EXHIBIT 10.6
Provident Savings Bank, F.A.
Management Incentive Program
Page (2) of 14
Provident Savings Bank
----------------------
Management Incentive Program
----------------------------
Objectives
- ----------
To motivate participants in achieving annual business and individual
performance objectives.
To provide competitive amounts of compensation to participants for the
achievement of annual performance improvements.
Eligibility
- -----------
Participation in the Plan is determined by the Board of Directors in
conjunction with the recommendations of the President. The minimum
requirement for participating in the incentive program is the attainment
of grade level 11 with the title of Vice President.
Incentive Program Trigger
- -------------------------
The incentive program will be activated if at the end of any fiscal
period the bank's earnings exceed 50 basis points ROA (Return on
Assets).
I. Statement of Policy
- -- -------------------
I. The policy of Provident Savings Bank, F.A. is to provide to members of
management a total compensation program comprise of three elements:
A. A pay for performance program which rewards employees for the
performance of their normal job responsibilities within a sound wage
scale that reflects the value of each job in the competitive
marketplace. Performance levels are measured by the use of objective
job standards established in advance. It also includes a level of
improvement in current operating systems and procedures. This
performance program is embodied in the bank's general salary
administration program.
B. An incentive program for accomplishments clearly beyond the normal
parameters of the normal job. This incentive program is tuned to the
value of the accomplishments and the level of contribution made by
participating managers. Eligibility for such incentive awards would
be based on predetermined values given to each goal and is
predicated on at least satisfactory performance of normal job
Page (3) of 14
activities. This incentive program is the focus of this document.
C. A special system of performance recognition for achievements that
either were necessitated by/or resulted from extraordinary changes
in the business environment, or due to unexpected activities and
operation of the bank. Such special awards would be determined by
the President upon approval by the Board of Directors after analysis
is made of the nature, importance and total impact of the
accomplishments.
II. Overall Description of the Incentive Program: (Policy B)
- --- ---------------------------------------------
Policy B- Management Incentives- Goal Attainment
1. Amount of total incentive allocation:
The payment of an incentive reflects achievements of great value to
then bank, thus, it is desirable that the amount of potential reward
any individual can receive is at a higher level since the greater the
payout the greater the value of the contribution made. The design of
the structure of payment insures that any awards made are paid for by
the accomplishments themselves. Concern that payments are "too large"
is mitigated by the fact that such payments are only a percentage of
the return provided to the bank. (It is estimated that the ratio of
return on the suggested incentive plan will be a minimum of 6 to 1).
Because the essential focus and nature of Managers jobs will vary, the
size the total incentive allocation will be greater at the higher
levels of management. The amount of the incentive tied to criteria also
will vary with the nature of the job. As a general rule, the
performance of the President and Executive Vice Presidents will have a
greater impact on the total operating experience of the bank. In
contrast, the proportion of incentives that can be earned by Managers
at lower levels will be weighted toward individual efforts. The
rationale behind this distinction is that high levels of management are
responsible for the coordination and total performance, largely
determined by the contributions and efforts of the lower level
Managers. A Department Head has less impact on the
Page (4) of 14
overall performance of the bank but his/her accomplishments on the
individual goals contributes to overall bank performance.
2. General Criteria
- -------------------
In following the rationale stated above the following criteria will be
established for awarding incentive payments.
a. Departments Heads and other Officers;
-------------------------------------
Each Manager will have an opportunity to identify goals, outside
normal job responsibilities, which are tuned to assisting the
bank obtain its overall business goals.
Each of these goals will be evaluated (EXHIBIT I) by the
Executive Vice President in consultation with the President.
Using this system it is conceivable that a Manager may suggest a
number of goals for the year which have a total value less than
the amount to which he or she may have been eligible. The
formula to be used would recognize the value of each goal up to
a maximum amount.
In addition, the amount received for the attainment of each goal
will be effected by the total performance of the bank as a
whole. In other words, a goal that is worth a predetermined
amount based on the anticipation of the banks performance during
the year could either be raised or lowered (by a specific amount
covered in later section in this presentation) depending upon
whether the bank met or exceeded this target. This builds in a
factor of concern for overall operation.
b. Officers at the level of Executive Vice President:
--------------------------------------------------
The formula for awarding incentive awards to Executive Vice
Presidents takes into account the primary responsibilities for
the total performance of the bank as opposed to carrying out of
specific objectives.
Page (5) of 14
However, it is important that officers at this level are
concerned with the fulfillment of the business plans made by
subordinate managers; therefore, part of the Executive Vice
Presidents overall incentive potential is tied to the
accomplishments of subordinates.
Accordingly, the formula for awarding incentives to Executive
Vice Presidents would consider two components:
A percentage (Exhibit II, supplemental performance) of
each's potential incentive target would be equivalent to
the percent of success of subordinate managers.
Individual projects undertaken by an EVP may be counted
and scored by the President in his sole discretion. This
score may represent 25% of the total supplemental score
of the Executive Vice President. The total supplemental
score of the EVP's may be adjusted up or down by 25% of
the target score at the sole discretion of the
President. This is to allow the President to take other
issues such as teamwork, leadership, independence,
creativity, unforeseen events, etc. into consideration.
The larger part of the incentive target would be
determined by the operating performance of the bank.
c. The President:
--------------
As the individual most responsible for the overall performance
of the bank the incentive award allocated for the President
would primarily reflect the bank's overall performance. Only a
small percentage (25%) of the potential incentive would be tied
to the achievement of individual goals by subordinate managers.
C. The Nature of Incentive Goals and Objectives and How they are
-- -------------------------------------------------------------
determined (essential and supplemental performance)
---------------------------------------------------
Page (6) of 14
a. The bank's annual planning process will be the vehicle that will
embody the overall bank goals and strategies. Department Managers
and other Officers that may participate in the incentive program
will be required to develop operating plans that support the bank-
wide goals. These operating plans will be used as the basis for the
supplemental incentive awards. The annual plan is developed by
Senior Management with the support from all other officers in the
association. The plan is presented to the Board of Directors for
discussion/modification and final agreement.
b. The annual planning process incorporates the following steps.
1-Senior management requests staff input in the process of
developing corporate goals.
2-Corporate goals are established and provided to incentive program
participants and other managers. In addition to the financial and
non-financial goals the participants are provided the bank's mission
statement, rationale for expected attainment of financial goals,
suggested strategies or tactics for achieving all goals and a
overall bank business strategy statement.
3-Each manager is given time to develop his or her ideas and plans,
stated in the form of department operating plans. Each objective
developed by a Manager would be a component of the banks overall
efforts to achieve its corporate goals for the year.
c. An analysis of each goal recommended and approved for inclusion by a
Manager will be made by the Senior Management group and rated for
overall value to the organization.
d. Based upon the value of each objective a total potential score is
determined. At the conclusion of the plan, each objective is rated
for overall
Page (7) of 14
performances with one of the following grades: 0, .5, 1, 1.5. The
performance is then multiplied by the value of each objective to
determine a weighted score. For any distribution to occur, the total
score must exceed a specified minimum indicated on exhibit I.
e. Each Executive Vice President and the President would establish
goals that would be framed within the scope of work identified as
objectives for Department Heads and other Managers. Thus, it is not
necessary (although possible) to establish special goals for the
Executive Vice Presidents and the President since their efforts will
be to provide the environment and assistance to subordinate
managers. By its nature, the efforts of subordinate managers should
total the attainment of the corporate goals.
Essential performance will be a ratio of annual net earnings divided
by annual average assets. The level of earnings to attain the target
payout is the earnings reflected in the plan adopted by the Board of
Directors. With the target level established, a scale will be
developed that will govern incentive payout when the earnings are
above or below the target. The parameters of the scale will be 6
basic points above and below the target level. If the lowest rung of
essential performance is not attained supplemental payout will not
be triggered. There may come a time when bank priorities change and
a different essential performance index is desired. The change
should be agreed upon before the annual planning process begins in
April of each year. This allows the new priority to be given new
attention in the planning process.
D. Amount of Total Incentive Allocation:
- -----------------------------------------
a. Department Heads and Other Managers
-----------------------------------
Page (8) of 14
Each manager will be eligible to receive total incentive
compensation of up to 10% of base salary (target incentive). The
target incentive (10%) payout will be allocated between two
performance indices: bank-wide earnings (essential performance) and
operating plan completion (supplemental performance). 75% of the
targeted incentive payout (10% of salary base) is predicated on
supplemental performance as reflected in exhibit I. Whether this
level can be reached will be determined by the value of each
individual goal approved and the level of attainment. A review of
that exhibit reflects that there is a potential to earn 150% of
target. The remaining 25% (essential performance) of the target
incentive level is based on the overall earning performance of the
bank. Target for essential performance is the level of earnings
represented in the annual plan approved by the Board of Directors.
b. Should the earnings performance of the bank be at its "targeted"
amount then the participant would receive that portion of the
essential performance at the incentive target level of 10%. Should
the bank's earnings level (essential performance) exceed that
"targeted" amount, a scale will be developed each year to calculate
the incentive above and below the target level. The maximum
incentive payout will be 150% of the target payout and zero if
earnings are below the bottom end of the scale. In no case will a
payout take place if earnings for the fiscal year fall below 50bp
ROA.
c. The total incentive allocation for the Executive Vice Presidents
will be 15%, 60% will be based on earnings of the bank against the
"targeted" amount. The remaining 40% will be a reflection of the
accomplishments of subordinate Department Heads and Managers. The
formula for determining the amount of incentive paid for the
accomplishments of managers is:
75% of goal attainment by managers=full
40% allocation
Page (9) of 14
50% of the goals attained by subordinate managers = 75% of the 40%
target 100% of the goals attained by subordinate managers = 150% of
40% allocation. The President in his sole discretion may increase or
decrease the supplemental score by 25% of the target level.
d. The total incentive allocation for the President will be 25%. 75% of
this allocation will be tied to the targeted performance of the bank
as a whole. Should the overall performance be higher or lower there
will be a corresponding increase or decrease in this 75% factor (of
the 25% total allocation).
The remaining 25% of the incentive allocation for the President will
be tied to the attainment of goals by subordinate managers
throughout the bank, using the same formula for actual payments as
used with the Executive Vice Presidents. The Board of Directors may
in their sole discretion increase or decrease the supplemental score
by 25% of the target level.
III. Incentive Awards for Extraordinary Performance: (Policy c)
- -----------------------------------------------------
In an unpredictable fast changing business climate there will be events
that occur and circumstances that arise that might give a manager operating
challenges that could not have been anticipated or there may be an unexpected
assignment requested by top management which will demand a major commitment of
time. Though these unexpected occurrences may actually be part of the normal
range of responsibilities the extraordinary nature may require an effort that is
clearly beyond what could be coped with as part of normal routine. The effort
that would be expended and the level of leadership over subordinate employees
clearly will require a total level of performance that deserves recognition as
part of the banks overall philosophy of regarding employees within an
environment of responsiveness for unusual and superior performance.
The unpredictability of the events and the difficulty in anticipating
their value precludes a predetermination of parameters for the size of the
reward; however, the following general guidelines would be used:
a. the size of any incentive would be no more than 15% of base salary
for any three month period in which this extraordinary performance
is maintained.
Page (10) of 14
b. In determining the value of the performance consideration would be
given to the potential financial impact on the bank if the
achievement cannot be made, the possible impact on customer service,
and the reputation of the bank.
c. The recommended amount of performance incentive award should be
documented with an explanation of the causes, and potential impact.
The recommendation and its justification should be provided to the
Board of Directors for final approval.
Schedule of Performance Goals
- -----------------------------
Management will present to the Board of Directors an annual plan in
early September or approximately two weeks before the "Annual Plan
Meeting" (generally during the second or third week of September). The
Board will respond to management with an approval of the plan or
modification of the plan by October 31. At that time the essential
performance index will be developed and approved by the Board of
Directors at the next Bank Administration Committee meeting.
Form and Timing of Payment
- --------------------------
Plan participants will normally receive their incentive awards in cash
within one month of the receipt of the final annual audit or at a time
the Board of Directors are reasonably sure of the fiscal year results.
Participant's Right to an Award
- -------------------------------
Plan participants employed by the institution throughout the Plan year
and at the end of the Plan year will have a vested right to receive any
incentive awards due them based on the performance results for that
year.
Participants who die, become disabled, or retire before the payment date
will be eligible for a pro rata incentive award based on the months they
worked during the year, from the first month of eligibility in the Plan
to the date of death, disability, or retirement. In the case of death,
the payment will be made to the estate.
Participants who voluntarily or involuntarily terminate employment with
the institution prior to the payment date will be ineligible for an
incentive payment. However, with the recommendation of the President,
the Board may make a discretionary pro rata payment to the terminated
employee.
Page (11) of 14
Participants who join the institution during the plan year, on the
recommendation of the President, may be awarded pro rata incentive
awards at the discretion of the Board.
Supplemental performance payout is triggered if the lowest rung of
essential performance is attained. If the Board of Directors believes
that some activity carried out during the year was worthy of an
incentive it would be governed by the special incentive provision on
page 2 paragraph C.
Page (12) of 14
EXHIBIT I
Described below are the numerical criteria for determining incentive
awards for the supplemental segment of the incentive program. The purpose is to
set forth a clear delineation between performance of sound job description
duties versus incentive performance levels. Each objective for a Department Head
or Manager will be given a weighting commensurate with its value to the
association. The President and Executive Vice Presidents will determine these
weights based upon the following criteria:
================================================================================
WEIGHTING DESCRIPTION
- --------------------------------------------------------------------------------
1 An objective that deals with day-to-day
operations but is characterized by more
complexity, duration, or unpredictable
factors that clearly are outside of
normal performance and deserving
recognition as an objective.
- --------------------------------------------------------------------------------
2,3 An objective that is clearly beyond
normal progress, based on job
description, representing intermediate
value to the association. To accomplish
requires creativity, significant
internal, external contacts and
managerial or technical expertise.
- --------------------------------------------------------------------------------
4,5 A major objective of the association
representing significant value. To
accomplish this requires creativity,
dealing in complex areas, and demands
decisions that are undirected and
involve unpredictable events.
================================================================================
Page (13) of 14
At the end of the year, the performance on each objective will be rated
on a scale of 0, .5, 1, 1.5 in accordance with the incentive performance
program. Standards for the supplemental scores are as follows:
Achievement of Payout Factor
Supplemental Performance Goals
- --------------------------------------------------------------------------------
Results reflect Plan not completed 0
Results reflect Competently completed .5
Results reflect Fully and Independently completed 1.00
Results reflect Exceptionally completed (independently) 1.50
(evaluation criteria on operating plans should support the evaluation)
Each Department Head will receive a total score which represents the weight of
the objective multiplied by the performance level and summed for all the
objectives. The Executive Vice Presidents may exercise sole discretion and alter
the score up or down by 25% of the target score.
The following payout scale will be used to determine the payout levels
for supplemental performance.
Total Score Payout Level
----------- ------------
12-13 50% of target
13-14 75% of target
14-16 target score 100% of target
----------------------------------------------------------------------
16-18 125% of target
18 150% of target
Thus, each Department Head or Manager must add significant value to the
association before any payout will be made.
Example:
Suppose a Department Head or Manager has objectives valued at
2,3,4,5 and performs these all to a satisfactory level thereby
earning a score of 1 for performance on each objective, The
Department Head's or Manager's final score will be 1x2 + 1x3 +
1x4 + 1x5 = 14. This would earn the Department Head a target
payout
Page (14) of 14
Exhibit II
Illustrative Example
--------------------
Target Incentive Award Percentages
----------------------------------
=========================================================================
ESSENTIAL SUPPLEMENTAL
PERFORMANCE PERFORMANCE
Total TARGET TARGET Award TARGET Award
Award (% of (% of Base (% of Base
Base Salary) Salary) Salary)
=========================================================================
LEVEL I 25% 18.75% 6.25%
- -President
- -------------------------------------------------------------------------
LEVEL II 15% 9 % 6 %
- -EVP's
- -------------------------------------------------------------------------
LEVEL III
- -SVP's 10% 2.5 % 7.5 %
- -VP's 10% 2.5 % 7.5 %
=========================================================================
Program allows for the maximum payout to be 150% of the target award.