that include 2020 executive compensation details and, in many cases, plans for 2021 pay packages. Fifth Third Bancorp in Cincinnati and Regions Financial in Birmingham, Ala., are among a handful of regionals to share details — and they bumped up their CEOs' pay.
At Fifth Third, Chairman and CEO Greg Carmichael’s 2020 pay rose 8.5% to $9.8 million, lifted by an increase in stock and option awards as well as an uptick in nonequity incentive plan compensation, a filing shows. Fifth Third has a pay-for-performance compensation program that takes into account shareholder value and rival regional banks pay, a company spokeswoman said in an emailed statement.
"Beyond the strong financial performance relative to our program's targets and peers, we are incredibly proud of Fifth Third's contributions to our customers, employees and communities throughout the pandemic, which are reflected in the CEO compensation," the statement said.
At Regions, President and CEO John Turner's compensation totaled $13.8 million, up 5.5% as a result of a higher salary and more stock awards. The board said it bumped up Turner's salary by 2.6% as a result of his performance since becoming CEO in July 2018 and in recognition that his salary was below the 50th percentile of CEO pay in Regions's compensation peer group.
The fact that some pay packages are rising shows that the industry is not moving in lockstep, said Jack Feng, associate professor of finance at the University at Buffalo School of Management in Buffalo, N.Y. But in general there will likely be “moderate declines” in CEO compensation for 2020 and a return to prepandemic pay levels in 2021, depending on the success of vaccine distribution, Feng said.
There’s no guarantee that an end to the health crisis itself means good news for bankers’ pay, warns Marty Mosby, an analyst at Vining Sparks. In fact, as long as interest rates hover near zero, the greater the chances that banks of all sizes are going to have to keep making hard decisions about compensation and other expenses.
The Federal Reserve has indicated that rates will remain low for the foreseeable future.
“As we go into 2021, the earnings pressure will get realized even more,” Mosby said. “So I think those [banks] that are already starting to pull back on compensation are reflecting an understanding of what they dealt with last year and what they still have to deal with this year.”
