When it comes to compensation, chief executive officers of banks believe they should be rewarded for the performance of their banks, not for their personal performance.

That's the key finding of the American Banker/Heidrick & Struggles second annual CEO survey.

The survey was mailed to CEOs at the top 300 U.S. banks. Although only 24 responded, making it difficult to draw statistically valid conclusions, the responses do indicate some key career and demographic characteristics of this elite group:

* More than one-fourth had a least 36 years banking experience.

* Nearly half earned at least $500,000 last year.

* More than one-third are between the ages of 56 and 60.

Here's what they said:

* Most Fortune 100 CEOs are not overpaid.

* Bank CEOs are not underpaid.

* Most of their boards had set specific Performance criteria for them.

* A large majority own stock in the bank, but close to half own less than 1%.

* They all agree that CEO compensation should be reflective of bank performance.

"In general, I would say that CEO compensation is not tied to performance," said Kathy Ferguson, human resources supervisor at Primerit Federal Savings Bank in Las Vegas.

"Rather it has a historical basis. That is, pay for a new CEO will be based on what the last person made." It's a spiral that no one has the courage to break," Ms. Ferguson said.

Today's Changing Climate

"CEO compensation appears to be a simple subject, but in fact it's very complex," said Emanuel Monogenis, a Heidrick & Struggles managing partner. It has been made complex, he said, by the changing character of today's banking climate. Consultants and compensation specialists alike agree with Mr. Monogenis.

The big failure in the measurement of compensation, said David Simmons of the Hay Group, is that there has not been sufficient accountability for performance in the changing regulatory environment.

It used to be that risk in the banking business was well regulated. Performance versus compensation was easily calculated, the experts agreed.

Changing Risk Dynamics

But changing regulations changed the risk dynamics. It got to the point where the accounting system no longer was able to accurately reflect performance, said compensation consultants.

And boards were increasingly composed of people from outside industries who saw banks as becoming unfettered. They thought they could use the same techniques for a bank that they used for a manufacturing firm. Consequently, incentives for banking CEOs went up on the basis of return on equity and return on assets, as they would in, say, a computer company.

Compensation for bank CEOs came to count on CEO integrity, "and an incentive plan should not count on integrity," said Mr. Simmons.

"That's why I advocate long-term thinking in the programs I design," he said. "I put a strong emphasis on base salary and long-term growth in it, and not so much on bonuses."

Balancing Act for the Board

Boards, and especially the compensation committee, are in a quandary, said David Cates of Towers Perrin.

"They have to be in the ballpark to be competitive, but they don't want to accused of being part of the upward spiral," he said.

So the board must perform a balancing act. The board's goal, said Mr. Cates, is to create rewards and accountability for the right kind of behavior.

"The board's challenge is to juggle accountability with motivational reward," he said.

The survey finding on setting performance criteria for CEOs proves that bank boards are moving in the right direction, said Mr. Cates.

But the survey findings on stock ownership are troublesome, he said.

Although most bank CEOs own stock in their banks, less than half hold more than 1% of the stock outstanding.

The best performance results may come when CEOs have a more significant ownership stake, said Mr. Simmons. "Maybe they should be required to leave their stock in the company until they retire."

This concept of ownership is currently lacking for CEOs.

"If we can," said Mr. Simmons, "maybe we should look at an incentive that creates ownership as some multiple of compensation."

Focus on Aberrations

But there's a problem here as well: shareholder backlash.

One of the factors that made pay packages look so huge in the early '90s was that many CEOs were cashing in on their stock options that had been awarded in the mid to late '80s. Thus, stock options, by swelling CEO pay packets, may have been partly responsible for shareholder accusations of CEO compensation abuse.

"Shareholder backlash has focused on the aberrations," said Mr. Cates. "They've focused on superstars and on compensation packages at the $2 million level."

Few bankers - even those at the top of the top organizations - make that kind of money. [See related story and statistical rankings, pages 5A and 8A.]

"Shareholder backlash [happens] when performance is dismal, the average worker is hurting, shareholder value is down - and the CEO's pay goes up," said Mr. Simmons.

One way, experts said, to stem the backlash is full disclosure per the proposed SEC proxy change, which would require the board to explain in detail how they arrived at the compensation packages for the five highest-paid executives of the bank.

"This is very important to shareholders," said Mr. Cates.

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