It's Bonus Decision Time
As we move into the new year it's time to look at CEO compensation and 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. But, we digress. It's that time of the year when we need to figure out who's been naughty and nice and decide who deserves a raise and who should get a lump of coal.
Who's Over and Under Paid?
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 231x (State Street) to a low of 56x (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. For example, CEO compensation multiples also vary widely across the three size categories we cover. The average comp multiple for our Super Regional banks is 166x, the Regional average is 76x, and Super Community banks average clocks in at 104x. However, because we look at the multiple, one would think that all of these factors would affect the total employee base as well. Also, one of our banks with the fourth highest multiple (Associated Bank at 216x) is relatively small, runs a very traditional commercial bank business model and is located in Green Bay, Wisconsin -- not exactly a high-cost market! 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 compensation practices 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. 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. We follow representative banks in three size categories -- Super Regional, Regional, and Super Community -- and tend to evaluate performance relative to peers within each category. For example, our highest rated bank is M&T (MTB) yet their CEO has the lowest comp multiple (101X) in our Super Regional category. Conversely, Associated Bank (ASB), one of our smaller and lowest scoring banks, has one of the highest CEO comp multiples across all three size categories (216X). Coincidence? Maybe. The graphs below show the banks with both the highest and lowest multiples relative to their performance score. 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 amounts of CEO compensation impact shareholder value in terms of stock performance or are they irrelevant? Unfortunately, the data is not conclusive. Ideally, and in a "fair" world, there would be a correlation, with high performing banks with more equitable comp structures generating higher market returns than those who pay more and perform worse. And, to some extent, there is. For example, two out of three of the banks with the most overpaid CEOs relative to their scores underperformed the banking index, while two out of three with the most underpaid CEOs outperformed the market. However, there are clear outliers. For example, we identified Associate Bank (ASB) as having one of the largest disconnects between performance and CEO comp as a multiple of median employee salary. Consequently, if there was a connection we would expect their stock price to suffer. Just the opposite occurred in 2022 and ASB’s stock has been one of the best performing banks that we cover. Clearly, there are other factors driving equity prices and performance. For example, we have identified ASB as one of the most vulnerable of our banks from an M&A perspective. Is their stock price reflecting an acquisition premium? Maybe. On the flip side, Western Alliance (WAL) is one of our highest rated banks with a CEO comp multiple among the lowest. But, WAL’s stock has been hammered all year. Go figure. So, while we believe these comp multiples are, in most cases, unreasonable, and in some cases outrageous, they are more of a symbol of corporate philosophy than a reflection of market performance. As for us, we prefer strong companies that have more equitable compensation structures to those that are very top heavy. But that’s just us.
YTD Stock Performance for High Multiple/Low Score Banks
(The Overpaid)
YTD Stock Performance for Low Multiple/High Score Banks
(The Underpaid)
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Opinions expressed in this article are solely those of the RJ Report and do not represent those of any other company or entity.
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