Tying a director's compensation to a company's performance-a concept sweeping corporate America-is slowly making its way into community bank circles.
Bankers and executive compensation experts say even some of the smallest banks are starting to pay their directors in stock options, deferred compensation, or an increasingly popular form of compensation dubbed phantom stock.
The benefits are supposed to flow in both directions: The director will view the options as a strong incentive to boost the bank's performance, while the bank and its shareholders will benefit from a director's ownership in the bank.
"I'm seeing a lot of enthusiasm for stock-option plans both for officers and directors," said Jeffrey C. Gerrish, a banking attorney at Gerrish & McCreary, Memphis. "In community banks, there was always some perception these plans were too complicated, too difficult to implement."
But Mr. Gerrish said that's changing as banks look for ways to appease shareholders while searching for ways to attract and retain good directors.
For small, closely held banks that can't offer options because they would be too dilutive, deferred compensation plans similar to 401(k) plans and phantom stock are also becoming options.
In a deferred compensation plan, directors' fees are put into a fund and accrue interest and principal tax-free until directors cash out. Some banks are adjusting the interest in line with their performance. In the phantom stock-option plans, also known as look-alike plans, interest on the deferred fees is tied to the bank's return on equity.
"I think it will get the directors as a group to concentrate more on the bottom line performance in making decisions that affect the bottom line," said Ed Vogelsinger, chairman of Pontiac National Bank in Bloomington, Ill. "Hopefully, it will get them thinking in that direction, instead of perhaps too much of the time thinking about smaller items management needs to resolve itself."
Pontiac National, a $200 million-asset bank, agreed to adopt a stock- option plan for officers and directors last summer. But it is still working out the details, Mr. Vogelsinger said.
He said making directors more accountable to the bank's performance was the main goal.
For other banks, compensation such as stock options has become a recruitment tool. Concerns of liability and more pressure on directors from regulators has made recruitment of directors a tad more difficult for even the most prestigious community banks.
Offering directors who are usually already shareholders a bigger stake in the bank can strengthen their ties to the bank, bankers said.
"I think it's a good idea," said Joseph Williams, president of American Heritage Bank in El Reno, Okla. "Whenever we get to the point when we need to attract some outside directors, we will sell them stock or phantom stock."
David H. Baris, executive director of the American Association of Bank Directors, said his group is trying to encourage banks to tie compensation to performance. He said too few community banks are adopting such plans.
A 1996 American Association of Bank Directors survey of 128 banks showed that 9.3% provided stock or stock options to directors and 6.25% paid directors based on performance. A 1991 survey showed that about 5% of 77 banks that responded used stock as director compensation.