The allocation of executive compensation resources is being scrutinized by internal and external forces. Regulations, board governance issues, and the lower margins require new thought processes on the various pieces of the compensation puzzle and how they fit together.

1. Puzzle Box
Compensation 2010

2. Above reproach on what is
paid and able to respond to
inquirers
Balance the need for talent
with budget concerns
Not dampening morale. At the
same time increase
productivity
A business model focused on
becoming a low cost provider
Compensation is just one
piece of the entire
business strategy.

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Effecting
Compensati
on Design
Economy & Industry
Issues
Regulations & Board
Governance Issues
Need for Capital
Need to Retain Those
Who Deliver Your
Services

4. Economy & Banks
• High Unemployment
• Significant change in economy not
likely until commercial lending
increases
• Not likely with big banks investing in
securities almost risk free
• 829 banks on the problem watch list
as of June 30, 2010.
• 118 failures by Sept 2010.
• 192 enforcement actions by the
Federal Reserve already this year vs.
172 in 2009.
• Estimated that we will go from 7800
banks to 4000 banks. Top 25% will
own 75% of all bank assets; up from
67%.

5. Hypothesis
Fewer Community Banks to
Compete
A pronounced cultural difference
between credit unions and big
banks
Consumers will continue to prefer
credit unions
Employees will continue to prefer
credit unions
Increased pressure for legislation
to end the tax free status of credit
unions

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Recommend
ed Take
Away from
the Todd
Frank Act of
2010
Independence of
Compensation Committee
Independence of Any
Compensation Consultant
Enhanced Clawbacks
Documented
Methodology

7. Clarify roles of management,
Compensation Committee,
Board on compensation issues.
Establish qualifications &
training of committee members
Document methodology & peer
group
Mirrors the independence
standard that applies to audit
committee members under
Section 301 of the Sarbanes-
Oxley Act.
Set Policy for
Independence of the
Compensation Committee

8. Governance Best Practices Will
Increase: Knowledge, Skills,
Experience of committee members
• Increased focus on board
member experience/skills,
eliminating weakening
performers.
• Access to internal information
• Periodic outside education in
executive compensation for
new members and refreshers
for current members

9. Governance Best Practices Will
Increase: Processes and Oversight
Begin with an audit of Status Quo
Committee & Board may not set
other executives’ pay packages
and related policies, but it should
understand it.
Formal resolution and written
definition of independence barring
directors and firms doing
consulting, legal and other work
for credit union.
Implement governance protocols,
process controls and design
features to mitigate risk taking.

10. Governance Best Practices Will
Increase Board-Consultant Relationship
• Interviewed by Committee; approved
by Board
• Board use consultant as a resource
“fully” asking recommendations,
advantages and disadvantages
• Consultant probes and challenges
Board members’ assumptions
• Selected Committee/Board members
review working drafts or consultant’s
reports before delivered to full Board

11. The compensation committee
retains authority to engage its
own compensation consultants
and other advisers, and the
company must provide
sufficient resources for the
committee to pay those
consultants/advisers
Need not follow consultants
advice, nor does the advise
relieve them of their
responsibility to exercise their
own judgment.
Independence of Advisors

12. Other services provided by the
consultant’s/adviser’s firm.
The amount of fees received by the
consultant’s/adviser’s firm from the
company relative to the firm’s total
revenues. Identify risks and how this
will be monitored and addressed.
The consultant’s/adviser’s firm’s
policies to limit conflicts of interest,
Business or personal relationships
between the consultant/adviser and
any member of the compensation
committee, or management
Independen
ce of
Compensati
on Advisors

13. Enhanced Clawbacks
• Requires clawback of incentive
compensation awarded to any
current or former executive
officers within three years of the
date of the triggering financial
restatement.
• No misconduct on the part of the
executive officer is required.
• Another uncertainty is how the
clawback rules will deal with
incentive compensation that is
based on a number of factors in
addition to financial performance.
• One of the biggest legal
challenges for any clawback
policy is establishing an
enforceable right against

14. Excessive Compensation

15. The Federal Reserve, FDIC,
OCC and OTS recently
issued their Guidance on
Sound Incentive
Compensation Policies.
They largely focused on
key principles for ensuring
that incentive comp plans
appropriately balance risks
with financial performance
and compensation
rewards.
Boards should include
“graphic analysis” of this
Sound Incentive Compensation Policies

16. IRC 4958
Sends out thousands of compliance
letters annually questioning direct
and indirect compensation issues to
identify questionable exec comp
activities.
The only defense is to invoke the
rebuttable presumption of
reasonableness clause.
Under these rules, an organization
may place the burden of proving
excessive compensation on the IRS
by using disinterested persons to
review comparability data to
establish compensation, and by
properly substantiating the

17. Is this what it
feels like to
be an
executive
banker these
days?

18. Clarify How Performance Translates
into Objective Pay Determinations
SEC issued more comments
regarding performance targets
than any other disclosure topic on
executive comp.
The transparency and accountability
necessary to create an above-
reproach practices can be
accomplished by an annual
performance evaluation for the
CEO that goes beyond meeting
financial goals and addresses
qualitative matters, such as
leadership, relationships with
customers, the board and
employee engagement.

19. Compensation Practices Should
Embrace a Long-term Horizon
• Rewards based on the targets over a
multi-year average, compared to
peer group
• Review mix, leverage and design
features to ensure a long-term view
of performance; perhaps leveraging
a percentage of the payout allowing
for room to take back based on
performance.
Pay For Performance at all Levels
• Comp plan supports organization’s
mission, goals & strategy
• Reward short and long-term
performance in appropriate balance
and based on different measures.
• Review Benefits.

20. May Be Questionable:
Short-term incentive based solely
on Net Income (or ROA, ROE….)
Quarterly bonus payments without
“true-up” if full year results fall
short.
Should non-exempt employees
participate in annual bonus plans
based on corporate goals?
Is it really only fair if everyone
participates in variable pay?
Everyone gets one week of pay as
the annual bonus.
Wait and see if the board thinks we
had a good year

21. Performance Measures Should
Change With Company Focus
Loan growth
ROA/ROE
Capital Ratio
Core Funding Mix
Core Deposit Increase
% of Profitable customers
Interest Bearing Accounts
Efficiency Ratio

22. Non-financial measures are
key indicators of long term
success
Employee engagement measures
Customer satisfaction measures
CAMEL Scores
Major projects
Avg. # Accts/Household
Individual Performance Rating
% of EE with Direct Deposits
Avg. Risk Rating
# Loan ratings that changed in
audits

23. Credit Union CEO
Base $295,695
Variable Pay 18%
401-k 98%
Pension 14%
Defined Contri. Pl 86%
457(b) 70%
457(f) 58%
Split Dollar 18%
Medical Coverage 100%
Dental/Vision/Life 91%
Company Car 57%
Cell phone
93%
Auto Allowance 61%
Pd Spouse Travel 51%
Laptop 58%
Community Bank
CEO
Base $370,811
Variable Pay 27%
401-K 98%
Pension 29%
Defined Contri PL 98%
Employee Stock Pur.
15%
Retire. Profit sharing
20%
Roth IRA 28%
Medical Coverage 100%
Dental/Vision/Life
78%/34%/17%
Company Car 58%
Cell phone
97%
Auto Allowance 72%
CEO PAY $600M - $1B
Not adjusted to local market

24. To create a compensation and
performance culture where solid
performers are not hurt when the
sector is down nor are average
performers given the keys to the
kingdom when the market is okay.
Hasn’t the goal
always been to
attract and
retain the best
talent to deliver
long term value
to the org.?

25. Christie Summervill
CEO
BalancedComp,
LLC
Helping you establish
balance in your
compensation practices
316-927-2668
Christie@balancedcomp.co