Friday, November 26, 2010

Compensation Conundrum: Do banks pay CEOs too much?

Banking has taken a beating in the media and court of public opinion in the past two years. Some of it has been unfair, particularly with how banks were associated with subprime mortgages (very few were originated by banks) and how community banks were lumped in with the practices of very large financial institutions (FIs). But if we are to be honest with ourselves, some of it is deserved and we should take positive steps to repair our image, better serve our customers, and lead us into the future.

I would like to look at three issues regarding our profession, and focus on Executive Compensation in this post:

1. Executive Compensation;
2. Fees; and
3. Product Pushing

Executive Compensation

My commentary may be the equivalent of digesting castor oil for some readers and it may not earn me fans in the executive suites of the very large FIs. But I do not think the value some executives deliver is commensurate with their compensation.

An egregious example is Charles Prince, former CEO of Citigroup. He took control of the behemoth bank when the stock traded in the $50’s, left amid huge losses in subprime mortgages when the stock price fell into the $30’s, and it is now trading at around $4. He didn’t receive severance, but he somehow received compensation and benefits of around $29 million at departure (see link). Was he worth it? I think I could have delivered that performance for much less.

In an era where community banks differentiate themselves on service and relationships, it is mysterious why we pay executives so much more than those responsible for delivering the service and building the relationships. I understand in a community bank environment executives serve this function also, but community FIs should examine their compensation strategies and the makeup of their employee base to determine if both are consistent with executing a relationship driven strategy. Paying the senior executive several multiples more than those that determine the success or failure of your strategy may not be a very good practice. See table below.

The CEO compensation in the table is highly skewed towards smaller banks, as my experience has been that they typically make more. However, I don’t want to suggest that CEO’s or other executives make less. On the contrary, I am suggesting that those most responsible for executing on your strategy are compensated more.

I understand the most extreme examples reside in mega-banks, but the video below represents how our entire industry may be viewed.

How can a community FI achieve a state where successful customer relationship staff are compensated more? The FI should look within itself. What percent of staff are dedicated to serving existing customers and winning new ones versus staff that is behind the scenes? In my experience, community FIs over-invest in outdated processes that should have long ago been replaced with technology. Having less support personnel frees up greater resources to elevate the quality of relationship management staff, improve retention of such employees, and differentiate you from the mega-bank.

What are your thoughts on your FIs compensation strategy?

I will discuss Fees and Product Pushing in future posts.

~ Jeff

Link to Charles Prince story

Link to BLS stats

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