Executive Compensation
Challenge
The Board of a specialized regional lender came to McLagan seeking evaluation of total value of compensation and benefits provided to executive officers, in order to better understand the Bank’ s competitive positioning in regards to total remuneration.
The executives were covered by a generous defined benefit plan, which required increased scrutiny of compensation adjustments and the impacts of these adjustments on the total value of retirement benefits and employer costs.
An actuarial analysis was completed to determine the nominal payouts of the defined benefit plan if the executives were given 0% or 4% salary increases between 2008 and their expected year of retirement.
The Board’s concerns/goals included:
- Ensuring competitive total remuneration while being mindful that small salary increases are magnified through inclusion in the defined benefit plan formulas, and
- Secondary costs that would result in higher defined benefit plan payments, including the liability of funding future contributions.
The executives’ concerns/goals included:
- Potential of compensation becoming uncompetitive if salary increases are not given, and
- Recognition that retirement benefits represented a culmination of decades of contribution and implicit past trade-offs of less cash for more benefits.
Solution
McLagan met with the Board and management to understand their concerns and devise a methodology that accounted for expected cost to the firm and actual and perceived value delivered to the executive.
“Tally Sheets” of 0% and 4% salary increase scenarios were created for each executive to determine the incremental cost by year until the date of retirement and actual value delivered to the executive.
Results
The board ultimately decided to limit salary increases based on competitive total remuneration. The incremental value of retirement benefits outweighed compensation in importance to the executives (as long as compensation didn't decrease) as several executives were close to their retirement date.
