Tom Chandler is no newcomer to bank boards, nor to banking. He's a veteran bank director at Syringa Bank, a $289.9 million-assets institution in Boise, Idaho, and a banking and corporate governance expert at Boise's Hawley Troxell Ennis & Hawley LLP law firm. But Chandler is also compensation committee chairman at Syringa, which took TARP funds earlier this year. And he finds life more confusing these days.

"Every time I start to think that I've got a handle on this, something new comes up and I realize I don't understand it as well as I thought. I feel like a New England farmer, who keeps finding new rocks." This uncertainty adds to a dynamic of healthy debate that the committee already enjoys. Chandler says his fellow committee members run the spectrum, from one who believes flat salaries are where it's at, with no incentives for anybody, to the member who thinks incentive pay should dominate the mix, with only a token salary. The impact of the TARP executive compensation rules are one more new wrinkle.

Who does what when

Indeed, many bankers and board members continue to work on and sort out the changing roles and attitudes of executive compensation. While it wears the clothing of an HR issue, it is as much an issue of corporate governance.

Over the last year, much has just been "slapped on banks quickly," says Susan O'Donnell, Boston-based managing director for the Pearl Meyer & Partners consultancy. "We'll see the repercussions of this on the back end."

The irony, O'Donnell hears from bankers, is that they are facing potential limitations, or major shifts, to their compensation when many of them are working the hardest of their careers.

Typically, O'Donnell notes, community bank compensation issues have lagged those of the rest of the industry: "But now, they have been shoved up to the forefront with everybody else."

The reaction in many community banks, in the short term, has been to excuse themselves from as much of the current trouble as possible, says O'Donnell. "There has been a huge shift towards increasing base salaries," she says, and pulling away from incentive pay and long-term compensation.

That's a boomerang from the immediate previous trend, towards an emphasis on performance-based pay for top officers. Boards liked that, O'Donnell says, because it encouraged results. Over time, however, when the tide was rising, a certain level of performance pay began to be regarded as an "entitlement," to use O'Donnell's word. "Now, that entitlement mentality has to be readjusted," she says. The other paradox is that as base pay has become reemphasized among community- banks, some wonder, "Docs the shareholder want to pay salaries to executives when they are not making moncv for them.- ' sne asks.

Another compensation consultant, Brian Dunn, president of McLagan, a subsidiary of AON Corp., and CEO of Global Compensation, thinks the shift to a base-pay emphasis merely represents a temporary overreaction.

In some cases (banks that took TARP money, for example) "it's the only tool that the Treasury left them," says Dunn.

"There is a lot of healthy skepticism in boardrooms right now," Dunn says. "It's not necessarily hostile; there is creative tension."

Indeed, Dunn thinks that the Geithner pay principles, covered elsewhere in this report, appear poised to bring some changes to bank compensation, even at the community bank level. Dunn believes that boards will begin to push for a great portion of executives' packages to be made up of deferred compensation. The intent will be to tie the delivery of that compensation to long-term performance.

Copyright Simmons-Boardman Publishing Corporation Sep 2009

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