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Bank executive compensation tied to performance

Bank executive compensation is gradually rising back up with improving bank profits.

Publicly traded companies report this time of year pay levels in proxy statements filed with the U.S. Securities and Exchange Commission ahead of annual meetings. The proxy statements tell shareholders items up for a vote including election of board directors.

This newspaper analyzed proxy filings of the region’s seven largest banks, headquartered in Ohio.

In the cases of Fifth Third Bancorp and Huntington Bancshares Inc., the total compensation of their top executives grew in 2012, primarily in response to 2011 results. Fifth Third and Huntington turned in higher profits in 2011 than 2010, and both had record-setting years in 2012.

Last year’s higher profits could be expected to raise compensation levels in 2013 because bank CEO pay is tied to reaching goals set on company financial targets, and individual goals set on implementing strategies.

Compensation packages include cash and equity components, as well as estimates of benefits such as health and retirement plans. It includes the estimated future value of equity awards, deferred compensation and changes in pension value that executives may not receive until a future date, or may not end up receiving at all, explained KeyCorp in its proxy filing.

Actual compensation earned from equity rewards depend on future stock price and financial performance.

Fifth Third CEO Kevin Kabat’s total compensation grew 25 percent in 2012 year-over-year to $8,987,341, according to the Cincinnati bank’s proxy filed March 7. Kabat became CEO in 2007.

Fifth Third is the largest bank in the group reviewed by the newspaper with assets of $122 billion.

Cash salaries of Fifth Third officers were kept flat in 2011 and 2012, according to Fifth Third’s proxy. Bank officials said raises have been approved for 2013.

Last year was the first year Fifth Third’s top level leadership was eligible to receive their full amount of annual incentives after the federal Troubled Asset Relief Program, or TARP, which increased Kabat’s compensation. Actual incentives awarded vary and are based on performance.

Fifth Third participated in TARP from 2009 through the early part of 2011, which prohibited participating banks from paying annual incentives and excessive bonuses. Instead in 2010 and 2011, Kabat and other executives received some of their salaries paid in stock in addition to cash.

KeyCorp and Huntington also paid salary stock in past years, reported with total salary on the proxies.

Under TARP, “restrictions included strict bonus limitations, prohibition of golden parachute payments, elimination of tax gross ups on certain payments, and a mandatory clawback provision that required the recovery of compensation that was based on inaccurate financial information. Many banks have paid back the TARP funds and are now free from those restrictions,” said Mark Sollenberger, managing director of Pennsylvania-based firm Meyer-Chatfield Compensation Advisors, in an email.

“While this did have some effect on the pay practices of TARP banks, many banks…were in ‘damage control’ mode and bonuses and other compensation was limited for the most part by economic conditions,” Sollenberger said.

Stephen Steinour, chair, president and CEO of Columbus-based Huntington, received total 2012 compensation of $6,932,505, up approximately 8 percent.

Top management of Huntington, at $56 billion in assets, agreed not to accept any annual merit increases for base salary in 2013. Steinour has not accepted a salary increase since it was set in 2009 at $1 million when he was hired, according to the bank’s proxy.

Beth Mooney, chair and chief executive of Cleveland’s Key, saw the biggest climb in compensation. But last year was Mooney’s first full year in the CEO position. Her total compensation level grew 27 percent in 2012 from the year before to $6,272,426, according to Key’s proxy statement filed March 29.

Key’s total assets are $89 million.

“Banking pay with the financial crisis is down significantly from where it was at the peak in 2006 or 2007,” said Alan Johnson, managing director and founder of New York-based Johnson Associates Inc., a financial services compensation consulting firm. “2011 was a tough year, 2012 was better, so pay in the banking industry was up a little bit but not dramatically.”

In the cases of smaller area banks First Financial, LCNB Corp., The National Bank & Trust Financial Group Inc. and Park National Corp., total compensation went down in 2012.

First Financial, a Cincinnati-based bank with $6.5 billion in assets, met financial targets and raised executive salaries a “modest” 3 to 6 percent in 2012. But compensation packages of the highest-paid executives went down. Officers were eligible to receive higher annual incentives for meeting goals, but CEO Claude Davis recommended payouts be reduced to help meet the company’s cost-cutting goals.

Park National Corp., parent company of Springfield’s Security National Bank, reduced cash pay in 2007. Cash pay hasn’t changed since then, and the compensation committee has left salaries unchanged again in 2013, according to Park’s proxy.

Park exited TARP in April 2012. The bank eliminated annual incentive compensation for executives from 2010 through last year, the largest share of executive compensation in the past. Some discretionary bonuses were paid in 2012 after exiting TARP.

Also, the Newark-based bank hasn’t paid long-term stock incentives since 2005. This year the board has recommended to shareholders that Park introduce a long-term stock incentive program, said CEO C. Daniel DeLawder.

“Our compensation levels are fairly modest relative to others,” DeLawder said, whose total 2012 compensation was $1,125,967.

The main factor affecting Park’s incentives is return on equity, compared to similar size companies, DeLawder said. He said policies that encourage stock ownership in the bank align executive’s interests with shareholder’s.

“If the shareholders do better, then the officers do better,” he said.

Regulators look for the element of risk when examining compensation practices, Sollenberger said.

“As bank performance improves and earnings increase, compensation will also reflect those positive (or negative) trends,” Sollenberger said. “With the passage of Dodd-Frank and other regulatory guidelines, there is a greater focus on bank compensation. Does the pay practice promote risk and how is that risk managed?”

Compensation committees comprised of board members decide on cash and equity pay levels using benchmarking data provided by compensation consultants such as Meyer-Chatfield and Johnson Associates. Compensation levels are based on reaching targets on earnings, earnings per share, stockholder return and return on assets, among other things. Performance also considers how the company did compared to peer groups of companies of similar size and services.

Executives receive fixed salaries. More than half of the compensation levels are variable, mostly equity, determined by performance on short and long-term financial targets and strategic goals.

“For a bank CEO, it’s probably two-thirds results and probably a third around softer things around leadership and building up the organization,” Johnson said.

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