EXHIBIT 10.9
THE SANDWICH CO-OPERATIVE BANK
MANAGEMENT INCENTIVE COMPENSATION PLAN
JANUARY 1990
TABLE OF CONTENTS
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Page No.
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MANAGEMENT INCENTIVE COMPENSATION PLAN
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Plan Objectives 1
Eligibility for Participation 2
PLAN ADMINISTRATION
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Procedures and Bonus Determination 5
Bonus Plan Contingencies 9
BONUS FORMULAS 12
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PERFORMANCE MULTIPLIER 20
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PERFORMANCE MANAGEMENT SYSTEM 21
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1
THE SANDWICH CO-OPERATIVE BANK
MANAGEMENT INCENTIVE COMPENSATION PLAN
December 1989
The objective of the Management Incentive Compensation Plan I-s to provide a
reasonable and effective means of recognizing, rewarding and encouraging
outstanding achievement on the part of management as a whole and the individual
officers of the Sandwich Co-operative Bank.
The principal measure of achievement utilized by the Plan focuses on corporate
performance - both short - and long-term - and the relationship of the
individual officers' performance to that of the Bank. It is a fundamental
expectation of the Plan that +.-he performance objectives of its management
will, at all times, give principal consideration to the provision of share
holder value. Short-term gains which in any way compromise this requisite value,
the Bank's operating philosophy or understanding of purpose should be seen as
contrary to its interests and unworthy of consideration within the context of
the Management Incentive Compensation Plan.
The Management Incentive Compensation Plan is based on the following precepts:
A. Overall corporate performance cannot be fully appreciated without a
thorough understanding of corporate purpose and explicit definition of
long-range objectives. Once formulated, this understanding, in the form of
a corporate plan, should be subject to ratification by the Directors and
reviewed annually for purposes of modification and reratification.
2
B. Under almost all circumstances, tire most accessible and consistently
reliable yardstick for the measurement of corporate performance is
profitability. In this regard "Return on Assets" and "Return on Equity"
will provide objective means of assessing profitability.
C. Other measures of corporate performance may also be suitable, depending
upon the circumstances and needs of the organization. In the instance of
the Sandwich Co-operative Bank, Asset Growth, Operating Expense, and Asset
Quality will constitute reasonable additional measurement criteria for the
assessment of organizational and senior management performance. Interest
rate spread, earnings per employee and deposit growth will provide
reasonable measurement criteria for the assessment of the remaining
management group.
D. Eligibility for participation in the Plan should be limited to those who
may be in a position to significantly contribute to the Bank's
profitability, e.g., its officers and designated managers. (This
delineation will serve as an incentive for nonparticipants to aspire to and
achieve participant status.) It should be clearly understood, however, that
eligibility alone does not assure an officer actual participation in any
incentive compensation distribution.
E. Actual distribution of incentive compensation should bear a direct
relationship to individual performance and contribution to profitability.
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i. Those who contribute little or nothing should be rewarded with
little or nothing.
3
ii. Extraordinary contributions should be rewarded in an
extraordinary fashion. The effort, skill, risk and/or personal sacrifice
required to produce superlative achievement cannot be effectively rewarded
with token incentive awards. Therefore, the higher the financial
performance of the Bank and its officers, the greater the potential
rewards.
iii. Definition of both i and ii requires a mutual understanding
relative to expected performance goals. Individual performance goals
should be explicitly defined at the beginning of each year, reviewed
quarterly (for progress and/or need for modification) and used as a means
of assessing performance at year-end. The relative importance of various
goals, as well as major unforseen changes in operating conditions must be
considered in the final evaluation of performance levels.
iv. The magnitude of individual incentive compensation awards should
be determined by the Chief Executive Officer, with the benefit of
supporting assessment information provided in writing by senior officers
relative to their subordinates.
v. Incentive awards should be subject to ratification by the Salary
Committee of the Board of Directors -which will, in addition, determine the
Incentive Compensation award of the Chief Executive Officer.
4
F. Particular effort will be required to ensure the relevancy of the
incentive compensation awards, i.e., the sensitivity of the plan in
recognizing and responding to variations in performance over time, and in
relation to the expectations as well as the performance of members of the
management group. If distribution becomes unvarying, nondiscriminatory, or
taken for granted, then the Plan's purpose will have been compromised.
G. No incentive compensation plan is without flaw, nor immune to ultimate
obsolescence. For this reason, the Plan, its purpose and actual impact
should be reassessed annually, and modifications adopted where necessary.
It should be expected that the Plan will be substantially modified at the
end of three years.
5
PLAN ADMINISTRATION
Procedures and Bonus Determination
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The Management incentive Compensation Plan will be carried out in accordance
with the following procedure:
1. Senior management will formulate a Corporate Plan for the Bank -
stating its understanding of purpose, operating philosophy, and
general objectives. The Corporate Plan will be presented to the Board
for review and ratification.
2. Eligibility of those to be included in the Plan will be recommended
annually by the Chief Executive Officer to the Personnel Committee
based on level of responsibility in the corporation. Any new employee
occupying a level which would qualify for plan participation as
determined by the Chief Executive Officer will be eligible for
participation in their first year as designated in the Bonus Plan
Contingency section on Page 9.
3. The Board of Directors will establish a Corporation Performance Review
Committee which will consist of the members of the Finance and
Personnel Committees.
4. Incentive Compensation will be based on both the financial performance
of the corporation and individual performance:
6
a. The Performance Review Committee will be charged with assessing
overall Bank financial performance on an ongoing basis in
conformance with the Corporation Plan. An analysis of peer group
data will also be used in assessing the financial performance of
the Bank where appropriate.
b. An objectives system will be established whereby each
participating officer annually formulates, in conjunction with
his or her direct superior, explicitly defined objectives for the
year ahead.
5. At the close of each fiscal year, a determination of both Bank and
individual performance will be made, subject to review and
confirmation by the appropriate Bank officers and committees.
6. A bank performance based "incentive bonus pool" will be established as
a percent of eligible plan participants' total salaries. Distributions
from the pool will be made pro rata on the basis of the individual's
salary level and performance against established objectives.
a. The financial performance criteria which will determine the
amount of the senior management incentive bonus pool are
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Profitability; Return on Assets; Return on Equity; Asset Growth;
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Operating Expense; and, Asset Quality. The criteria used for
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determining the management incentive bonus pool are: Interest
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Rate Spread; Earnings per Employee;
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7
and, Deposit Growth (see pp. 12 - 19). The criteria ranges were
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determined based on peer group comparisons and an analysis of the
Bank's historic, current and projected financial performance. It
is recommended that the criteria ranges be adjusted every two or
three years to accommodate changes in operating and economic
conditions.
b. The individual plan participant's percent share of the "incentive
bonus pool" will be determined by calculating his or her
performance weighted pro rata share of total participant
salaries.
8
HYPOTHETICAL EXAMPLE
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* The total salaries of all plan participants is $400,000.
* The Bank's results against plan criteria warrant an Incentive Bonus Pool of
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10.0% - resulting in an Incentive Bonus Pool of $40,000 ($400,000 x 10% =
$40,000).
* Participant X was paid a base salary of $40,000 during the plan year. His
pro forma share of total salaries was 10.0%.
* Participant X's performance "exceeded" his objectives established at the
beginning of the year - resulting in a performance multiplier of 1.5 (see
page 20). His "gross performance weighted share" is therefore 15.0% (10.0%
x 1.5).
* The sum of the "gross performance weighted shares" of all of the
participants equals 122.2%. Participant X's "net performance weighted pro
rata share" is therefore 12.2% (15.0% divided by 122.2% = 12.2%). His
actual bonus will be $4,880 (12.2% of $40,000 Incentive Bonus Pool).
Pro Rata% Performance Perf.Wtd. Perf. Wtd.
Participant Salary of Total Multiplier Share Share
- ----------- ------- --------- ----------- --------- ----------
A $120,000 30% 1.0 30.0% 24.5%
B $100,000 25% 1.5 37.5% 30.6%
C $ 80,000 20% .5 10.0% 8.2%
D $ 60,000 15% 2.0 30.0% 24.5%
x $ 40,000 10% 1.5 15.0% 12.2%
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122.5% 100.0%
9
PLAN ADMINISTRATION
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Bonus Plan Contingencies
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1. The Corporate Performance Review Committee will convene to assess the
degree to which the Bank's performance for the year conformed with the
standards established in the corporate plan. An unwarranted variance from
the plan could result in adjustment to the "incentive bonus pool" - either
upward or downward - by whatever amount is deemed appropriate by the
Corporate Performance Review Committee. For example, if the Committee
determined management risk-taking unduly jeopardized "soundness", the
"incentive bonus pool" would be reduced and, if considered necessary,
incentive awards for the year might be eliminated. On the other hand, if
extraordinary mitigating circumstances beyond the control of management
were to negatively impact profitability, an upward adjustment might be
considered. The Corporate Performance Review Committee should give due
consideration to the performance of the Bank relative to its peer group and
existing economic and competitive conditions when reviewing corporate
performance with respect to the incentive plan. The Corporate Performance
Review Committee may also elect to make exceptions to the plan in order to
recognize the truly extraordinary contributions of individuals - separate
from the Bank and the management group as whole.
10
2. The amount of the "incentive bonus pool" will under no circumstances
exceed ten percent of the Bank's net income. The net income base for this
calculation should be net of the effect of the annual accrual for the
incentive plan for that year (i.e., the accrual, net of associated tax
benefits, should be added back to net income). Net income is considered to
be bottom line net income, including the net effect of investment
securities gains/losses and other nonrecurring items, but exclusive of
extraordinary one-time events, e.g., Co-operative Central Bank dividends,
the sale of physical assets, etc.
3. Under no circumstances will an incentive bonus be paid in any year for
which a cash dividend on the Bank's stock has not been paid, or in any year
in which cash dividends have been reduced.
4. Bonus Eligibility Determination: active full-time employees are eligible
for 100% participation in the Management Incentive Compensation Plan if
they have been designated as a participant by the Chief Executive Officer
in conjunction with the Salary Committee and have been working under a set
of individual performance goals for 12 months prior to the effective date
of the bonus. Otherwise eligible employees having less than 12 months but
more than six months of employment working under a set of individual
performance goals may be designated participants by the chief executive
officer.
Their level of participation will be limited by the amount of base salary
received during the bonus period. Officers must be on the payroll at the
time of the bonus disbursement to receive their bonus.
11
5. The salary base to be used in the calculation is based upon earned salary
for the period less any bonus payment included in that salary from a prior
year.
6. It should be fully understood that the described plan is not intended to
interface, complement or otherwise relate with the Bank's regular Salary
Administration Program. The two are and should remain totally separate
entities.
7. The Management Incentive Compensation Plan will be administered and
established at the discretion of the Bank's Board of Directors and can be
discontinued or modified at any time at their discretion. Furthermore,
such bonus plan is not to be construed as a contract between employer and
employee/officer. Any and all right to participate in this Plan will cease
upon the officer's termination.
12
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
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A. PROFITABILITY: The Bank's relative profitability will be determined by
contrasting its Return on Assets (Net Income/Average Total Assets) against
that of its peer group. Net Income will be calculated exclusive of
extraordinary, one time events, e.g., Cooperative Central Bank
distributions, the sale of physical assets, etc.
Bonus
Return on Assets Percentage
Variance over the Peer Group Allocation
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0.10 or less 0.00%
0.11 to 0.15 0.50%
0.16 to 0.21 1.00%
0.22 to 0.26 1.50%
0.27 to 0.31 2.00%
0.32 to 0.36 2.50%
0.37 to 0.42 3.00%
0.43 to 0.47 3.50%
0.48 to 0.52 4.00%
0.53 to 0.57 4.50%
0.58 to 0.63 5.00%
0.64 to 0.68 5.50%
0.69 to 0.73 6.00%
0.74 to 0.78 6.50%
0.79 to 0.84 7.00%
0.85 to 0.89 7.50%
0.90 to 0.94 8.00%
0.95 to 0.99 8.50%
1.00 or more 9.00%
13
B. RETURN ON EQUITY: The Bank's Return on Equity (net Income divided by
average total shareholders' equity). Net Income will be calculated
exclusive of extraordinary, one time events, e.g., Cooperative Central
Bank distributions, the sale of physical assets, etc.
Bonus
Percentage
Return on Equity Allocation
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5.50 or less 0.00%
5.51 to 5.96% 0.50%
5.97 to 6.43% 1.00%
6.44 to 6.89% 1.50%
6.90 to 7.36% 2.00%
7.37 to 7.82% 2.50%
7.83 to 8.28% 3.00%
8.29 to 8.75% 3.50%
8.76 to 9.21% 4.00%
9.22 to 9.68% 4.50%
9.69 to 10.14% 5.00%
10.15 to 10.60% 5.50%
10.61 to 11.07% 6.00%
11.08 to 11.53% 6.50%
11.54 to 11.99% 7.00%
12.00 to more 7.50%
14
C. ASSET GROWTH: The Bank's asset growth as calculated be comparing the
difference between average assets for the fiscal year on which the
incentive is based to the average assets of the prior year.
Bonus
Percentage
Asset Growth Allocation
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7.00 or less 0.00%
7.01 to 8.37% 0.50%
8.38 to 9.75% 1.00%
9.76 to 11.12% 1.50%
11.13 to 12.50% 2.00%
12.51 to 13.87% 2.50%
13.88 to 15.24% 3.00%
15.25 to 16.62% 3.50%
16.63 to 17.99% 4.00%
18.00 to more 4.50%
15
D. OPERATING EXPENSE/AVERAGE TOTAL ASSETS: The Bank's relative Operating
Expense will be determined by contrasting it Operating Expense against that
of its peer group.
Operating Expense/ Bonus
Average Total Assets Percentage
Variance below Peer Group Allocation
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0.05 or less 0.00%
0.06 to 0.11 0.50%
0.12 to 0.16 1.00%
0.17 to 0.22 1.50%
0.23 to 0.27 2.00%
0.28 to 0.33 2.50%
0.34 to 0.38 3.00%
0.39 to 0.44 3.50%
0.45 to 0.49 4.00%
0.50 to more 4.50%
16
E. ASSET QUALITY: Asset quality as measured by net loan charge offs (charge
offs less recoveries realized from the previous year) stated as a percent
of average total loans.
Bonus
Percentage
Asset Quality Allocation
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0.040 or less 0.00%
0.039 to 0.036% 0.50%
0.035 to 0.033% 1.00%
0.032 to 0.029% 1.50%
0.028 to 0.026% 2.00%
0.025 to 0.022% 2.50%
0.021 to 0.018% 3.00%
0.017 to 0.015% 3.50%
0.014 to 0.011% 4.00%
0.010 to more 4.50%
17
MANAGEMENT INCENTIVE COMPENSATION PLAN
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A. INTEREST RATE SPREAD: The Bank's Interest Rate Spread for the fiscal
year contrasted against that of its peer group. Interest rate spread is
defined as total income on interest earning assets, stated as a percent of
average interest earning assets, less the total expense of interest bearing
liabilities, stated as a percent of average interest bearing liabilities.
Percent
Interest Rate Spread Bonus
Variance over Peer Group Allocation
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0.05 or less 0.00%
0.06 to 0.10 0.50%
0.11 to 0.16 1.00%
0.17 to 0.21 1.50%
0.22 to 0.26 2.00%
0.27 to 0.31 2.50%
0.33 to 0.37 3.00%
0.38 to 0.42 3.50%
0.43 to 0.47 4.00%
0.48 to 0.53 4.50%
0.54 to 0.58 5.00%
0.59 to 0.63 5.50%
0.64 to 0.69 6.00%
0.70 to 0.74 6.50%
0.75 to more 7.00%
18
B. EARNINGS PER EMPLOYEE: The Bank's earnings (interest income plus
noninterest income) divided by the average number of full-time equivalent
employees for the fiscal year.
Percent
Bonus
Earnings Per Employee Allocation
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$225,000 or less 0.00%
$225,001 to $235,714 0.50%
$235,715 to $246,428 1.00%
$246,429 to $257,143 1.50%
$257,144 to $267,857 2.00%
$267,858 to $278,571 2.50%
$278,572 to $289,285 3.00%
$289,286 to $299,999 3.50%
$300,000 or more 4.00%
19
C. DEPOSIT GROWTH: The Bank's retail deposit growth as calculated by
comparing the difference between the average total deposits for the year on
which the incentive is based to the average total deposits of the prior
year.
Bonus
Percentage
Deposit Growth Allocation
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7.50 or less 0.00%
7.51 to 8.57% 0.50%
8.58 to 9.64% 1.00%
9.65 to 10.71% 1.50%
10.72 to 11.78% 2.00%
11.79 to 12.85% 2.50%
12.86 to 13.92% 3.00%
13.93 to 14.99% 3.50%
15.00 to more 4.00%
20
SANDWICH CO-OPERATIVE BANK
Performance Multiplier
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Attainment Level
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Objectives Attainment Level Performance Multiplier
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FAILED TO Participant substantially 0.0
ACHIEVE OBJECTIVES failed to meet all objectives;
no mitigating circumstances.
PARTIALLY Participant met some objectives 0.5
ACHIEVED OBJECTIVES although significant objectives
were not achieved. Performance
in general was below expectation.
FULLY Participant accomplished all 1.0
ACHIEVED OBJECTIVES major objectives. Those that
were not fully accomplished
may have been minor or may have
been passed over due to efforts
exerted to accomplish more
important objectives. Level of
accomplishment in general was
at expectations.
EXCEEDED OBJECTIVES Participant fully accomplished 1.5
objectives according to
expectations, and exceeded
expectations in some areas.
GREATLY Participant greatly exceeded 2.0
EXCEEDED OBJECTIVES expectations in most areas
of performance.
21
PERFORMANCE MANAGEMENT SYSTEM
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Objectives
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The purpose of the Performance Management System is to:
Systemize the process of performance management in order to stress its
importance as an integral part of Management Incentive Compensation.
Provide a direct link to the Management Incentive Compensation System
through a scoring system.
Description of the System.
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The system is an objectives-driven approach to evaluating performance. In its
most simplistic form:
1. Officers establish their own objectives in conjunction with their
superiors.
2. Objectives are weighted in terms of overall importance from 0 - 100%
3. Quarterly or semiannual reviews of objectives are conducted with
superiors to ensure relevancy of objectives and weightings.
4. End of the year reviews of the levels of objectives attainment are
conducted and an evaluation of level of achievement based on a scale
of 0.0 - 2.0 is assigned to the overall objective. Definitions of
objectives attainment are presented on Page 20 of the plan.
5. The cumulative total of the objectives attainment ratings (0.0 to 2.0)
becomes the "performance multiplier" applied to determine individual
participant "adjusted total salary."