The take-home pay of top bank executives skyrocketed in 1993 as banks raked in record profits, according to an American Banker survey.
At the same time, banks continued shifting compensation toward bonuses and stock programs based on the meeting of specific financial targets.
The trend toward performance-based compensation, which first gathered steam in the late 1980s, accelerated in 1993 as the result of new federal rules aimed at linking executive pay with shareholder value.
"Banks come from an environment of paying for the level or title. But banks, along with the rest of the world, are shifting toward paying for performance," said Lee Pomeroy, a consultant in the New York office of Egon Zehnder International, an executive search firm.
"At the extreme we have banks like Bankers Trust or J.P. Morgan saying, 'We don't want to have five pretty good vice presidents; we'd rather pay to have one killer managing director,'" Mr. Pomeroy said.
Citicorp chairman John S. Reed received the highest compensation of any bank senior executive in 1993, taking home $4.2 million in cash, an 87% increase over 1992. His raise came in a year in which Citicorp's profits tripled to $2.2 billion.
BT's Sanford No. 2
Mr. Reed was followed closely by Charles S. Sanford Jr., chairman of Bankers Trust New York Corp., who took home $4.07 million, 61% more cash than in 1992, according to an American Banker analysis of proxy statements filed by the nation's 100 largest commercial banks.
Indeed, most of the industry's highest-paid executives saw double-digit pay raises. The industry's biggest raises were handed out by Wells Fargo & Co. -- to president Paul Hazen and chairman Carl E. Reichardt, whose pay increased 173% to $1.7 million and 155% to $2.2 million, respectively.
While the numbers are high, banks justify the raises by pointing to the dramatic improvement in financial performance of the country's largest banks.
New Securities and Exchange Commission rules require the executive compensation committees at banks not only to show in some detail how they arrive at their awards, but to put their signatures on the explanation. Only outside directors with less than $60,000 worth of business with the bank per year can sit on the committee.
The new tax law requires incentive plans to be tied to financial performance. Compensation committees may exercise discretion in granting awards -- but only to reduce pay, not, as in the past, to increase it.
'Vision and Tenacity' Cited
In outlining its program, Citicorp said it allocated compensation based on all-time high operating earnings and operating margin, and return on equity of 15.3% in 1993.
Mr. Reed was rewarded for his "vision and tenacity in overseeing Citicorp's return to corporate strength," the bank said.
"Mr. Reed personally deserved credit for accomplishing this recovery without disposing of any of the core businesses which contribute to Citicorp's unique global strength and balance."
While the new rules have tightened the procedure for allocating pay, bank performance had been reflected in executive compensation even earlier.
Between 1989 and 1992, when Citicorp suspended its dividend, it did not hand out executive bonuses. Mr. Reed took home $1.2 million in 1990, $1.22 million in 1991, and $2.18 million in 1992, when bonuses were reinstated.
In 1990, when most of the industry was in trouble, only 11 bank executives took home more than $1 million.
In 1993, median return on assets at banks with more than $10 billion of assets increased 21.7% in 1993, to 1.18%, according to SNL Securities, while median return on average equity rose 15.38%, to 15.38% from 13.33%.
Even so, banks do not reward their senior executives as well investment banks, brokerage firms, and insurance companies do, according to a study by KPMG Peat Marwick.
Executives holding one of the top three offices at a group of 10 banks -- including Chase Manhattan Corp., Chemical Banking Corp., Citicorp, and Wells Fargo -- received an average of $1.7 million in take-home pay.
By comparison, such officers at nine financial services companies, including Merrill Lynch & Co. and the Travelers, got twice as much in average cash compensation -- $3.62 million.
Base salaries in 1993 inched upward.
On average, chairmen of the top 35 banks saw salary increases of just 6% over each of the last two years -- just above the cost of living increase -- according to New York-based Pearl Meyer & Partners Inc., a specialist in compensation packages for banks that does its own survey of proxy filings.
The huge salary increases reflected in the American Banker numbers were driven by bonuses, many of them linked to measures such as net income and return on equity.
Such annual incentive payments accounted for 32% of executives' total compensation, up from one-quarter in 1992, according to Pearl Meyer.
In part, banks are using performance-based compensation to encourage a sales culture, along the lines of the brokerage firms and investment banks with which they compete.
Incentive plans such as stock plans "really make an impact on that teamwork effort," said Martin Zuckerman, executive vice president at Chemical.
The tax rule change also has helped shift compensation toward performance-based measures.
The rule states that executive compensation over $1 million is deductible only if it is part of a performance-based pay plan approved by shareholders.
Mr. Reed was the only bank executive to receive a base salary of over $1 million in 1993.
So far, only 18 of the banks surveyed by Pearl Meyer had actually Complied with the tax rule by submitting their incentive plans for shareholder approval. But 1993 is considered a transitional year, so banks have another year to submit their incentive plans to shareholder vote.
Even retirement plans are affected by the new tax laws. The new law reduces the maximum amount of compensation, from $235,000 to $150,000, that can be considered for pension, profit sharing, and 401(k) plans.
As a result, some banks are setting up separate plans, while others are simply taking the difference away from the executives, and adding it to the bottom line of the bank, says Eric P. Rader, a principal in the Todd Organization, Greensboro, N.C.
Not included in the American Banker figures are components of pay such as pension plan and retirement plan payments, stock options exercised, or long-term bonus payments such as stock option grants that are based on company performance for longer than one year.
Growing in Popularity
Stock options are difficult to measure because of their uncertain future value.
Yet they, more than any other component of compensation, can make their recipients rich.
Stock options, by their nature linked to performance goals, are growing in popularity.
"Both the SEC and the IRS would like you to use stock options because they are the best method of rewarding executives for increasing Shareholder value," said Rosie Orens, a partner at KPMG's performance and compensation consulting practice.
The value of stock options as a percentage of total compensation rose from 25% to 29%, and that of annual incentives rose from 21% to 29%, according to Pearl Meyer.
But the exercise of stock options has remained fiat over the last three years, at about 1.1% of available options.
Of the banks surveyed by Pearl Meyer, 14 said the stock programs were aimed at raising the equity position of senior executives, implicitly increasing management accountability.
Restricted stock awards are also popular.
They have a tangible value -- the market value at the time of the award.
Restricted stock payments gained popularity in the troubled late 1980s as a way of rewarding executives without paying out cash.
"Restricted stock is a good vehicle for retaining executives," said Pearl Meyer partner Diane Posnak.
Several banks -- notably NationsBank Corp., Chase, Chemical, and Citicorp -- have granted one-time awards of stock options to all nonsenior employees.
NationsBank, which has a restricted stock plan for senior executives, has considered a stock option program for senior executives, said Chuck Loring, a vice president.
Banks may be hurrying to take advantage of stock option programs before the Financial Accounting Standards Board follows through on a plan to require banks to charge options to earnings beginning in 1997.
If a charge is required, "the cost of a stock option grant like ours would discourage any company from incurring the cost" in the future, Mr. Loring said.