CEO Comp 2024: Are They Worth It?

With all the recent focus on expense reduction and cost containment, the one area that hasn't been touched is CEO compensation. Should it?

Now that all the data is in, it’s time once again to look at CEO compensation and ask that burning question “Are they worth it?”  To start, let’s get one thing straight, the compensation system in the banking industry is whacked, and has been since time immemorial. The lowest paid employees (tellers) have arguably one of the hardest jobs in the bank, are the face and brand of the company to a large portion of the customer base and are at risk of literally getting shot. Those factors do not apply to the highest paid who have large organizations to do the work, never or rarely ever see a customer, and if they screw up usually get a really nice parting gift. So, the answer to the question if bank CEOs are worth their compensation, the answer is generally “no”.

However, we at the RJ Report are capitalists and believe that people should get paid whatever they can get away with. And bank CEOs get away with a lot.  To evaluate which CEOs are earning their keep within our covered banks we examine two variables – CEO comp as a multiple of the average employee compensation and our proprietary scoring model that measures bank performance relative to peers. The question we are trying to answer is if relatively higher CEO compensation translates into better performance and higher shareholder return. Spoiler alert, there are no simple answers.

What Did We Find?

Two things jump out when analyzing the data – there is no need to start a Go Fund Me campaign for any of these folks, and if you’re going to be a bank CEO you might as well run a larger bank. The median compensation multiple in our Super Regional category was 141(e.g. the Median CEO was earning 141 times the compensation of the average employee) while the multiple for both the Regional and Super Community categories was around 70. Not surprisingly, there was quite a range, especially in the Super Regional and Super Community sectors. Super Regional CEO compensation multiples ranged from a low of around 110X (MTB and TFC) to a high of around 270 (STT and USB). Among the smaller Super Community banks, the range was equally large between the lowest multiple of 53 (UMBF) and the highest of 125 (CADE). Regional banks were more clustered around the median with the lowest CEO compensation multiple being 48 (BOKF) and the highest being 79 (EWBC). We have provided a full analysis of the CEO compensation levels of all our banks relative to the bank’s performance in our most recent quarterly report. However, suffice it to say that some of these CEOs should have a talk with the Compensation Committee because they are underpaid on a relative basis while others should be expecting a call from the Compensation Committee regarding a downward adjustment.

Does It Matter?

The other question of whether relative CEO compensation translates into shareholder value is tougher to answer. It is always dangerous to take one variable and extrapolate its impact on stock price and performance. The main risk is confusing correlation with causality. There are myriad factors that influence stock performance, CEO compensation being the least. Nevertheless, the CEO is theoretically responsible for managing within all those factors so one would hope that higher paid CEOs would deliver higher market performance.

Well, not so fast. We took the two highest paid and two “lowest” paid CEOs (on a relative basis) in each of our size categories and tracked stock performance since the beginning of the year. Obviously, it would be more sensible to review a longer period, but we were too lazy to go back further. Anyway, a funny thing happened on the way to a conclusion: only one bank with a highly paid CEO showed positive returns YTD 2024 (EWBC), while all the banks with lower paid CEOs except one showed positive returns, especially MTB, BOKF, and TFC. During the same time, the regional bank index fell 2.37%.

While these findings are interesting and somewhat entertaining, we urge caution in jumping too quick to a conclusion, one way or another. For Example, two of our banks with the highest paid CEOs on a relative basis, Bank OZK (OZK) and Western Alliance (WAL) are perennially two of our highest rated banks and have delivered strong shareholder value over a long period of time. Consequently, we have always thought that those CEOs deserved a compensation premium over peers. However, we believe both banks' stock prices will continue to come under pressure in this interest rate environment and given their relatively high concentration in commercial real estate. In this world of “What have you done for me lately” even their pay packages may come under increased scrutiny.

But Is This Fair?

One could argue that analyzing CEO compensation in this way is too simplistic and a little unfair. After all, much of a CEO’s compensation is comprised of incentives based on achieving established performance metrics, as well as consisting of stock components that tie overall compensation to shareholder return. Therefore, there is, or should be, a systemic relationship between compensation and performance. This may be true up to a point, but only up to a point. The fact is that some performance factors may influence CEO pay at the margin, but the structure of most CEO pay provides a floor that would look like the ceiling to most people. We have yet to see a CEO compensation plan that pays zero if performance targets aren’t met.

Over the past few quarters, most banks have stressed expense savings and reductions as a way to counter rising interest rates, shrinking margins, and increased credit risk. However, most of these cost reduction programs have focused on reducing headcount, primarily among the lowest paid employees, and replacing them with technology where possible. Few, if any, of these programs have touched the executive suites of these banks. However, as AI capabilities expand exponentially, maybe it’s just a matter of time before bank CEOs are replaced by a new software program, JamieDimonGPT.

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