WBHC Wilson Bank Holding Company (PK)

EXECUTIVE COMPENSATION

Risk Assessment of Compensation Policies

The Board of Directors of the Company and the Bank have reviewed the Company’s and the Bank’s compensation policies as generally applicable to their employees and believes that the policies are consistent with sound compensation practices and do not encourage excessive and unnecessary risk taking, and that the level of risk that they do encourage is not reasonably likely to have a materially adverse effect on the Company or the Bank.

Compensation Discussion and Analysis

Compensation Policy and Philosophy. Decisions with respect to compensation of the Company’s and the Bank’s executive officers, including the Chief Executive Officer and the other Named Executive Officers, as identified in the Summary Compensation Table, for fiscal year 2021 were made by the Board of Directors of the Company and the Bank based upon recommendations by the Personnel Committee.  The components of compensation of the Named Executive Officers consist of a base salary, an annual cash incentive opportunity, any amounts contributed (and earnings) under the executive officer’s frozen Executive Salary Continuation Agreement and thereafter under the SERP Agreements (as defined below) entered into in 2012, 2015, 2016, and 2020 and matching and profit-sharing contributions under the Company’s 401(k) plan (as well as health and disability insurance and other non-cash benefits similar to those of all employees of the Bank or Company).  At times, these executive officers have also been awarded equity-based compensation in the form of time vested stock options or, as was the case in 2016, 2018, 2020 and 2021, cash-settled stock appreciation rights (“SARs”); however, the Personnel Committee and the Chief Executive Officer have historically focused on cash-based compensation using stock options and other equity-based awards primarily in connection with promotions or changes in duties. In 2019, Mr. Foster’s base salary and bonus opportunity was increased in anticipation of his assumption of the role of President of the Bank that would occur on January 1, 2020. In addition, Mr. Foster was awarded stock options in 2020 in recognition of his additional responsibilities as President. The Company issued options and cash-settled SARs to Messrs. McDearman and Foster and Ms. Pominski to further incentivize such Named Executive Officers to drive the Company’s performance as certain awards previously granted to them became fully vested in 2021. The Company utilizes the frozen Executive Salary Continuation Agreements and the SERP Agreements, each as described in more detail below, to provide for post-retirement or other post-termination payments to the Named Executive Officers. No member of the Personnel Committee served as an officer or employee of the Company or of any of its subsidiaries during 2021.

The overarching policy of the Personnel Committee and the Board of Directors in determining executive compensation, including the compensation of the Chief Executive Officer, is to attract and retain the highest quality talent to lead the Company and the Bank and to reward key executives based upon their individual performance and the performance of the Bank and the Company.  The Personnel Committee evaluates both performance and compensation to ensure that the Company and the Bank maintain their ability to attract and retain superior employees in key positions and that compensation packages provided to key employees remain competitive relative to the compensation paid to similarly situated executives of peer companies. When evaluating the Company’s performance, the Personnel Committee and Board of Directors look to the Company’s earnings per share, return on average assets, return on average shareholders’ equity and the Company’s efficiency ratio.  Asset quality measures, like the Bank’s non-performing assets ratio are also reviewed as are the Bank’s capital levels and book value per share accretion. 

In evaluating compensation paid to similarly structured peers, the Personnel Committee reviewed and considered comparative market data prepared by Compensation Advisors, a consulting firm with experience providing compensation consulting to compensation committees of financial institutions. The comparative market data analyzed the compensation practices of twenty (20) banks across the United States between $2.5 billion and $8.4 billion in total assets as of June 30, 2020. The Personnel Committee targets executive compensation for the Named Executive Officers at the 50^th to 60^th percentile of compensation in the peer group when, for purposes of the annual cash incentive component of such compensation, the Bank’s performance is at budgeted levels. 

The Personnel Committee believes that providing incentives to and rewarding the performance of the Company’s and the Bank’s executive officers enhances the profitability of the Company.  To that end, the Personnel Committee believes that the compensation paid to the Company’s and the Bank’s executive officers should include base salary and a significant cash incentive opportunity designed to reward performance as measured against established goals.  The Personnel Committee has not historically utilized equity-based compensation as a significant component of the compensation paid to the Named Executive Officers, but, as described above, has utilized equity-based awards in certain instances as it did in 2020 and 2021. As a result, the Named Executive Officers’ total compensation has been more heavily weighted toward cash compensation, and their annual cash incentive compensation makes up a greater percentage of their total compensation than is the case of peer companies. The Personnel Committee may utilize equity-based awards more in the future.

Executive compensation programs impact all employees by setting general levels of compensation and helping to create an environment of goals, rewards and expectations. Because we believe the performance of every employee is important to our success, we are mindful of the effect of executive compensation and incentive programs on all of our employees.

Say on Pay Vote. At our 2020 Annual Meeting of Shareholders, we held our triennial shareholder advisory vote on the compensation of our Named Executive Officers and our shareholders overwhelmingly approved our fiscal year 2019 executive compensation program. Of the 6,047,453 votes cast, 5,807,548, or 96.03%, were cast in favor of approval.  The Personnel Committee has considered the results of the vote on our 2019 executive compensation program and concluded that the shareholders support the Company’s compensation policies and procedures which the Personnel Committee believes provide a competitive pay-for-performance package that effectively incentivizes our Named Executive Officers. The Company’s strong financial performance in fiscal year 2021 reinforces the Personnel Committee’s view that our executive compensation program is achieving its objectives, and the Board of Directors and the Personnel Committee made no significant changes to the program during the year. The Personnel Committee will continue to consider shareholder views about our core compensation principles and objectives, including the results of future say-on-pay votes, when determining executive compensation.

Base Salary.  Annually, the Personnel Committee reviews and approves a base salary for the Company’s Chief Executive Officer taking into account several factors, including prior year base salary, responsibilities, tenure, performance, salaries paid to chief executive officers of peer group companies, including in approving the salary for Mr. McDearman for 2021, the comparative market data prepared by Compensation Advisors, the Bank’s overall pay scale, including retirement benefits payable to the executive, and the Bank’s recent performance. Taking these factors into consideration, the Personnel Committee approved an increase of 3% to the 2021 base salary of Mr. McDearman when compared to 2020. In setting the base salaries of the other Named Executive Officers, the Personnel Committee considers the recommendations of the Chief Executive Officer, who makes his recommendations regarding these salaries based on many of the same factors as are considered by the Personnel Committee in setting his base salary, including salaries paid by peer companies to their employees serving in similar capacities at their peer companies. Based on those criteria, the Personnel Committee approved a 3% increase to the 2021 base salary of each of the Named Executed Officers.

Annual Cash Incentive. The Named Executive Officers are eligible for an annual cash incentive payment, which we refer to as a bonus, pursuant to a percentage formula recommended by the Personnel Committee and approved by the Board of Directors, after consideration of the same factors that are considered in the base salary approval process and detailed above. The annual cash incentive is based upon the Bank’s estimated after tax earnings for the fiscal year as of the date the bonus is paid.  In 2021, Messrs. McDearman, Foster, Oakley and Whitaker and Ms. Pominski were eligible for a cash incentive payment equal to 1.25%, .96%, .47%, .25% and .25%, respectively of the Bank’s estimated after tax earnings as of the date the payout is approved by the Board of Directors. In total, Messrs. McDearman, Foster, Whitaker, Oakley and Ms. Pominski were paid cash incentive payouts totaling $613,049, $470,822, $279,550, $171,654 and $171,654, respectively, based on the estimated performance of the Bank in 2021 as of the December 10, 2021 payment date. The Bank’s estimated after tax earnings as of December 10, 2021 were $49.0 million and its reported earnings for the year were $50.867 million, an increase of 28.6% compared to 2020 performance. In 2021, the Personnel Committee increased the cash incentive payment opportunity for each of Messrs. Whitaker and Oakley and Ms. Pominski by 0.10% under the Company’s annual cash incentive plan in light of the Bank’s outstanding performance in 2021 in regards to budgeted expectations as well as return on average assets and return on average equity performance metrics. The Personnel Committee also took into account the leadership displayed by the Named Executive Officers in continuing to lead the Company through the challenging operational environment brought on by the ongoing COVID-19 pandemic. In addition, the Company paid a special cash bonus of $1,500 to every employee, including the Named Executive Officers, in 2021 in appreciation of the employees working through the challenges of the ongoing COVID-19 pandemic beginning in 2020 and continuing into 2021.

Stock Options.  In 2021, Mr. Foster was awarded options to purchase 2,500 shares of the Company’s Common Stock. The stock options vest in 20% increments on each anniversary for the first five (5) years of the ten (10) year term and have an exercise price of $62.10 per share. Mr. Foster was also awarded 833 cash-settled stock appreciation rights that vest in 20% increments on each anniversary for the first five (5) years of the ten (10) year term and have an exercise price of $62.10 per share.  In 2021, Mr. McDearman was awarded options to purchase 5,000 shares of the Company’s Common Stock. The stock options vest in 20% increments on each anniversary for the first five (5) years of the ten (10) year term and have an exercise price of $62.10 per share. In 2021, Ms. Pominski was awarded options to purchase 1,000 shares of the Company’s Common Stock. The stock options vest in 20% increments on each anniversary for the first five (5) years of the ten (10) year term and have an exercise price of $62.10 per share. Ms. Pominski was also awarded 4,000 cash-settled stock appreciation rights that vest in 20% increments on each anniversary for the first five (5) years of the ten (10) year term and have an exercise price of $62.10 per share. All of the options to purchase stock and cash-settled appreciation rights were granted in light of the fact that certain awards previously granted to such Named Executive Officers became fully vested in 2021.

401(k) Plan and Profit Sharing Contributions.  All employees, including our Named Executive Officers and other executive officers participating in the Bank’s 401(k) Plan, receive a matching grant of $.50 from the Bank for each one dollar ($1) up to a maximum of 8% of the amount contributed each year by the employee to his or her 401(k) account. No employee was entitled to contribute more than $25,000 in 2021. The Bank historically has also contributed additional funds into each employee’s 401(k) account under a profit-sharing arrangement. During 2021, Messrs. McDearman, Foster, Whitaker and Oakley and Ms. Pominski received contributions under the 401(k) Plan and profit sharing arrangement totaling in the aggregate $27,550, $25,700, $27,550, $27,551 and $26,587, respectively, as compared to $27,075, $25,425, $27,075, $27,075 and $27,075, respectively, in 2020.

Post-Termination Benefits. The Bank has entered into Executive Salary Continuation Agreements with certain of its senior executive officers, including Messrs. McDearman and Whitaker and Ms. Pominski, which agreements were amended on December 30, 2008, November 23, 2012, and September 26, 2016.  The Executive Salary Continuation Agreements were amended during 2008 to bring the agreements into compliance with the requirements of Internal Revenue Code Section 409A, along with simplifying the calculation of the benefits received at retirement.  In November 2012, each of these agreements was amended to freeze future benefit accruals thereunder as of October 1, 2012 (the “Frozen Plans”).  In addition, in November 2012, the Bank entered into SERP Agreements with each of the senior executive officers, including the Named Executives Officers, other than Mr. Foster, effective as of October 1, 2012 (the “2012 SERP Agreements”).  On May 22, 2015, additional SERP Agreements were entered into with the senior executive officers, including the Named Executive Officers (the “2015 SERP Agreements” and together with the 2012 SERP Agreements, the “SERP Agreements”).  On September 26, 2016, the Executive Salary Continuation Agreements were amended to extend the period of benefit payments regarding the executives’ retirement following age 65 under the Executive Salary Continuation Agreements such that benefits payable thereunder will continue following 180 months of payments for the life of the recipient if the recipient is still alive when the 180th payment is made.  The 2015 SERP Agreements were entered into on May 22, 2015 for the purpose of making the normal retirement benefit for all executives officers equal to 30% of base salary.  On October 26, 2020, the SERP Agreements were amended to limit the amount of payments payable to the Named Executive Officers a party thereto upon the executive’s disability to 60% of the executive’s annual base salary and bonus at the time of disability, including any amounts payable under all other disability benefits, plans and arrangements that the Bank may have in place with the executive. In 2020, the 2015 SERP Agreements for Messrs. Foster and McDearman and Ms. Pominski were amended to reflect the addition of annuity contracts to fund the Bank’s obligations under the 2015 SERP Agreements. In addition, in 2022, the Bank and Mr. Whitaker entered into an amendment to his 2015 SERP Agreement to provide for an additional annuity contract to support the Bank’s obligations thereunder.

In 2021, the Bank and Ms. Pominski entered into an amendment to her 2015 SERP Agreement to add an early retirement benefit.  Pursuant to the amended agreement, in the event that Ms. Pominski remains employed by the Bank until March 29, 2024, if her employment terminates prior to reaching age 65 for any reason other death, disability or following a change of control, she will be entitled to receive a monthly benefit payable for the remainder of her life paid from annuity contracts purchased by the Bank.  These payments are expected to approximate $6,138 per month and are conditioned on Mr. Pominski not providing services substantially similar to those she provides to the Bank to a company engaged in the business of banking in counties where the Bank has a location from the date that she separates from service and ending on the earlier of the date that payments are no longer being made to Ms. Pominski under the 2015 SERP Agreement and the date Ms. Pominski reaches the age of 80.

In connection with entering into the amendments for the Frozen Plans in 2012, the Company subsequently discovered that Mr. Oakley’s Executive Salary Continuation Agreement had not been executed. To address this oversight, the Company and Mr. Oakley entered into an amendment to his 2012 SERP Agreement to increase the benefits payable to him thereunder for each allowable termination event by an amount necessary to place Mr. Oakley in the same position as if his Executive Salary Continuation Agreement had been executed.

The Executive Salary Continuation Agreements and the SERP Agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits.  The primary impetus for freezing the Executive Salary Continuation Agreements and establishing the 2012 SERP Agreements was attainment of a net decrease in compensation expense for the Bank of approximately $1.9 million over the life of the Frozen Plans and the additional SERP arrangements, including similar agreements with Elmer Richerson, the former President of the Bank, and Randall Clemons, the former Chief Executive Officer and President of the Company

The accrual of benefits was frozen under the Executive Salary Continuation Agreements such that no additional benefits (including disability and death benefits thereunder) would be accrued under the Executive Salary Continuation Agreements on or after October 1, 2012. In the event of disability under the Executive Salary Continuation Agreement, the frozen disability benefit would be paid to the Executive’s normal retirement age, at which time such benefit would be reduced to the normal retirement benefit provided for under the applicable executive Salary Continuation Agreement for the remaining benefit payment period of the normal retirement benefit. The 2016 amendments to the Executive Salary Continuation Agreements were implemented to provide for continued payments beyond the original 180-month period until the executive’s death.

The SERP Agreements were entered into to provide certain supplemental nonqualified pension benefits to the Named Executive Officers a party thereto in coordination with the then freezing of the benefits under the executive’s Executive Salary Continuation Agreement.  The SERP Agreements, when combined with the frozen Executive Salary Continuation Agreements, if applicable, are designed to provide the Named Executive Officers with a targeted percentage of final salary for the remainder of each of the executive’s lives following their separation from service for normal or early retirement.  The Bank purchased Flexible Premium Indexed Deferred Annuity Contracts in 2012 and 2015 as a way to fund the benefits under the SERP Agreements and in 2016 as a way to fund the benefits under the portion of the frozen Executive Salary Continuation Agreements following the original 180-month payment period. The frozen Executive Salary Continuation Agreements and the SERP Agreements together provide for the payment of an annual cash benefit following the executive’s separation from service from the Bank under a variety of events including voluntary termination of employment and involuntary termination of employment without cause (except that the 2015 SERP Agreements do not provide for an early termination benefit) though Ms. Pominski’s 2015 SERP Agreement was amended in 2021 to provide for an early retirement benefit.

Per these supplemental benefit agreements, upon an executive’s separation from service for any reason other than death or disability after reaching age sixty-five (65), he or she is entitled to receive a percentage of his or her then current base salary payable in equal monthly installments for 180 months beginning the month following the month in which the executive’s retirement occurs. Following the end of the 180-month period, if the executive’s employment was terminated as a result of normal retirement, this payment will continue for the remainder of the executive’s life. The targeted annual normal retirement benefit is 30% of base salary payable in equal monthly installments upon such separation from service for the executive’s life, commencing on the first full day of the month following separation from service. 

If a Named Executive Officer that is a party to such agreements retires after the later of twenty (20) years of service or age 55, but prior to reaching age 65, his or her retirement will be considered an “early retirement” under the frozen Executive Salary Continuation Agreement and the 2012 SERP Agreement. Upon such event, he or she shall be entitled to receive a benefit equal to the executive’s then accrued balance under the plans, payable in equal monthly installments for 180 months beginning the month following the month in which the executive’s early retirement occurs. Following the end of the 180-month period, the 2012 SERP Agreement will continue early retirement payments for the remainder of the executive’s life.  In the event of a separation from service prior to his or her reaching age 65 for any reason other than death or disability or a change in control, the 2015 SERP Agreement will terminate and such executive will not be entitled to benefits, except that if Ms. Pominski remains employed through March 29, 2024 and her employment thereafter terminates other than for death, disability or following a change in control, she will be entitled to an early retirement benefit, which is estimated to be approximately $6,138 per month, for the remainder of her life provided that she complies with certain restrictive covenants. Mr. McDearman is entitled to an annual “early termination” benefit payable for 180 months under the frozen Executive Salary Continuation Agreement, and each of Mr. McDearman and Mr. Oakley is entitled to an annual “early termination” benefit payable for life under the 2012 SERP Agreement if his employment is terminated for any reason other than death, disability or retirement by his voluntary action or by the Bank other than for cause. At December 31, 2021, this annual benefit was $2,525 under the frozen Executive Salary Continuation Agreement for Mr. McDearman and was $4,851 and $4,108 under the 2012 SERP Agreement for Mr. McDearman and Mr. Oakley, respectively.  These payments commence at normal retirement age under the Executive Salary Continuation Agreement and upon separation from service under the 2012 SERP Agreements. Both Mr. Whitaker and Ms. Pominski were eligible for early retirement as of December 31, 2021 and would not receive these “early termination benefits”.

In the event that a Named Executive Officer becomes disabled prior to reaching age 65, the Bank is obligated to pay to the executive an annual benefit equal to 60% of the Named Executive Officer’s base salary and bonus at the time of disability payable in equal monthly installments until the Named Executive Officer’s 65th birthday, though the amount payable under the 2015 SERP Agreement is reduced by any amounts payable to the Named Executive Officer under the Executive Salary Continuation Agreement and 2012 SERP Agreement. Following that date, the disability benefit under the Executive Salary Continuation Agreement is reduced to the Named Executive Officer’s normal retirement benefit under the Executive Salary Continuation Agreement for the number of months necessary for a total of 180 monthly payments to have been made to the Named Executive Officer thereunder, and the disability benefit under the SERP Agreements will be reduced to the normal retirement benefit under the SERP Agreements, which shall be paid annually for life thereunder. 

As noted above, the SERP Agreements were amended on October 26, 2020 to limit the amount of payments payable to the Named Executive Officers a party thereto upon the executive’s disability to 60% of the executive’s annual base salary and bonus at the time of disability, including any amounts payable under all other disability benefits, plans and arrangements that the Bank may have in place with the executive.

In the event that the Named Executive Officer dies before he or she has a separation from service with the Bank, his or her beneficiary is entitled to receive a payment equal to the amount of the liability that should at that time have been accrued by the Bank under generally accepted accounting principles for the Named Executive Officer under the Executive Salary Continuation Agreement and SERP Agreements to which the Named Executive Officer is a party payable in a lump sum no later than thirty (30) days (or in the case of the 2015 SERP Agreement, 60 days) from the date of the Named Executive Officer’s death. In addition, the Named Executive Officer’s beneficiary is entitled to receive under a split dollar life insurance arrangement (the “Split Dollar Benefit”) a death benefit the amount of which as of December 31, 2021 was approximately equal to $458,000, $568,000, $800,000, $544,981 and $335,000, in the case of Messrs. McDearman, Foster, Whitaker and Oakley, and Ms. Pominski, respectively.  In the event that the Named Executive Officer dies after retirement benefit payments have commenced under the Executive Salary Continuation Agreement and SERP Agreements to which the Named Executive Officer is a party, but before he or she has received 180 monthly payments, the Bank will continue to pay the Named Executive Officer’s beneficiary those payments until a total of 180 monthly payments have been made to the Named Executive Officer and/or his or her beneficiary.

In the event there is a change in control of the Bank, the normal retirement benefit under the Executive Salary Continuation Agreements and SERP Agreements becomes fully vested and will be paid to each Named Executive Officer in equal monthly installments, as applicable, for the remainder of his or her life. A change in control will be deemed to have occurred if a “change in ownership,” a “change in the effective control,” or a “change in the ownership of a substantial portion of the assets” of the Bank occurs, as such terms are defined in Treasury Regulation §1.409A-3(i)(5) or any subsequent, applicable Treasury Regulation.

Additional Life Insurance Benefits.  On April 14, 2014, the Bank entered into an Executive Survivor Income Agreement (the “Executive Survivor Income Agreement”), with each of the Named Executive Officers.  The Executive Survivor Income Agreements were entered into to encourage the Named Executive Officers to remain in service to the Bank by the Bank providing certain survivor income benefits to designated beneficiaries if the Named Executive Officer dies prior to the termination of his or her employment.

In the event that a Named Executive Officer is removed from office with cause or any Named Executive Officer is permanently prohibited from participating in the Bank’s activities by an order of the Bank’s regulators, or terminated for “cause”, in each case prior to such person’s death, all obligations of the Bank under the Executive Survivor Income Agreement shall terminate. Cause under these agreements means the Bank has terminated the Named Executive Officer’s employment for any of the following reasons: (i) gross negligence or gross neglect of duties; (ii) commission of a felony or of a gross misdemeanor involving moral turpitude; or (iii) fraud, disloyalty, or willful violation of any law or significant Bank policy committed in connection with the Named Executive Officer’s employment or service on the Board, as applicable, and resulting in an adverse effect on the Bank.

The amounts payable to a Named Executive Officer’s beneficiary under the Executive Survivor Income Agreements are largely fixed, though in some instances are reduced based on the age of the Named Executive Officer at the time of his or her death. As of December 31, 2021, the amount payable under the agreements with each of the Named Executive Officers was $400,000. The Bank will pay the benefits due under the Executive Survivor Income Agreements from its general assets, but only so long as one of the Bank’s general assets is an enforceable life insurance policy on the Named Executive Officer’s life that was issued by Massachusetts Mutual Life Insurance Company and Midland National Life Insurance Company.

Health Insurance Benefits.  In 2021, the Company paid the employee portion of the premiums under the Company’s health insurance plan for each of Messrs. McDearman, Foster, Whitaker, Oakley, and Ms. Pominski and certain of their family members at a cost of $19,226, $11,570, $13,285, $19,226 and $13,285, respectively.

Fuel Allowance. In addition to the above-described compensation, the Company provides a company owned car for each of Messrs. McDearman, Foster, and Whitaker, each of whom is entitled to also use such car for personal use. The Company provides a fuel allowance for such personal use based on the amount of miles driven for personal use multiplied by the effective federal mileage reimbursement rate. In 2021, these allowances totaled $1,711, $3,158, and $2,106 for each of Messrs. McDearman, Foster, and Whitaker, respectively.  Mr. Oakley was provided an auto allowance for 2021 totaling $6,000 for business use of his personal vehicle.

2022 Compensation.  The Personnel Committee considered the reports and information received from Compensation Advisors, including updated comparative market data of the compensation practices of twenty (20) banks across the United States between $2.5 billion and $8.4 billion in total assets as of June 30, 2021 in finalizing the recommended compensation for the Named Executive Officers in 2022. The Personnel Committee once again targeted compensation for 2022 at the 50^th to 60^th percentile of the peer group if, for purposes of the annual cash incentive component thereof, the Bank’s performance achieves budgeted results. For 2022, base salaries have been set at $555,000, $374,750, $328,158, $283,662 and $311,472 for Messrs. McDearman, Foster, Whitaker and Oakley, and Ms. Pominski, respectively. The Personnel Committee also approved a cash incentive plan for the Named Executive Officers in 2022, which was largely unchanged from the 2021 cash incentive plan in terms of award opportunities for the Named Executive Officers and performance metrics on which payment will be based (without giving effect to the discretionary increase made in 2021).