Analyzing Cash Incentives and Bank Performance: Trends for CEOs and CFOs in 2023

Overview of Findings and Analysis

During 2023 and early 2024, we engaged in numerous discussions with our clients regarding incentive plans. Many were concerned that these plans would not pay out at targeted levels. A significant factor in this concern was the performance of banks; many failed to meet their budget targets.

To investigate this further, we tapped into our internal database. We analyzed 177 CEO and 106 CFO positions from banks nationwide. Our goal was to assess cash incentive and bonus payments across these roles. Specifically, we wanted to determine if these payments had decreased in 2023 compared to the previous two years.

Findings on Cash Incentives and Bonuses for CEOs and CFOs

Our analysis revealed noteworthy results.

For both CEO and CFO positions, the median value of cash incentive payouts declined in 2023 compared to 2022. Specifically, there was an approximate 18% decrease for CEOs and around 24% for CFOs. This data indicates a significant shift in cash incentives. Notably, cash incentives and bonuses for CFOs remained relatively stable between 2021 and 2022. On the other hand, CEOs experienced a modest increase in cash incentives from 2021 to 2022.

ROAA and ROAE Findings

In addition to cash incentives, we also examined the year-end ROAA (Return on Average Assets) and ROAE (Return on Average Equity) performance for each bank linked to the CEO and CFO analysis. Our findings showed a clear correlation between ROAA, ROAE, and cash incentives.

The median 2023 ROAA for these banks dropped by approximately 17% compared to 2022 and 2021. Similarly, 2023 ROAE revealed a decrease when compared to the previous years. It's worth noting that about 70% of banks reported a decline in both ROAA and ROAE from 2022 to 2023.

Current Trends in Annual Incentive Plan Designs

Given the current economic landscape, many banks are adjusting their annual incentive plan designs. Here are three prevalent trends we observed:

1. Widening Payout and Goal Ranges

Economic uncertainties have prompted banks to widen the payout and goal ranges in their annual incentive plans. Many banks have found it increasingly difficult to predict annual budgets during challenging economic times.

To adapt, several banks are now:

• Lowering their threshold payout level from 90-95% to 80-85% of the budget.

• Adjusting payouts, resulting in approximately 25% of the target amount for underperforming metrics.

  
  

2. Incorporating Strategic and Department Goals

An increasing number of banks are integrating strategic or departmental goals into their annual incentive plans. These goals, encompassing aspects like core deposit growth and credit quality, generally receive a 10-25% weighting in the overall performance scorecard for executives.

This approach enables banks to tie payouts to objectives that prioritize long-term viability over purely profitability. Moreover, it's aligned with best practices outlined in the Sound Incentive Compensation Guidelines from regulatory agencies.

3. The Use of Discretion in Payout Decisions

Another emerging trend is the inclusion of discretion within annual cash incentive plans. Many banks now utilize a discretionary component, commonly capped between 10% and 20% of the total incentive award.

Discretion allows banks to reward executives for meeting goals that are challenging to quantify. It also enables the Board to adjust incentives based on various performance factors, such as:

• Regulatory ratings,

• Credit quality issues,

• Performance reviews.

  
  

As illustrated by the Blanchard Consulting Group 2024 Compensation Trends & Employee Benefits Survey, about 93% of banks provided cash incentives or bonuses for their performances in 2023.

Our analysis reveals a strong correlation between pay and performance within these incentive plans. The decline in cash incentives for CEO and CFO positions reflects the lower profitability and overall financial performance observed in 2023. This serves as a reminder that annual incentive plans are designed to adjust variable pay based on annual results.

If you have any questions regarding this study or need assistance with compensation consulting, please reach out to the Blanchard Consulting Group at info@blanchardc.com.

By Michael Blanchard, Matt Brei, and Jeff Fairchild

Findings are supported by proprietary information from Blanchard Consulting Group’s internal database, data from S&P Global, and the 2024 Blanchard Consulting Group’s Compensation Trends & Employee Benefits Survey.