Compensation Committee Report
The Compensation Committee has reviewed the Compensation Discussion and Analysis included in this proxy statement and has discussed it with management. Based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.
The following report has been furnished by members of the Compensation Committee:
Kenneth J. Knuckles (Chairman)
Janet L. Rollé
Colvin W. Grannum
Pazel G. Jackson, Jr.
2018 COMPENSATION DISCUSSION AND ANALYSIS
This section discusses Carver’s executive compensation philosophy, guidelines and programs. It also provides the material factors affecting the Compensation Committee’s decision-making as it relates to Carver’s Named Executive Officers. The discussion and analysis is presented to provide shareholders a clear and comprehensive picture of Carver’s executive compensation program, and its individual components. For a full understanding of the information presented, please consider the following information together with the tables and its related narrative and footnotes below.
The following table lists Carver’s Named Executive Officers during the fiscal year ended March 31, 2018.
Name | | Position with Carver During Fiscal 2018 |
Michael T. Pugh | | President and Chief Executive Officer |
Christina L. Maier | | First Senior Vice President and Chief Financial OfficerCOMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS |
John Fitzpatrick | | First Senior Vice President and Chief Operating Officer |
Blondel Pinnock | | Senior Vice President, Chief Lending Officer |
Sophia Haliotis | | Senior Vice President, Chief Credit Officer |
Executive Summary
2017 Shareholder Engagement and Say-On-Pay Results
Carver holds an annual non-binding shareholder advisory vote as part of our requirements under the EESA. Over 75% of our stockholders approved the “say-on-pay” proposal concerning the compensation of our Named Executive Officers described in our proxy statement in 2017. The Compensation Committee considered the significant approval of the “say-on-pay” proposal in its deliberations and determined that no significant changes to the Company’s executive compensation program were required for the fiscal year ended March 31, 2018.
Regulatory Programs and Agreements
Carver continues to be a participant in the TARP-CDCI. As such, Mr. Pugh is ineligible to receive cash-based incentive compensation and is subject to other compensation related restrictions. Additionally, on May 24, 2016, the Office of the Comptroller of the Currency (“OCC”) and Carver Federal entered into a Formal Agreement to carry out the compliance matters discussed further in the Carver Current Report on Form 8-K, as filed with the SEC on May 27, 2016. Under the Formal Agreement, Carver must comply with the requirements of the golden parachute regulations under 12 C.F.R. Part 359.
For more information, please refer to the “Compensation-Related Governance,” section in this Compensation Discussion and Analysis.
Compensation Philosophy
The ultimate goal of our compensation philosophy is to create long-term shareholder value by rewarding performance that furthers the strategic goals and growth of the Company. At the same time, the Compensation Committee seeks to maintain an executive compensation program that is competitive with comparably-sized financial institutions. The Compensation Committee also considers its location and sources of talent in making pay determinations. As a small community bank in New York City, competitive pressures on the ability to attract and retain talent are intense. Most executives and staff are recruited to Carver from money center banks and other larger financial institutions.
The Compensation Committee believes that executive compensation should support Carver’s unique business strategy and result in a compensation program that:
| · | Enables Carver to attract and retain top talent by providing competitive reward opportunities while at the same time effectively controlling compensation costs; |
| · | Places significant focus on incentive/performance based rewards that are contingent on achievement of Company and individual performance; and |
| · | Enhances Carver’s long-term stockholder value. |
Pay for Performance
Named Executive Officers, other than Mr. Pugh, earn a base salary and participate in the Short-Term Incentive Plan (“STI Plan”) and Long-Term Incentive Plan (“LTI Plan”). Due to compensation restrictions under TARP-CDCI, Mr. Pugh, receives a base salary and has the opportunity to receive restricted stock.
Carver does not target a specific pay mix; however, each Named Executive Officer has a significant percentage of their pay at risk through the STI Plan and LTI Plan. Each executive’s compensation opportunity is designed to provide pay below targeted pay levels if annual and/or long-term performance goals are not achieved. The compensation program is designed to provide pay at or above targeted pay levels if performance meets or exceeds goals.
Carver’s strategic vision is translated into specific performance goals, which the Compensation Committee considers in assessing its results and making total compensation decisions. Company, department and individual performance are also considered in the assessment. Factors critical to understanding Carver’s total performance include the following:
| · | Internal and External Benchmarks – Executive performance is measured against Carver’s financial, operational and strategic goals for the fiscal year, along with economic and industry factors that may impact performance or strategy. |
| · | Company and Individual Performance – Executives are incentivized to work together as a team to drive overall Company performance; however, each executive is also held accountable and rewarded for achieving individual goals. |
| · | Short and Long-Term Performance – Compensation reflects a balance of short-term performance (i.e., how Carver meets its annual goals) and long-term performance (i.e., building a platform for sustained, profitable growth over multiple years). |
| · | Unique Business Model – Carver’s legacy is anchored in a 70-year history of commitment to providing capital, and thereby expanding wealth enhancing opportunities, to consumers and institutions in historically low to moderate income communities. Carver’s“Outstanding”rating by the Office of the Comptroller of the Currency following its most recent Community Reinvestment Act (“CRA”) examination in January 2016 (conducted every three years), noted that 75% of Carver’s loans were originated in such communities, far exceeding peer institutions. |
Role of the Compensation Committee
The Compensation Committee operates under a written charter that establishes its responsibilities. A copy of the Compensation Committee Charter can be found on the Company’s website at www.carverbank.com. The Compensation Committee reviews the charter annually to ensure that its scope is consistent with the Committee’s expected role and meets regulatory requirements. Under the charter, the Committee is charged with general responsibility for the oversight and administration of the Company’s compensation program. The charter gives the Committee the sole responsibility for determining the compensation of the President and Chief Executive Officer based on the Committee’s evaluation of his performance. The charter also authorizes the Committee to engage consultants and other professionals without management approval to the extent deemed necessary to discharge its responsibilities.
The Compensation Committee is comprised of three members of the Board, each of whom is independent. The Compensation Committee met four (4) times during the fiscal year ended March 31, 2018. The Chairman of the Committee reported on Committee actions at subsequent meetings of the Board of Directors.
Decisions regarding other executives are made by the Compensation Committee considering recommendations from the President and Chief Executive Officer and with input from the Senior Vice President and Chief Human Resources Officer. Decisions by the Compensation Committee with respect to compensation of the President and Chief Executive Officer are ratified by the non-executive members Board of Directors.
Interaction with the Compensation Consultant
The Compensation Committee has the sole authority to retain and terminate a compensation consultant and to approve the consultant’s fees and all other terms of the engagement. For the fiscal year ended March 31, 2018, the Compensation Committee retained the services of Pearl Meyer & Partners LLC ("Pearl Meyer"), an independent compensation consulting firm, to assist with compensation matters concerning the President and Chief Executive Officer. The Compensation Committee holds regularly scheduled executive sessions without management present with the compensation consultant and has direct access to Pearl Meyer. Pearl Meyer provided support to the Committee, mainly in regard to CEO compensation and performance evaluations during the fiscal year ended March 31, 2018 and attended no meetings of the Committee held in the fiscal year ended March 31, 2018.
Pearl Meyer reports directly to the Compensation Committee and does not provide any other services to the Company. The Compensation Committee has analyzed whether the work of Pearl Meyer as a compensation consultant has raised any conflict of interest, and has determined that the work of Pearl Meyer and the individual compensation advisors employed by Pearl Meyer as compensation consultants to the Company has not created any conflict of interest.
Role of Executives in Committee Deliberations
The Compensation Committee requests the President and Chief Executive Officer and Chief Human Resources Officer to be present at Committee meetings where executive compensation and Company or individual performance are discussed and evaluated. Executives are free to provide insight, suggestions or recommendations regarding executive compensation. However, only the Compensation Committee members are allowed to vote on decisions regarding executive compensation.
The Compensation Committee meets with the President and Chief Executive Officer to discuss his own performance and compensation package, but ultimately decisions regarding his compensation are made solely based upon the Committee’s deliberations with input from the compensation consultant, as requested. The President and Chief Executive Officer is not present at meetings at which his compensation is being discussed and determined. Decisions regarding executives reporting directly to the President and Chief Executive Officer are made by the Compensation Committee considering recommendations from the President and Chief Executive Officer, as well as input from the compensation consultant as requested.
Total Compensation Program Components
The main components of Carver’s total compensation program are: base salary, annual incentives, and long-term incentives.
The following sections summarize the role of each component, how decisions are made and resulting decisions for the fiscal year ended March 31, 2018 as they relate to the Named Executive Officers.
Base Salary
The purpose of base salary is to provide fixed, competitive pay that recognizes the executives’ role, responsibilities, experience, performance and past and potential contributions. Base salaries are generally near the median; however, judgment is exercised in determining each executive’s base salary relative to the market. As a result, experienced and/or high performing executives may be paid above the market median and less experienced or average performing executives may be paid below the market median.
The Named Executive Officers received salary adjustments in the fiscal year ended March 31, 2018 to reflect cost of living increases.
Short-Term Incentive Plan (“STI Plan”)
The purpose of the STI Plan is to motivate and reward actual corporate, department and individual performance on an annual basis. The Compensation Committee reviews the STI Plan each year and, if necessary, adjusts the specific performance metrics, goals and compensation opportunities based on business objectives and the executives’ competitive position. No adjustments were made in the fiscal year ended March 31, 2018.
STI Plan pool funding is based on adjusted operating income (excluding allowances for loan and lease losses, taxes and the impact of any other one-time gains or losses). A threshold level of adjusted operating income is established and funding is adjusted up or down based on the Bank’s actual performance. Incentive payouts can range from 0% of target to a maximum payout of 150% of target (not including additional downside/upside adjustments based on individual performance factors – see explanation below).
The Compensation Committee reserves the right to either increase or decrease the calculated STI Plan pool based on multiple strategic metrics. In the fiscal year ended March 31, 2018, the Compensation Committee considered:
Upon determination of the final STI pool amount, actual incentive payouts are based on the achievement of corporate and department/strategic goals. Weightings are dependent on the executive’s level (see table below for Named Executive Officers).
In addition to corporate and department goals, the STI Plan design includes an individual modifier that allows incentive awards to be modified (up or down) to reflect overall individual performance and contribution. As such, an individual incentive award can be increased by 30% for exceptional performance or reduced to 0% for poor performance.
For fiscal year 2018, Carver’s annual target incentive ratios for the Named Executive Officers were as follows:
| | STI Plan Weighting | | | | | | Payout Range (as % of salary) |
Executive | | Corporate | | | Dept. / Strategic | | | (as % of salary) | | | (inclusive of individual modifier) |
| | | | | | | | | | | |
Michael T. Pugh, President and Chief Executive Officer (1) | | | 50 | % | | | 50 | % | | | 30 | % | | 0% - 65.8% |
| | | | | | | | | | | | | | |
Christina L. Maier, First Senior Vice President and Chief Financial Officer | | | 50 | % | | | 50 | % | | | 50 | % | | 0% – 97.5% |
| | | | | | | | | | | | | | |
John Fitzpatrick, First Senior Vice President and Chief Operating Officer | | | 50 | % | | | 50 | % | | | 50 | % | | 0% - 97.5% |
| | | | | | | | | | | | | | |
Blondel Pinnock, Senior Vice President and Chief Lending Officer | | | 40 | % | | | 60 | % | | | 20 | % | | 0% - 39.0% |
| | | | | | | | | | | | | | |
Sophia Haliotis, Senior Vice President and Chief Credit Officer | | | 40 | % | | | 60 | % | | | 20 | % | | 0% - 39.0% |
| | | | | | | | | | | | | | |
| (1) | Notwithstanding the specified target incentive ratio designated for Mr. Pugh, Carver is prohibited from paying or accruing a bonus for Mr. Pugh under the STI Plan for any period that Carver continues to retain any financial assistance provided by the U.S. Treasury under TARP. For further information on Carver’s participation in TARP and this bonus restriction, see below under “Compensation-Related Governance – Participation in Troubled Asset Relief Program.” |
After reviewing Carver’s fiscal year ended March 31, 2018 performance, the Compensation Committee determined that Carver did not meet the threshold adjusted operating income goal for the fiscal year ended March 31, 2018. No STI Plan payouts were received in the fiscal year ended March 31, 2018.
Long-Term Incentive Plan (“LTI Plan”)
The LTI Plan provides an opportunity for executives to receive cash or equity-based awards under the Carver Bancorp 2014 Equity Incentive Plan. The goal of the LTI Plan is to promote Carver’s growth and profitability, to provide certain officers with an incentive to achieve corporate objectives, to attract and retain individuals of outstanding competence and to provide initial grants to new non-employee directors of Carver. The LTI Plan is also designed to align participants’ interests with stockholders of Carver and serves as a retention tool for key members of management.
The Compensation Committee reviews the LTI Plan each year and establishes specific goals and targets that are aligned with business objectives and Carver’s compensation philosophy. For the fiscal year ended March 31, 2018, the Compensation Committee considered the Company’s overall health and progress toward achieving financial and strategic objectives as the main determinant of equity award allocation. Eligible employees must also receive an individual performance score of at least 3 (on a scale of 1 to 5) to be considered.
Long-term incentives may be in the form of cash, stock options and/or restricted shares. Regardless of the type of award, the awards vest ratably over a five-year period. Vesting may be accelerated in the third or fourth year of if Carver meets or exceeds the current peer group’s average three-year ROE.
For the fiscal year ended March 31, 2018 long-term incentive target awards (as a percent of salary) for the Named Executive Officers are as follows:
| | | | Target | |
Executive | | Position | | Award | |
Michael T. Pugh(1) | | President and Chief Executive Officer | | | 30 | % |
Christina L. Maier | | First Senior Vice President and Chief Financial Officer | | | 25 | % |
John Fitzpatrick | | First Senior Vice President and Chief Operating Officer | | | 25 | % |
Blondel Pinnock | | Senior Vice President and Chief Lending Officer | | | 20 | % |
Sophia Haliotis | | Senior Vice President and Chief Credit Officer | | | 20 | % |
| (1) | Notwithstanding the specified target incentive ratio designated for Mr. Pugh, Carver is prohibited from paying or accruing a bonus for Mr. Pugh under the LTI Plan for any period that the Carver continues to hold any financial assistance provided by the U.S. Treasury under TARP. For further information on Carver’s participation in TARP and this bonus restriction, see below under “Compensation-Related Governance – Participation in Troubled Asset Relief Program.” |
No LTIP Plan awards nor any other awards under the Carver Bancorp 2014 Equity Incentive Plan were made in the fiscal year ended March 31, 2018.
Compensation-Related Governance
Participation in the Troubled Asset Relief Program (“TARP”)
On January 16, 2009, Carver entered into a Securities Purchase Agreement with the U.S. Treasury that provided for Carver’s participation in the Capital Purchase Program (“CPP”) under TARP.
TARP participants are required to agree to significant restrictions on executive compensation during the period in which the U.S. Treasury holds an equity position in Carver as a condition of participation. Also, the ARRA created compensation-related limitations in addition to compensation limitations under TARP and required the Secretary of the U.S. Treasury to establish additional standards for executive compensation that apply beyond Carver’s senior executive officers to include the 20 next most highly compensated employees. In compliance with such requirements, Carver’s senior executive officers or “SEO’s” and the next 20 most highly compensated employees have agreed in writing to accept the compensation restrictions under the TARP and ARRA and thereby limit some of their contractual or legal rights.
Under TARP and ARRA, while a participant in the TARP programs, the following compensation restrictions are in effect:
| · | Clawback of Bonus and Incentive Compensation if Based on Certain Material Inaccuracies. Incentive compensation paid that is later found to have been based on materially inaccurate financial statements or other materially inaccurate measurements of performance is subject to recovery by Carver. Carver’s senior executive officers and next 20 most highly paid employees acknowledge that each incentive program and each compensation or benefit agreement that incorporates incentive compensation was deemed amended to the extent necessary to give effect to such clawback. |
| · | No Compensation Arrangements that Encourage Excessive Risks.Carver is prohibited from entering into compensation arrangements that encourage employees to take “unnecessary and excessive risks that threaten the value” of Carver. To insure this does not occur, Carver’s Compensation Committee is required to meet at least once a year with senior risk officers to review Carver’s compensation arrangements in light of Carver’s risk management policies and practices. To the extent that such review suggests revisions to any compensation arrangement, Carver agrees to modify promptly the compensation arrangement to eliminate any undue risk. During the fiscal year ended March 31, 2018, the Compensation Committee met with Carver’s Chief Risk Officer and determined that Carver’s compensation program does not encourage unnecessary risk taking by executive officers. Carver’s short-term and long-term incentive programs use a broad-based balance of performance measures with no one measurement dominating the payout determination. This feature greatly mitigates any incentive for an employee to engage in unnecessary or excessive risk. The performance measures include net income, loan and deposit growth, efficiency ratio, Sarbanes Oxley Act of 2002 (“SOX”) Section 404 compliance, New Markets Tax Credit allocation deployment and individual performance throughout the year. Company and departmental goals are based upon an annual business plan submitted to and approved by the Board of Directors, whereat the Board considers the reasonableness of the plan and its goals. Individual performance is based upon actual performance compared to pre-established performance goals and market and other conditions. In this connection, incentive compensation can be reduced to zero based upon individual performance, further ensuring employees are not rewarded for performance that is not in Carver’s best long-term interests. |
| · | Limit on Federal Income Tax Deductions.Carver is prohibited from taking a federal income tax deduction for compensation paid to senior executive officers in excess of $500,000 per year. |
| · | Limit on Severance.Carver is prohibited from making severance payments resulting from termination of employment for any reason, except for payments for services performed or benefits accrued to Carver’s senior executive officers and the next 20 most highly compensated employees. |
| · | Limits on Incentive Compensation. The ARRA standards prohibit the payment or accrual of any bonus, retention award or incentive compensation to Carver’s most highly compensated employee (in Carver’s case, the President and Chief Executive Officer) other than awards of long-term restricted stock that (i) do not fully vest while participating in the TARP programs, (ii) have a value not greater than one-third of the total annual compensation of the employee and (iii) are subject to such other restrictions as determined by the Secretary of the U.S. Treasury. The prohibition on bonus, incentive compensation and retention awards does not preclude payments required under written employment contracts entered into on or prior to February 11, 2009. |
| · | Compensation Committee Functions. The ARRA requires that Carver’s Compensation Committee be comprised solely of independent directors and that it meets at least semiannually to discuss and evaluate Carver’s employee compensation plans in light of an assessment of any risk posed to Carver from such compensation plans. |
| · | Compliance Certifications.The ARRA requires a written certification by Carver’s President and Chief Executive Officer and Chief Financial Officer of Carver’s compliance with the provisions of ARRA. These certifications must be contained in Carver’s Annual Report on Form 10-K that is filed after the relevant U.S. Treasury regulations are issued. |
| · | U.S. Treasury Review of Excessive Bonuses Previously Paid.The ARRA directs the Secretary of the U.S. Treasury to review all compensation paid to Carver’s senior executive officers and Carver’s next 20 most highly compensated employees before date of enactment to determine whether any such payments were inconsistent with the purposes of ARRA or were otherwise contrary to the public interest. If the Secretary of the U.S. Treasury makes such a finding, the Secretary of the U.S. Treasury is directed to negotiate with the TARP recipient and the affected employees for appropriate reimbursements to the U.S. Treasury with respect to the compensation and bonuses. |
| · | Limitation on Luxury Expenditures.The Board of Directors must have in place a company-wide policy regarding excessive or luxury expenditures, as identified by the U.S. Treasury, which may include excessive expenditures on (i) entertainment or events, (ii) office and facility renovations, (iii) aviation or other transportation services, (iv) other unreasonable expenditures for staff development events, performance initiatives or other similar measures conducted in the normal course of business operations. |
| · | Say on Pay.Under ARRA, the SEC promulgated rules requiring a non-binding say on pay vote by shareholders on executive compensation at the annual meeting. Carver implemented this provision beginning with the proxy statement for the fiscal year ended March 31, 2009 by including the submission of an “Advisory Vote on Compensation of Named Executive Officers.” |
In February 2010, the U.S. Treasury announced the creation of the TARP-CDCI to invest lower-cost capital in community development financial institutions (“CDFI”) that lend to small businesses in the country’s hardest hit communities, in recognition of the unique role of CDFI’s as lenders in disadvantaged communities. Carver, as a CDFI, applied to participate in the TARP-CDCI program. On August 27, 2010, Carver completed an exchange of TARP CPP capital for TARP-CDCI capital. All restrictions on executive compensation that applied under TARP CPP remain in force under the TARP-CDCI program. Effective October 28, 2011, the U.S. Treasury exchanged 18,980 shares of Series B Preferred Stock that it held for 34,819,299 shares of common stock, pursuant to an Exchange Agreement by and between U.S. Treasury and Carver entered into on June 29, 2011. Pursuant to the Exchange Agreement, all restrictions on executive compensation that applied under TARP CPP and the TARP-CDCI program will continue to apply so long as the U.S. Treasury holds any of Carver’s securities.
Enforcement Actions with Carver and Carver Federal’s Bank Regulators
In May 2016, the OCC and Carver Federal entered into a Formal Agreement pertaining to certain compliance matters as more fully described in the Current Report on Form 8-K, as filed with the SEC on May 27, 2016. Furthermore, the OCC has designated that the Bank is in “troubled condition.” Accordingly, Carver and Carver Federal are required to comply with the requirements of the golden parachute regulations under 12 C.F.R. Part 359.
The FDIC golden parachute regulations limit the ability of Carver and Carver Federal to enter into contracts and to pay and make golden parachute payments to directors, officers, employees or controlling stockholders. A golden parachute payment includes, generally, any payment (or agreement to make any payment) in the nature of compensation which is contingent on such person’s termination of employment or affiliation with Carver or Carver Federal and is received on or after, or is made in contemplation of, when Carver Federal is or becomes troubled. Accordingly, for so long as Carver remains subject to the Formal Agreement, no payments can be made under any employment agreement or change in control agreement or any other contract, agreement or arrangement that would become payable as a result of a director’s, officer’s or employee’s employment if such payment would constitute a golden parachute payment. Payments that become due under any tax-qualified plan, certain bona fide deferred compensation plans, nondiscriminatory severance pay plan (so long as the severance payment does not exceed 12 months of base compensation), and payments made by reason of death or disability, or payments that are approved by the FDIC are not subject to this limitation.
Compensation of Executive Officers and Directors
SUMMARY COMPENSATION TABLE AT MARCH 31, 2018
2020