How a publicly traded company compensates its executive officers is something that savvy investors keep a close eye on, as a company's incentive structure can have a potent impact on its performance. Fortunately, in the case of Bank of America (NYSE: BAC), the nation's second biggest bank by assets has designed its compensation structure to create incentive for long-term responsible growth.
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Bank of America Chairman and CEO Brian Moynihan. Image source: Bank of America.
This is especially true when it comes to Bank of America CEO Brian Moynihan. In 2016, the 57-year-old executive earned a $20 million compensation package, which equated to a 25% raise over 2015. Reading between the lines of Bank of America's press release announcing the pay package, the bank boosted Moynihan's compensation for five reasons:
- Earnings in 2016 were up 13% compared with 2015 and were the second highest in the bank's history.
- The bank achieved positive operating leverage in 2016, meaning that its revenue grew faster than expenses.
- The bank achieved "historically low credit losses" last year.
- Total shareholder return through 2016 was 33%, which exceeded Bank of America's peer group.
- Finally, the North Carolina-based bank "made progress on its long-term return on assets, return on tangible common equity, and efficiency goals."
But just because Moynihan's total compensation package added up to $20 million doesn't necessarily mean he'll get all of it. That's because a healthy portion of it came in the form of performance-based restricted stock units, which require the bank to meet certain objectives over the next three years for the entire award to vest.
RSUs-restricted stock units. Data source: Bank of America regulatory filing.
For Moynihan's performance-based restricted stock units to vest, two things must happen: Bank of America must generate a three-year average return on assets of 0.80% and a three-year average growth of adjusted tangible book value of 8.5%. "This pay-for-performance structure, which emphasizes variable pay, helps motivate our executives to deliver sustained stockholder value and responsible growth," the bank said in its latest proxy statement.
The most important thing to note is the fact that a majority of Moynihan's performance comes in the form of stock -- i.e., not cash. His salary is obviously paid in cash, and $5.55 million of his time-based restricted stock units, which vest in equal monthly installments over the course of a year, are cash-settled, too. But that leaves nearly $13 million, or two-thirds of the potential total, coming in the form of stock, assuming the bank meets its performance targets. This is a good thing, because it ensures that Moynihan has a considerable and growing amount of skin in the game, so to speak, and is thereby closely aligned with the bank's shareholders.
In short, while there's no getting around the fact that Moynihan earned a pretty penny last year, second only among commercial-bank CEOs to JPMorgan Chase's Jamie Dimon, the good news is that his compensation plan seems to be designed with shareholders' interest in mind.
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