by Andrew S. Nix, Maynard Cooper & Gale
Equity incentives can be a very effective component of a bank’s compensation program. When used properly, equity incentives can help advance a bank’s business strategy, link pay and performance and provide a competitive advantage in recruitment and retention.
Many banks adopt some form of equity incentive plan in connection with the formation of the bank or the transition to a holding company structure. It is important for a bank to periodically revisit its equity incentive plan and equity incentive program – perhaps the plan originally established was not a primary area of focus at the time of the formation or transition event, or it could be that what worked then just does not sync up with what the bank currently wants from its equity incentive program. Regular review and consultation with counsel and/or a compensation consultant will ensure that the objectives of the equity incentive program are being met and that its effect is being maximized.
Among the several topics that should be regularly considered are the following:
What is the bank trying to accomplish with its equity incentive plan? The bank should frequently consider whether its equity incentive plan measures are aligned with the bank’s business plan and will aid in accomplishing its long-term goals. The types of equity awards granted (e.g., stock options, time-based restricted stock, performance-based restricted stock, stock appreciation rights, etc.), the mix of those awards and the size of awards should be evaluated at least annually.
Have enough shares been authorized for issuance under the equity incentive plan? One of the primary issues at the outset of establishing an equity incentive plan is the number of shares to be authorized for issuance in connection with awards granted under the plan, and the potential dilutive effect of those issuances on existing and future shareholders. It is important to reserve an appropriate number of shares to accomplish the bank’s objectives for the plan, while at the same time properly balancing the impact of dilution. Also, when the board of directors is establishing the number of shares to reserve for issuance under the plan, it should arrive at a number that will be sufficient for a number of years – at least five years – in order to minimize the number of times that the shareholders must be asked to approve an expansion of that number.
Does the bank’s equity plan contain the right features? It is not uncommon for a bank to realize that its equity incentive plan does not contain certain features that the bank believed were in place, or that it needs or wants to be in place. For example, many stock option plans adopted during the bank formation process do not include a net exercise feature, which allows an award recipient to cover the exercise price of an option by requesting that the bank withhold from the issuance a number of shares having a fair market value equal to the exercise price. Because option grants typically vest over a number of years, and may not be exercised for a number of years after vesting, the bank may not realize that the plan does not contain a net exercise feature until a notice of exercise arrives, and, at that point, may not have time to obtain the board and shareholder approvals that are required in order to add that type of feature to the plan. A routine review of the plan will allow issues like this to be addressed in advance and potential problems to be avoided.
Is the bank properly documenting activity under its equity incentive plan? It is essential that the bank’s equity incentive plan document is current and accurate at all times, and that all awards granted under the plan are memorialized in proper award agreements and backed up by formal board and/or compensation committee approvals. Not only will this documentation prevent issues with interpretation of awards down the road, it will also be valuable as the bank enters discussions and negotiations in connection with acquisition or capital raising transactions.
A bank should take the time to ensure that, with respect to its equity incentive plans and programs, its house is always in order.
Andrew Nix is a shareholder in Maynard Cooper & Gale, P.C.’s Corporate, Securities & Tax Section and a member of the firm’s Securities Regulation and Corporate Finance, Mergers and Acquisitions, and Banking practice groups. Andrew routinely advises financial services institutions, including banks and bank holding companies, regarding various securities regulatory, capital raising and corporate governance issues.
