A number of banking companies are getting tough on compensation, and even greater changes are expected.

Citigroup Inc., JPMorgan Chase & Co. and SunTrust Banks Inc. are among bigger banking companies that have implemented executive compensation rules that go beyond the scope of those under the Troubled Asset Relief Program. Others, such as Associated Banc-Corp, are diving even deeper into their organizations to make changes in how they compensate front-line, nonexecutive employees such as loan originators.

"There is a structural shift with compensation," said Chris Crawford, the executive director at Longnecker & Associates, a consulting firm in Houston. "We are seeing banks place a greater emphasis on making good quality loans and producing sustained earnings. It isn't like the pre-2008 model when the message was grow, grow, grow."

To some, the idea of paying incentives based on overall corporate performance rather than production is far from novel. Aubrey Patterson, the chairman and CEO of BancorpSouth Inc. in Tupelo, Miss., said that is how his company has operated for years. "We have never been quota-driven," he said. "We've always followed a team approach more than production."

In the industry, Tarp clearly has forced the issue, mandating tighter controls over some aspects of compensation. Banking companies operating under the program are barred from making "golden parachute" payments to senior executive officers. Those officers are also subject to clawbacks, meaning that they must return bonuses and incentive compensation if those payouts were based on materially inaccurate financial information or flawed performance.

Crawford said banks had all but put incentive compensation on ice last year, with boards shifting to discretionary payouts as revenue and profit forecasts were uncertain. "Now that they see more predictability in the economic environment, they are looking to re-establish a formula," he said, presenting an opportunity for directors to make adjustments to how bonuses are earned.

Several companies went even further than Tarp with clawback policies, including two companies that have already exited Tarp. JPMorgan Chase said in its 2010 proxy statement that it can recoup bonuses when executive actions cause "reputational harm" to the company or its business activities, while members of the operating committee and business-line leaders are also subject to clawbacks. Citi implemented a policy where bonuses are returned if the company discovers that "an executive materially violates risk limits."

SunTrust, which remains in Tarp, said in its proxy materials that it had expanded its clawback and forfeiture provisions to all 2010 incentive pay plans.

Laura Hanf, a compensation consultant for Pearl Meyer & Partners LLC, said she is seeing more regional banking companies express interest in clawbacks as a way of aligning the interests of management and investors.

But Crawford said he is skeptical about the efficacy of clawback provisions. "It's going to be hard to enforce that," he said. "Once someone has paid the taxes on incentive compensation, it will be hard to get it back."

Rather, consultants said the more effective changes could involve lengthening the amount of time it takes to earn an incentive. Many banks are looking to scrap the long-standing model based on annual payouts to ones that cover multiple years. Others are interested in replacing time-based vesting altogether, issuing performance-based restricted stock instead.

Hanf said another area ripe for review involves incentives for loan officers, particularly those dealing in commercial lending. However, she said, few banking companies have reached a stage of implementing such changes.

"A common thread involves variable payouts supported by good quality loans that hold up and are profitable over a period of time," Crawford said. Such programs could look back up to three years to gauge the performance of an originator's portfolio.

Another increasingly popular change involves linking lending officers' rewards with credit quality or earnings, instead of with return on assets or return on equity. The thinking is that using earnings as an incentive factor encourages quality loan-making. If officers push through bad loans, earnings would fall and their compensation would be reduced, advocates of the approach say.

But trying to tie compensation to the bottom line can present a delicate balancing act.

John Halechko, the director of retail sales and service at Associated Bank, said the company last year started emphasizing earnings per share as part of its overall formula for determining incentives. Associated, however, did not want to discourage lending, either, so it still has incentives for production.

"Our retail compensation plan is aligned with all of our key products," he said. "When it comes to compensation for retail colleagues who originate loans, compensation is tied to loan volume. Since our retail loans are approved through a centralized processing unit, retail colleagues are not 'penalized' if a loan goes into default."

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