TOTAL COMPENSATION

Julia A. Johnson Senior Manager, Talent Management

Wipfli, LLP Green Bay, WI

jajohnson@wipfli.com 920-662-2876

August 9 & 10, 2018

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Total Compensation

Date or subtitleGraduate School of Banking 2018Julia Johnson, Senior Manager

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Session Highlights

Purpose of a Total Compensation Plan

Components of Total Compensation

The Role of Each Component

Compensation Strategy Considerations

Definition of a Compensation Philosophy

Total Compensation “Mix”

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Session Highlights

Developing a Base Compensation Structure

Developing Annual Cash Incentives

Long Term Incentive and Deferred Incentive Basics

AIP and LTI Plan Documentation

Compensation Risk Assessment

Key Benefit Offerings and Considerations

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Purpose of a Compensation Plan

To ensure pay is competitive and aligned with the compensation philosophy

To ensure pay is established and administered fairly and equitably for the work being performed

To recognize the value each position and employee brings to the bank

To attract, motivate, and retain talent

To provide administrative guidelines for compensation-related decisions

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Compensation Component Roles

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Compensation Component Attract Retain

MotivateChange

Behavior

ProvideSecurity/

ProtectionShort-term Long-term

Base Salary X X

Annual Incentives X X X X

Long-Term Incentives X X X

Basic Benefits X

Supplemental Benefits X

Supplemental Retirement Plan X X

Perquisites X

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Compensation Strategy

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Compensation Component

25th Percentile (Lag)

50th Percentile (Meet)

75th Percentile (Lead)

Base Salary

Annual Incentives

Long-Term Incentives

Basic Benefits

Supplemental Benefits

Supplemental Retirement Plan

Perquisites

Total Compensation

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Formal, Written Compensation Philosophy

Board Compensation Committee

Reward mix and market position (articulates the purpose of each component)

Base compensation

Annual incentive

Long term incentive

Reward focus (bank, team, individual)

Retirement philosophy (SERP)

Perquisites

Guides compensation decision making

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Total Compensation Component Mix

EXAMPLE

Base Salary

Annual Incentive

Long-Term

IncentiveBenefits Retirement Perqs Total

Comp

Executives/Senior

Management

AboveMarket

Above Market

Above Market

Above Market

At Market

Below Market

Above Market

Management/Supervisors

At Market

Above Market

Above Market

At Market

At Market NA Above

Market

EmployeesSlightly Above Market

At Market NA At

MarketAt

Market NASlightly Above Market

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Developing a Base Compensation Structure

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Overview of Base Compensation Structure

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Purpose and Objectives

Philosophy and Strategy

The Basic Steps

Team and Tools

Research and Analysis

Documentation

Communication

Employee Questions

WHAT YOU NEED TO KNOW

WHAT YOU NEED TO DO

WHAT YOU NEED TO SAY

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Base Compensation Strategy Considerations

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EO

SM/DM

Staff

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The Basic Steps

Create a Compensation Committee

Develop/update job descriptions

Conduct internal equity analysis

Conduct an external market analysis

Design a salary structure

Conduct a comparative ratio analysis

Develop merit impact guidelines

Create and execute communication plan

Develop administration policies

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Create Compensation Committee

Usually comprised of senior management members and the human resources leader.

It should consist of three or five members (an odd number) and represent a cross-section of the Bank.

Committee members will need to make a long-term commitment and be willing to work together to make potentially tough but fair decisions (must be able to separate the people from the position).

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Develop/Update Job Descriptions

Well-designed compensation systems begin with clear documentation of job accountabilities, responsibilities, and qualifications:

• Title• Exemption status (FLSA considerations)• Reporting relationships• Position summary• Primary accountabilities and responsibilities• Secondary responsibilities• Education, experience, and other requirements• Working conditions• Employment At-Will and ADA disclaimer

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Conduct an Internal Equity Analysis

An internal equity analysis determines the relative value of each position to every other position within the bank on the basis of compensable factors.It is highly effective for a bank to establish a

position’s relative worth within the bank before it conducts an external analysis.Typically this analysis is accomplished through the

Compensation Committee or an independent third party (to assist in testing the accuracy and completeness of the job descriptions).

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Point Factor Evaluation Method

The Point Factor Evaluation Method breaks jobs down into identifiable compensable factors by assigning levels and points within the evaluation criteria.

This provides uniformity of evaluations, determines relative value of different positions, and addresses comparable worth issues.

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Point Factor Evaluation Method

Some of the most common factors are:• Skills – education, experience, complexity, initiative,

and ingenuity• Responsibilities – contacts, equipment or process,

confidential information, safety of others, and supervision of others

• Effort – physical demands and mental or visual demands

• Job Conditions – working conditions and unavoidable hazards

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Point Factor Evaluation Factors and Levels

Points assigned to factors and levels

Consider the job requirements only, not the job incumbent

Assign an appropriate point value to each of these factors and levels.

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Point Factor Evaluation Sample Results

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Conduct an External Market Analysis

An external equity analysis determines the market value of each position by comparing it to published compensation data and/or to customized survey results.

Use the job description to match the survey job descriptions to each position’s role and responsibility.

Do not rely solely upon job title as role, responsibilities may vary.

A reputable survey will have an adequate sample size and sound compensation survey methodology practices.

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Conduct an External Market Analysis

External Data and Format Considerations Survey name Survey job Demographic Number of organizations Aging Factor Weight Median (average where median not available) Weighted and Aged Bonus / Incentive Total Cash Compensation

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Design the Base Compensation Structure

After completing the internal and external equity analyses, design the compensation structure.

Typically, the external market analysis will be the primary consideration for the development and placement of positions within the salary structure.

Sort positions by external market (equal value) and calculate a midpoint average for that particular group of positions.

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Design the Base Compensation Structure

This midpoint average will assist you in defining the pay groups throughout the salary structure.

Development of the salary structure typically begins with the top position; subsequent ranges are then developed on the basis of the remaining pay groups.

Typically, there are approximately 10% progressions between midpoints; however, there may be higher progressions between upper management positions.

All positions are then incorporated into the salary structure.

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Design the Base Compensation Structure

Evaluate the preliminary salary structure to determine if the pay groups make sense.Consider the internal equity analysis and make any

necessary adjustments on the basis of the relative value of the positions.Internal equity considerations are brought into focus

if the value of the position internally differs from the external market and/or if external market data is unavailable given the uniqueness of the position.

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Base Compensation Structure Example

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Conduct a Comparative Ratio Analysis

A compa-ratio analysis allows the bank to determine where current rates of pay fall in relationship to the newly established salary structure midpoints. A highly effective tool for compensation administration to ensure fairness and equity.

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Develop Merit Decisions Impact Worksheet

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Develop Plan Administration Guidelines

Develop a written compensation philosophy

Outline plan objectives

Identify who has responsibility for the plan

Describe importance and use of job documentation

Describe how the internal and external equity analysis process occurs

Describe how the salary structure will be administered

Outline how pay adjustments will be handled

Update annually – merit increase considerations

Incorporate tools utilized

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Plan Maintenance

After a compensation structure has been designed, it is just as important to maintain its equity and consistency as the organization and market changes. The Bank should develop a plan to ensure, at a minimum, the following are addressed on a regular and ongoing basis. Job descriptions are updated annually Compensation structure is reviewed and are adjusted to reflect

market structure movement Conduct a full review at least every three years Manage employees falling outside the established

compensation structure ranges

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Communications Plan

Manage employee expectations

Overcome entitlement mentality through communication

Compensation is an emotional topic

Important to communicate why and how the compensation plan was developed

Good communications will show employees you want to be fair and consistent in wage administration

Respond confidently and directly to questions

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Why Base Compensation Plans May Fail

Lack of compensation philosophy

Lack of compensation strategy

Inaccurate job descriptions

System design flaws

Poorly managed employee expectations

Poorly trained managers and supervisors

Plan is allowed to become outdated

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Developing Annual Cash Incentives and Long Term Incentives

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Importance of Plan Design

Misaligned and/or flawed incentive plans encourage risk-taking behavior that may

reward short-term gains without consideration of long-term risks, thereby jeopardizing the

safety and soundness of financial institutions.

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Corporate Governance

Form an informed compensation committee composed of outside directors.

Ensure all decisions impacting compensation risk are approved by the committee.

Allow committee access to external experts.

At the time payments are approved, have the committee conduct a “postmortem” opportunity to discuss necessary adjustments for the next plan year.

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Goal Setting

Tie goals to budgeted financial results as derived from and aligned with the strategic plan.

Determine who establishes team and/or individual goals.

Establish goals before the performance period.

Determine appropriate thresholds and maximums.

Cap payouts at a reasonable level.

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Annual Incentive Considerations

Individual Department Bankwide

CEO X

EXEC/SM X X

Exempt X X X

Employees X X X

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What performance criteria are appropriate to use as a basis for annual incentive awards?

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Annual Incentive Targets - Examples

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Target RangesTier Position As % of Salary

I CEO 20 - 50%

II Executive Management 15 - 35%

III Department Managers and Commercial Bankers 10 - 25%

IV Staff Support Managers 5 - 15%

V Employees 3 - 10%

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Performance Measures

Can be measured and quantified

Are tied to strategic plan

Use absolute and/or relative goals

Use “gates”/qualifiers to manage risk

Balance bank, team, and individual

Keep it simple and understandable

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Stress Testing

Run “what-if” scenarios for all incentive arrangements.

Test scenarios against YTD results periodically.

Adjust accounting accruals periodically to reflect likely outcomes.

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Long-Term Incentives

Create an equity stake – perceived or real

Increasing critical component to attract and retain talent

Privately held banks competing with publicly traded institutions for top-tier talent

Must be tied to senior management performance

Should create an alignment of management priorities with shareholder priorities

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___ Equity opportunities are not appropriate at the Bank Provide long-term orientation Link executive financial reward opportunities with shareholders Retain executive talent___ Limit equity opportunities to key executives only___ Provide equity opportunities to broad key employee group Reward individual executive performance Reinforce teamwork among executive team___ Other: __________________________________________

Long-Term Incentives Philosophy

What is the Bank’s primary objective(s) in providing long-term incentive opportunities to executives?

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Long-Term Incentive Options

Stock OptionsRestricted StockPhantom StockStock Appreciation Rights (SARS)Value Appreciation Rights (VARS)Performance UnitsDeferred Compensation Plan(s) Supplemental Executive Retirement Plan (SERP)

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Descriptions

LTI Option DescriptionStock Options Provide participants with the opportunity to purchase a fixed number of shares at a

fixed price over a specified period of time after vesting requirements are met. Stock options provides the potential for substantial rewards without the use of cash resources, requires no upfront investment by the executive, promotes shareholder mentality to leadership, and raises capital. Stock options are most commonly found in public organizations, may dilute the ownership percentage of current shareholders, and are a market risk for the executive which recently has caused stock options to fall out of favor. The two types of stock options are incentive stock options and nonqualified stock options. Nonqualified stock options are more prevalent. Tax treatments for stock options would need to be considered.

Restricted Stock Shares of stock are given or sold at a discount to an executive who is restricted from selling or transferring for a defined period of time. If the executive remains employed through the restricted period, the shares vest. There are typically a number of years between grant awards. It would be important to tie awards of stock to individual and Bank performance. There is no executive investment required therefore minimal risk to the executive with potentially high rewards. .

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Descriptions

LTI Option DescriptionPhantom Stock/Stock Appreciation Rights (SARS)/Value Appreciation Rights (VARS)

Provide participants with reward opportunities that mirror stock options without the use of stock. Rather they are tied to the appreciation of bank stock value and are typically used as incentives when stock is not available as is often the case in private/closely held banks.

Performance Units Provide participants with financial reward opportunities based on the achievement of predetermined long-term goals which are typically expressed in terms of corporate profitability rather than stock value.

Deferred Cash Compensation Plan

Provides participates with an annual cash contribution to the plan for achieving specific metrics and targets. These plans typically have a rolling vesting period with an annual interest rate applied each year.

Supplemental Retirement Plan (SERP)

Provides participants with deferred compensation over a period of time after retirement. A supplement executive retirement plan provides participants with a defined amount of income beginning at retirement for a fixed number of years. Together the Bank and the executive determine the retirement shortfall of income and identify what amount of that shortfall will be paid to the executive on an annual basis.

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AIP and LTI Plan Documents

Develop plan documents that clearly present plan features and provisions, including plan period, timing of payments, performance thresholds, expectations, etc.Reserve and protect rights of the bank.Do not alter the employment at-will status.

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Compensation Risk Assessment

Inventory all compensation arrangements.

Identify risks associated with each plan.

Conduct a team risk assessment.

Present review findings to compensation committee and/or board of directors.

Modify incentive arrangements as needed.

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Key Benefit Offerings and Considerations

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Total Rewards Mindset

The monetary and nonmonetary return provided to employees in exchange for their time, talents, efforts, and results. It refers to

everything that employees value in the employment relationship.

- WorldatWork

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What A Total Rewards Mindset Involves

It involves the deliberate integration of five key elements of: Compensation BenefitsWork-LifePerformance and RecognitionProfessional Development and Career Planning

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Benefits

Social Benefits•Federal and State Unemployment (FUTA, SUTA)•Workers’ Compensation•Social Security (FICA)

Group Benefits•Medical, Dental, Vision, Drug•Mental •Life and AD&D•Short and Long Term Disability•Retirement

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Benefits

Salary Continuation•Vacation•Sick Leave•Holiday•Bereavement•Jury Duty•Military•Inclement Weather•Personal Days•Breaks

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Work-Life

Paid and Unpaid Time Off•FMLA•PTO Policies•Personal Leave

Workplace Flexibility•Alternative Work Arrangements

Health and Well-Being•HRA’s•Smoking Cessation•Weight Loss•Concierge Services

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Work-Life

Caring for Dependents•Adoption•Pet Insurance

Financial Support•Financial Planning•Legal Support

Community Involvement•Professional Associations•Community Activities•School Activities

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Performance and Recognition

Performance•Performance Planning•Performance Feedback

Recognition•Acknowledgement•Appreciation•Cash and/or Noncash Rewards•Formal or Informal

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Development and Career Planning

Development Opportunities•Educational Assistance•Corporate Universities•On-the-Job Training•Online or External Seminars

Coaching and Mentoring Opportunities•Internal or External Mentor Assignment•Professional Memberships•Leadership and Management Training•Special Project Work

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Development and Career Planning

Advancement Opportunities•Career Planning•Skill Enhancement•Promotion/Lateral Movement•Succession Planning and Management

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Total Compensation

The role and goal of benefits in today’s diverse and ever-changing work environment is to

assist employees in effectively managing their personal life and work life. For many, this represents a cultural shift as to how (and potentially where) work is performed, how

employees are managed, and how productivity is measured.

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Questions

Julia JohnsonSenior Manager, Talent Management Consultingjajohnson@wipfli.com920.662.2876

www.wipfli.com

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