Bank CFO pay and performance: mixed relationship.

A study of the relationship between executive pay and banks' financial performance found that changes in pay were effectively random relative to performance. Compensation consultants at Presidio Pay Advisors evaluated executive pay and company performance among a group of 115 publicly traded banks holding total assets of $11.9 trillion, each of which received a minimum of $50 million in Troubled Assets Relief Program (TARP) investments.

While absolute levels of chief financial officer compensation dropped at many banks, there was no measurable link between changes in pay and performance for the group as a whole.

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Since 2006, more than 90 percent of the banks studied generated negative shareholder returns. Surprisingly, despite the negative returns:

* More than one-third (37 percent) of CFOs who held office from 2006 through 2008 received increases in 2008 total cash compensation of 2 percent to 76 percent compared to 2006.

* An even greater percentage (43 percent) of these CFOs received increases in 2008 total direct compensation of 2 percent to 420 percent over the same period.

The study also found compensation committees approved increases in the size of equity grants that helped offset lower stock prices.

Total stock options granted to CFOs increased from 2.2 million in 2006 to 3.5 million in 2008, combined with an increase in restricted stock grants from 0.42 million shares in 2006 to 0.65 million in 2008.

The apparent disconnect between banks' stated pay-for-performance philosophies and actual pay actions is arguably one of the primary factors behind the pay restrictions imposed by Congress on banks receiving TARP investments. These restrictions will only be lifted once TARP funds are repaid in full.

Treasury Secretary Timothy Geithner has outlined guiding principles for compensation plans that include accounting for the time-horizon of risks and the impact of incentives on risk-taking activities. These guidelines will likely influence both U.S. Securities and Exchange Commission regulations and congressional legislation.

As the executive compensation de-bate continues in Washington, D.C., and elsewhere, thoughtful compensation committees at banks should use this "time-out" to fix their programs. Otherwise, regulators and politicians may well do it for them. Companies should consider the current environment as they review their programs.

--Dave Bisson, senior consultant, Presidio Pay Advisors