Now that all the proxy statements are in and we can see how much all of our CEOs are paid, it's time once again to try to figure out why these folks get paid the big bucks when the majority of the people in their organizations who actually do all the work get paid squat. For example, the average branch employee, who is completely responsible for representing the bank to a vast majority of its customers, gets paid around $30,000 to $40,000 per year, barely a living wage, and a fraction of the money paid to executives who wouldn't know a customer if they stepped on their foot.
One of the ways we evaluate CEO comp is as a multiple of median employee compensation. For the banks we cover those multiples range from a high of 374X (State Street) to a low of 41X (Bank of Oklahoma). Clearly this is a very wide range and some of the differences can be explained by size, business model, location, and other factors. However, because we look at the multiple, one would think that all of these factors would affect the total employee base as well. Clearly, one major determinant is size, but not always. For example, the average multiple for Super Regional Banks is 176X, while the average for the Regional and Super Community categories are 71X and 95X, respectively. While this accounts for some of the differences there still exists wide disparity within size categories. Bottom line: it's difficult, if not impossible, to apply general principles to explain these wide variances.
We think the answer primarily comes down to culture and how CEO comp systems demonstrate how the board and management think about "value". What interests us is not so much the actual compensation, but whether or not these CEOs deserve the kinds of multiples they receive. (Spoiler alert: They Don’t!) As a result, we evaluate compensation relative to the performance score we have calculated for each of our banks to determine who we believe is overpaid and who is underpaid. For example, our highest rated bank is Bank OZK (OZK) and their CEO has the second highest comp multiple (119x) in our Super Community category. Conversely, State Street (STT) is our lowest scoring bank across all categories, yet their CEO has the highest comp multiple across all the banks we follow by a wide margin. Coincidence? Maybe. The graphs below show the banks with both the highest and lowest multiples relative to their peer groups compared to their performance score.
We have conducted similar types of analyses using other key performance metrics. For example, two of the banks in our Super Regional category, PNC and US Bank, produce the highest ROE in that category and their CEOs rank second and third in terms of CEO comp multiples. Makes sense, right? Conversely, the bank with the lowest ROE in the Regional group, New York Community Bank (NYCB), has the highest CEO comp multiple in that sector. We are completely confused and convinced that the boards of these companies just come in once a year and throw darts at a dartboard to come up with these comp numbers, but feel free to draw your own conclusions.
Does it Matter?
The question, of course, from an analyst or investor perspective, is “Does it Matter?” Do both the relative and absolute amount of CEO compensation impact shareholder value in terms of stock performance or are they irrelevant? Unfortunately, like all the other comp-related analysis, the data is not conclusive. Ideally, there would be a correlation, and, to some extent, there is. However, there are clear outliers. For example, we identified KeyCorp (KEY) as one of our highest rated banks with the lowest CEO comp multiple in the Super Regional sector. However, their stock price has been hammered more than the rest of the sector and is just now beginning to recover. Just the opposite occurred with STTs stock price as it has significantly outperformed the banking index since the beginning of the year. Part of this performance is driven by business model, rather than great management -- State Street has less reliance on net interest margin than other banks and, therefore, has not been impacted as negatively as others by rate increases and the corresponding acceleration in cost of funds. However, there has been one interesting development so far this year. As the graphs below indicate, our 4 banks with the highest paid CEOs on a relative basis have all outperformed the banking index since the beginning of the year, in some cases by a considerable amount. So, maybe these CEOs are worth it after all. Those with the lowest multiples have not fared quite as well, with KEY showing the worst performance of the group. However, Bank OZK (OZK) continues to justify our high rating by outperforming the banking index YTD by a whopping 27% margin. We think they should pay the CEO anything he wants.
Banks with Highest Paid CEO: Market Performance 2023 YTD
Banks with Lowest Paid CEO: Market Performance 2023 YTD
Clearly, there are other factors driving equity prices and performance, especially this year. However, we have watched this over time and have not been able to discern any noticeable correlation between CEO comp and market performance. Does this mean that CEO comp is irrelevant and that these folks should be paid whatever they can get away with? Not really. While we believe these comp multiples are, in most cases, unreasonable, and in some cases outrageous, we tend to view them as a symbol of corporate culture and philosophy rather than a driver of market performance. As for us, we prefer companies that have more equitable compensation structures to those that are very top heavy. But that’s just us.
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