Now that rank-and-file employees have gotten a raise, it may soon be time for bank executives to get theirs.
The new tax law has been cited as the primary reason behind several banks’ decisions to raise their minimum pay rates and to give one-time bonuses to scores of employees. But the new tax law also contains provisions that compensation experts say may eventually lead to higher pay for executives as well.
The potential for a boost in executive pay centers on pay for performance, a concept that’s widely promoted by corporate-governance watchdog organizations like Institutional Shareholder Services and Glass Lewis.
Under the old law, publicly traded companies qualified for tax deductions for pay exceeding $1 million provided it was performance-based. That’s a big reason, for example, why the 2016 salaries of SunTrust Banks’ Bill Rogers and KeyCorp’s Beth Mooney were set at $1 million, but each had total annual compensation of $8.2 million, according to the latest available proxies. Much of the rest of their pay packages were concentrated in performance-based vehicles.
Most bank CEOs’ salaries hover around $1 million with the rest of their compensation attached to stock awards and bonuses, some of which can be performance-based. The $22 billion-asset PacWest Bancorp in Los Angeles paid CEO Matthew Wagner a base salary of $879,167 in 2016, but other compensation pushed his total pay to $5.2 million. At the $31 billion-asset F.N.B. Corp. in Pittsburgh, CEO Vincent Delie received a $928,009 salary and total pay of $4.6 million.
Now, companies will receive no tax deductions from compensation exceeding $1 million, regardless of whether it’s performance-based.
Without the deduction, banks and other companies are free to boost base salaries as high as they want. At the same time, companies don’t want to lower performance-based pay because it could send the wrong message that executives’ interests are not aligned with those of shareholders.
The result may be a net increase in compensation for executives, said Laura Hay, a managing director at Pearl Meyer & Partners who consults banks on pay practices.
“Salaries will rise, but it’s likely that annual incentive opportunities will not be reduced,” Hay said. “The result would be greater executive pay.”
The compensation committees of bank boards will spend much time over the coming weeks studying the new tax law’s provisions. And boards will only adjust executive compensation in a way that’s in the best interest of shareholders, said Claude Davis, the CEO of the $8.8 billion-asset First Financial Bancorp in Cincinnati.
“We’re really going to be evaluating the go-forward plan for the company,” Davis said. “We’re trying to prove to shareholders that they will see the biggest benefit from this change in the law.”
Some compensation experts don’t believe the new law will result in higher executive pay. Instead, it will only change how executives are paid, not the amount of their compensation, said Bill O’Malley, a senior director in the tax practice at RSM.
“I don’t think overall compensation will improve necessarily,” O’Malley said. “If you raise their base salary, you may cut their bonuses.”
The new tax law may also help bank directors encourage better risk management practices. Regulators have warned that pay-for-performance principles can encourage executives to take unnecessary risks.
But the Tax Cuts and Jobs Act gives bank boards the opportunity to scale back executives’ ability to take risks, said George Paulin, chairman of the compensation consulting firm Frederic W. Cook & Co.
“The bonuses are so big, you might take risks [if you are a CEO] to earn your bonus,” Paulin said. “Now you don’t have that situation.”
As for employees who don’t work in the C-suite, it’s possible there’s another reason banks were so eager to give rank-and-file employees a raise after the tax cut.
Starting this year, as required by the Dodd-Frank Act, each company must include in its annual proxy statements a ratio that compares its CEO’s pay rate with that of its median employee salary. If companies increase the minimum pay rate for all employees, it will shrink the divide between the pay received by CEOs and front-line employees, Hay said.
“You’ll be getting questions from the board about whether you are paying a livable wage,” she said. “There will be an employee morale issue. This tax reform law is going to help you get to a living wage.”
The new tax law also includes several minor changes that should help banks reduce some administrative expenses. One provision will streamline the legal requirements for establishing employment contracts, which should help banks cut costs, Paulin said. He declined to estimate the potential savings for banks.
But the biggest impact on banks won’t be the changes for tax deductions or any other provision of the new law. Instead, it’s simply the fact that banks will have far lower tax bills, said RSM’s O’Malley.
“Maybe you don’t get to deduct your executives’ salary,” O’Malley said. “But if your trade-off is a lower tax rate, you’re pretty happy.”