INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In the ordinary course of business, CTBI, through its wholly-owned commercial bank subsidiary, Community Trust Bank, Inc. (the “Bank”), has had in the past and expects to have in the future banking transactions, including lending to its directors, officers, principal shareholders, and their associates. When these banking transactions are credit transactions, they are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. None of the credits are disclosed as nonaccrual, past due, restructured, or potential problem credits. In the opinion of CTBI’s Board of Directors, such transactions do not involve more than the normal risk of collectability or present any other unfavorable features.
Mr. Charles J. Baird, a director of CTBI, is a shareholder in Baird and Baird, P.S.C., a law firm that provided services to CTBI and its subsidiaries during 2013 and will be retained by CTBI and its subsidiaries during the fiscal year 2014. Approximately $1.1 million in legal fees and $0.2 million in expenses paid on behalf of CTBI, $1.3 million in total, were paid to Baird and Baird, P.S.C. during 2013.
The Board of Directors has determined that the Compensation Committee of the Board should review and approve related party transactions. Accordingly, management recommends to the Compensation Committee related party transactions to be entered into by CTBI, including the proposed aggregate value of such transactions if applicable. After review, the Compensation Committee recommends approval or disapproval of such transactions and at each subsequently scheduled meeting, management updates the Compensation Committee as to any material change to those proposed transactions. The Compensation Committee provides a report to the Board of Directors at each regularly scheduled meeting of the related party transactions approved by the Compensation Committee since the date of its previous report to the Board.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the “Act”) requires CTBI’s executive officers and directors and persons who own more than ten percent (10%) of the Common Stock to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”), as well as to furnish CTBI with a copy of such report. Additionally, SEC regulations require CTBI to identify in its Proxy Statement those individuals for whom one of the referenced reports was not filed on a timely basis during the most recent fiscal year. Based upon a review of Forms 3, 4, and 5 furnished to CTBI, there were no late filings during 2013.
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
This Compensation Discussion and Analysis is intended to provide shareholders with an understanding of our executive compensation philosophy, our decision making process, the key compensation-related decisions made by the Compensation Committee in 2013, and any changes approved for 2014. It also describes the key components of compensation provided to CTBI’s executive officers, including the Named Executive Officers.
Executive Summary
CTBI’s earnings (Net Income, EPS) and returns (Return on Assets, Return on Equity) for 2013 were not significantly different from the prior year and below the performance targets established at the beginning of 2013. CTBI’s performance for 2013 was impacted by continuing to operate in a slowly recovering economy with low interest rates. Additionally, the financial performance of CTBI was negatively impacted during the fourth quarter of 2013 by an accrual of $6.2 million for anticipated costs as reported in the Annual Report on Form 10-K for the year ended December 31, 2013. Accordingly, cash bonuses and total compensation paid to the Named Executive Officers in 2013 were lower than the prior year. See “2013 Annual Incentive Plan” and “Long-Term Incentive Plan” below for additional information.
During 2013, the Compensation Committee continued its ongoing review of the compensation program for executive officers and monitored the impact of certain changes implemented in 2012 and 2013, especially in regard to the executive incentive plans. As described in more detail below, the changes made in 2012 and early 2013 were intended to increase the portion of total pay that is performance-based. This should enable CTBI to accomplish three significant objectives: (i) improve the alignment of executive pay with CTBI performance, (ii) provide executives a pay opportunity that is competitive with industry practices, and (iii) attract and retain qualified management.
In order to accomplish those objectives, in early 2012 the Committee adopted, and the Board of Directors approved, the following strategy for managing executive compensation over the next several years:
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Manage executive officer salaries toward the median of market values (i.e., the middle of the range), contingent on the executives meeting or exceeding performance standards.
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o
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Salaries for some CTBI executives have been noticeably below market, so a series of adjustments may be made over a period of several years in order to improve competitiveness and control expense.
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o
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Managing salaries toward the median also will control the portion of total pay that is “fixed,” enabling CTBI to gradually provide more incentive pay that is variable and performance-based.
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Increase the cash incentive opportunity under the Senior Management Incentive Plan.
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o
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The annual cash incentive potential for executive officers will be increased gradually over several years, beginning in 2012 and continuing through 2014.
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o
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The increased incentives are not guaranteed but will be paid only if the executives achieve performance targets set each year by the Compensation Committee.
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o
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By gradually raising the executives’ annual cash incentive potential, CTBI will increase the portion of total pay that is performance-based, improve the alignment of pay with performance and improve the competitiveness of the total pay opportunity.
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Slightly reduce the stock-based incentive opportunity under the Senior Management Incentive Plan in order to offset some of the increase in cash incentives and control the potential dilution to shareholders that could result from the use of stock-based incentives.
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Introduce a performance-based long-term incentive plan.
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o
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CTBI began granting performance units to executive officers in 2012.
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o
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Performance units are cash-based long-term incentives that are earned for achieving one or more specific financial goals over a multi-year period.
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o
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Performance units granted by CTBI will be earned for achieving a target level of Cumulative Net Income during a three-year performance period.
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o
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The Committee believes that sustained growth in earnings (as reflected in the Cumulative Net Income target) will result in value for shareholders.
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o
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By granting performance units, CTBI will increase the portion of total pay that is performance-based, improve the alignment of pay with performance and provide a more competitive pay opportunity.
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After careful consideration, the Compensation Committee concluded the changes described above were necessary to ensure that CTBI pays executives for performance and agreed to implement them over several years, beginning in 2012 and continuing in subsequent years. This will enable CTBI to maintain a conservative posture versus market pay practices while making sequential improvements to the executive incentive plans and other adjustments as necessary.
During 2013, the Committee reviewed the compensation strategy adopted in 2012 and the progress CTBI had made towards accomplishing the objectives described above. Based on this review, the Committee concluded it would be appropriate to continue the implementation of the compensation strategy. Accordingly, the Committee approved certain changes to the compensation plans for executive officers for 2014, including base salary increases and adjustments to annual and long-term incentive potentials as further described below. During 2014, the Committee will continue to monitor the implementation of the executive compensation strategy.
Role of the Compensation Committee
The principal duties of the Compensation Committee are to establish the executive compensation strategy of CTBI; approve compensation plans that support the implementation of the strategy; assess and monitor the potential risk associated with various compensation arrangements, especially incentive compensation plans; approve the compensation of the CEO; review the recommendations of the CEO and approve the compensation of the other executive officers of CTBI; and make recommendations to the Board of Directors concerning executive officer compensation. The Committee is responsible for establishing, implementing and continually monitoring adherence with CTBI’s executive compensation philosophy.
To accomplish these responsibilities, the Compensation Committee reviews and approves corporate goals and objectives relevant to the compensation of CTBI’s CEO, and it evaluates the performance of the CEO relative to the approved goals and objectives. The Committee determines and approves the CEO’s compensation considering this evaluation of performance. Additionally, the Committee reviews compensation levels for CTBI’s other executive officers relative to goals and objectives relevant to their responsibilities, considers the CEO’s evaluation of their achievements, and approves their compensation based on this evaluation.
The Committee strives to establish and maintain compensation plans that are: (i) focused on rewarding performance, (ii) aligned with the interests of shareholders, (iii) competitive with the practices of peer companies, and (iv) sufficient to enable CTBI to attract and retain a strong management team.
The Committee has followed certain guiding principles to ensure the effectiveness of CTBI’s executive compensation strategy. The Committee recognizes the importance of perceived fairness of compensation practices, both internally and externally, and believes that the long-term success of CTBI and its ability to create value for shareholders is dependent on attracting, motivating, rewarding, and retaining skilled executives. Significant time is devoted by the Committee to monitoring the relationship between executive pay and CTBI performance, and adjusting compensation plans and practices as needed from year to year to maintain an appropriate alignment of pay with performance. The Committee recognizes that the competition for talented executives among financial institutions similar to CTBI is intense, and it considers compensation data and other labor market indicators as it reviews CTBI’s compensation plans. Current economic and industry environments are considered when reviewing executive compensation. Full disclosure is made to the independent members of the Board of Directors of CTBI’s executive compensation policies, practices, and issues to ensure that all directors understand the implications of the Committee’s decisions. Likewise, the Committee works with management to ensure that public filings related to executive compensation are transparent and comply with applicable regulations.
The Compensation Committee has established various processes to assist it in ensuring CTBI’s executive compensation program is achieving its objectives. Among these are:
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Assessment of Company Performance
– The Committee considers various measures of company and industry performance, including but not limited to asset growth, asset quality, earnings per share, return on assets, return on equity, total shareholder return, and execution of CTBI’s growth strategy. The Committee does not apply a formula or assign relative weights to these measures. Instead it makes a subjective determination after considering such measures individually and collectively.
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Assessment of Individual Performance
– Individual performance assessments impact the compensation of all CTBI employees, including the CEO and other Named Executive Officers. Goals and objectives are established for the CEO, and performance relative to those goals and objectives is evaluated. The Committee reviews the performance of other executive officers and considers the CEO’s recommendations concerning the officers’ achievements. Additionally, the Committee applies its own judgment based on the interactions of the Board and/or the Committee with each executive officer. The performance evaluation of each executive officer considers their contributions to CTBI’s performance and other leadership accomplishments.
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Total Compensation Review
– The Compensation Committee annually reviews each executive’s base salary, annual incentive, and stock-based incentives. In addition to these primary compensation elements, the Committee reviews other executive compensation arrangements, including, for example, payments that could be required under various severance and change in control scenarios. This “holistic” review process ensures that the Committee considers the executive’s total compensation prior to changing any single component.
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The Committee meets in executive session without management or guests present when making decisions about the compensation arrangements for Named Executive Officers and at other times as needed.
In addition to its responsibilities for executive compensation, the Committee periodically reviews the compensation provided to the CTBI Board of Directors to ensure that the compensation provided for service on the Board and its committees is commensurate to the amount of work required from the individual directors as well as from the Board in aggregate. The Committee periodically compares the pay arrangements for the Board and the actual amounts earned by individual directors to amounts paid to outside directors of banking companies in the Peer Group (as defined below) and to survey data for director compensation. In late 2013, the Committee reviewed the existing compensation program for outside directors of CTBI and determined it would be appropriate to adjust the annual retainer for service on the Board from $25,000 to $30,000. The retainer for the Chairman of the Audit Committee was maintained at $10,000, resulting in a total retainer of $40,000. The retainer for the Chairman of the Risk and Compliance Committee was maintained at $5,000, and a retainer of an equal amount was established for the Chairman of the Compensation Committee, in each case resulting in a total retainer of $35,000. These adjustments were deemed necessary to provide the Board of Directors with compensation that is comparable to amounts paid to outside directors at similar publicly traded financial institutions. These changes were approved by the Board of Directors and became effective in January 2014.
Executive Compensation Philosophy
The Compensation Committee believes that executive officer compensation is an integral component of CTBI’s business and human resources strategies. It is important to CTBI’s success that highly talented and experienced individuals serve as executive officers. The Committee strives to provide compensation which is sufficient to attract and retain such executives. The Committee seeks to establish executive compensation at fair, reasonable, and competitive levels. The Committee also believes that executive compensation should be strategy-focused and recognize individual achievements as well as group contributions and CTBI results. Therefore, the Committee desires to offer a competitive, market-driven executive officer compensation package which provides for a meaningful portion of compensation to be based upon performance. As a result, CTBI’s executive compensation package includes incentive-based cash and equity compensation in addition to base salary and employee benefits.
The goal of the Compensation Committee is to offer market competitive compensation, without being the highest or lowest provider. Total compensation packages, including base salaries plus cash- and stock-based incentives, are set at levels the Committee believes are sufficient to attract and retain qualified executives whose performance and success should contribute to shareholder value. The compensation of Named Executive Officers is based on the same criteria and performance factors used for all other executive officers.
Compensation Consultant
The Compensation Committee may engage outside advisors as necessary to assist with its oversight of executive compensation. Pearl Meyer & Partners (“PM&P” or “Consultant”) was retained during 2013 to review CTBI’s executive compensation plans. The role of the Consultant is to provide analyses, information, and advice to assist the Committee in making decisions related to compensation of executive officers. The Committee believes that the Consultant is independent and no conflicts of interest are raised by the work of the Consultant under the criteria specified in SEC rules.
During December 2012 and January 2013, PM&P performed a compensation review which included: (i) evaluating the competitiveness of pay for eleven executive officers, including each of the Named Executive Officers, and (ii) developing recommendations for managing executive pay in 2013. PM&P’s analysis revealed that CTBI’s executive compensation was somewhat more competitively positioned in 2012 than in 2011 as a result of changes approved by the Committee and the Board of Directors in early 2012. However, CTBI’s budgeted levels of pay (i.e., the amount of salary plus annual and long-term incentives that executives would receive if performance met budget) still were significantly below the median pay levels for similar positions in comparable financial institutions. Additionally, based on separate analyses of banking industry performance prepared by PM&P, CTBI’s performance on a variety of metrics (such as EPS growth, ROE, and ROA) exceeded the median results of similar financial institutions, resulting in pay and performance being somewhat misaligned. CTBI’s business performance relative to other banks would have supported higher levels of pay for executives. These results were similar to the outcome of its 2011 analysis of CTBI’s executive pay; therefore, PM&P recommended the Committee continue to implement the executive compensation strategy it had adopted in early 2012. As described previously in the Executive Summary, the thrust of the executive compensation strategy is to increase the portion of executive pay that is contingent on performance and provide a total compensation opportunity that is more competitively positioned with current practices in the banking industry. In early 2014, the Committee considered the impact of changes made in 2012 and 2013 and determined it would be appropriate to continue the implementation of the executive compensation strategy. Accordingly, in January 2014, the Committee approved certain changes to the compensation of the Named Executive Officers, including base salary increases and adjustments to their annual and long-term incentive potentials, as further described below.
PM&P also reviewed the compensation program for the Board of Directors in late 2012. The analysis found that CTBI’s compensation program for outside directors was structured in a manner that was consistent with banking industry practices, in terms of providing retainers and meeting fees for board and committee service. However, the amount of compensation provided to CTBI directors was below the median levels of compensation paid to outside directors of banks within the Peer Group and median values reported in survey data for comparable banks. Based on these results, PM&P developed several alternatives for adjusting the compensation of the Board of Directors. After considering the outcome of the PM&P analysis, the Committee decided to adjust the annual retainers for Board members and the Compensation Committee Chairman, as described previously. In late 2013, the Committee again reviewed the compensation information provided in late 2012 and recommended the increase in directors compensation previously discussed. The Board of Directors approved the adjustments to the annual retainers in January 2014.
Peer Group
CTBI periodically compares its executive pay and business performance, as well as the compensation of the Board of Directors, to a group of comparable, publicly traded financial institutions (“Peer Group”). In establishing a Peer Group, CTBI seeks to include regional bank holding companies that are similar to CTBI in terms of assets, business lines, and geographic footprint. During 2012, the Committee worked with PM&P to update the Peer Group to ensure it continued to include organizations that were comparable to CTBI. The resulting Peer Group included the fifteen companies listed below. The Committee believes the Peer Group provides a reasonable basis of comparison for CTBI due to their similar business lines and geographic locations, as well as their comparable size, as reflected in their assets. At the time the Peer Group was constructed, CTBI’s assets were $3.6 billion, and the companies included in the Peer Group ranged in asset size from $2.1 billion to $6.2 billion, with a median of $3.2 billion and an average of $3.7 billion.
Bank
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Ticker
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Bank
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Ticker
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1st Source Corporation
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SRCE
|
Lakeland Financial Corporation
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LKFN
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City Holding Company
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CHCO
|
MainSource Financial Group, Inc.
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MSFG
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First Busey Corporation
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BUSE
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Renasant Corporation
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RNST
|
First Bancorp
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FBNC
|
S.Y. Bancorp, Inc.
|
SYBT
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First Community Bancshares, Inc.
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FCBC
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Stellar One Corporation*
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STEL
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First Financial Bancorp
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FFBC
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Towne Bank
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TOWN
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First Financial Corporation
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THFF
|
Wesbanco, Inc.
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WSBC
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First Merchants Corporation
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FRME
|
|
|
*Stellar One Corporation was acquired by Union First Market Bankshares
Executive Compensation Components
CTBI’s executive compensation program includes the following major components, each of which are described further below.
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Long-Term Incentive Plan
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Benefits and Perquisites
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Employment Contracts, Termination of Employment, and Change in Control Arrangements
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Base Salaries
Salaries for CTBI’s executives are established based upon the scope of their responsibilities, taking into account competitive market compensation paid by other similarly situated companies for comparable positions. The Committee sets the CEO’s base salary, subject to approval of the Board of Directors. Any salary increase for the CEO is determined based on the Committee’s review of the CEO’s leadership and contributions to the achievement of performance objectives for CTBI, which for 2013 included asset and revenue growth, asset quality, core earnings performance, identification of strategic opportunities, and execution of the current business strategy and operating plan. The Committee also considers how the CEO’s salary compares to salaries of CEO’s within the Peer Group. Base salaries for other executive officers, including the other Named Executive Officers, are approved by the Committee after considering recommendations from the CEO. In approving any salary increases for Named Executive Officers, the Committee considers performance for the prior year, responsibilities for the upcoming year, how the current salaries compare to those paid by peer companies to executives with similar responsibilities, and CTBI’s budget for salary increases for employees other than executive officers. The Committee’s objective is to pay base salaries which will be sufficient to attract, retain, motivate, and reward management for successful performance while maintaining affordability within CTBI’s business plan.
The Committee has established a policy of managing executive officer salaries to the market median, recognizing that a series of increases over several years may be required to adjust salaries to the desired level for any executive whose current salary is significantly below the market (contingent upon the executive sustaining the required level of performance). After considering both CTBI and individual performance, as well as how individual officer salaries compared to the market median, the Committee determined that it was appropriate to increase executive salaries for 2014. The salary increases for 2014 reflect the Committee’s desire to balance the need to compensate our Named Executive Officers at levels that are competitive with the market and recognize their performance and value to CTBI with the need to control expenses in an economic and regulatory environment that continues to be challenging for CTBI and other financial institutions. The salary increases approved for the Named Executive Officers for 2014 ranged from 3.49% to 4.98%%. The 2013 base salary for Kevin J. Stumbo reflects an increase from $200,000 to $210,000 effective April 2013 upon his promotion to Chief Financial Officer. The increase for the CEO was near the low end of the range, which the Committee determined was appropriate based on: (i) how the CEO’s salary compared to the market median and (ii) the adjustments to the CEO’s annual and long-term incentive potentials, as described in more detail below. The following table shows the 2014 base salary for each Named Executive Officer and the percentage increase over 2013.
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Base Salary
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Base Salary
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% Increase
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2013
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2014
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2013 to 2014
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Jean R. Hale
Chairman, President, and Chief Executive Officer
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$505,000
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$525,000
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3.96%
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Kevin J. Stumbo
Executive Vice President, Chief Financial Officer and Treasurer
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$210,000
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$220,000
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4.76%
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Mark A. Gooch
Executive Vice President and Secretary
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$372,000
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$385,000
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3.49%
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Larry W. Jones
Executive Vice President
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$230,000
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$240,000
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4.35%
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James B. Draughn
Executive Vice President
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$221,000
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$232,000
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4.98%
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Annual Incentive Plan
The Named Executive Officers (“NEOs”), other executive officers, and other members of senior management may earn annual cash incentive bonuses as well as stock-based awards under the Senior Management Incentive Compensation Plan (“the Incentive Plan”). Bonuses and stock awards are earned for achieving targets set for earnings per share (“EPS”) and return on average assets (“ROAA”) of CTBI. A cash-based employee incentive plan for employees not covered by another incentive plan is paid based upon the same performance criteria as the Senior Management Incentive Plan. The Incentive Plan was designed to reward participants for meeting or exceeding annual profit goals, and it was adopted to achieve the following objectives:
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Increase the profitability and growth of CTBI in a manner which is consistent with other goals of the company
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Provide an incentive opportunity which is competitive with other financial institutions in the Peer Group
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Attract and retain executive officers and other key employees and encourage excellence in the performance of individual responsibilities
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Motivate and appropriately reward those members of senior management who contribute to the success of CTBI
At the beginning of each year, the Committee establishes a target (base) level of performance for EPS and ROAA. The Committee also establishes a performance range relative to the base level and an associated payment scale which defines the percent of salary that participants may earn as a cash bonus for a given level of performance. In addition, the Committee establishes a separate payment scale which defines the percentage of salary that participants may receive as a stock award for a given level of performance. Stock awards under the Incentive Plan may be granted as either restricted shares or stock options.
2013 Annual Incentive Plan
For 2013, the target (base) level of ROAA was 1.25%, and the target (base) level of EPS was $2.98, both of which represented increases over the prior year. The Committee believed the target (base) levels of performance were challenging, but appropriate given the expectations at the beginning of 2013 for improvement over the 2012 results. In January 2014, the Committee evaluated CTBI’s performance for 2013 and determined that results for ROAA and EPS were below the target (base) levels but above the minimum levels of performance required to earn cash bonuses under the Incentive Plan. For purposes of the 2013 Incentive Plan, ROAA was 1.24%, and EPS was $2.90. Based on these results, participants in the Senior Management Incentive Plan, including the CEO and other Named Executive Officers, earned cash bonuses and restricted stock awards at the lowest tier on the payment scale the Committee had established at the beginning of 2013. Specifically, the CTBI CEO earned a cash incentive of 32% of base salary, the CEO of Community Trust Bank, Inc. (“CTB CEO”) earned a cash incentive of 25% of base salary, and other NEOs earned cash incentives equal to 18% of their base salaries. Cash incentives earned by the Named Executive Officers for 2013 were less than the cash incentives earned in the prior year, in keeping with CTBI’s philosophy of paying executives for performance. The amounts of the 2013 cash incentives are shown in the Bonus column of the Summary Compensation Table. A portion of the total annual incentive earned under the Incentive Plan is paid in restricted shares which vest ratably over four years. In 2012, the Committee reduced the portion of the annual incentive paid in restricted shares in order to offset some of the increase in the cash portion of the annual incentive. Restricted stock awards granted in January 2014 as a result of performance in 2013 were approximately 2.6% of salary for the CEO and other NEOs. The value of these awards is shown in the Equity Compensation column of the Summary Compensation Table.
2014 Annual Incentive Plan
Prior to setting the Incentive Plan for 2014, the Committee considered the outcomes for 2013, the adjustments made to the Incentive Plan during 2012 and 2013, and the adjustments that were recommended for 2014, based on the Consultant’s analyses and the executive compensation strategy adopted in January 2012.
As a result of these discussions, the Committee recommended, and the Board approved, adjustments to the Senior Management Incentive Plan for 2014 which are intended to more closely align pay with performance and further improve the competitiveness of the pay opportunity. These changes are consistent with the Committee’s plan to implement the executive compensation strategy gradually over at least three years, allowing time for CTBI and the executives to adjust to the changes. Adjustments approved for the Named Executive Officers in the 2014 Incentive Plan are listed below:
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Increase the cash incentive component payable if results meet or exceed the target (base) level of ROAA and EPS
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Maintain the stock-based incentive component payable to Named Executive Officers at the reduced levels of the 2013 plan, if results meet or exceed the target (base) level of ROAA and EPS
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Maintain the continued service period of four years for executive officers to fully vest in stock awards made under the Incentive Plan
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Continue to allow executives to earn modest cash and stock incentives if results are below goal, so long as performance meets or exceeds minimum levels of performance approved by the Committee
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Continue to allow executives to earn target (base) level incentives if the goal for net income is achieved
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Continue to differentiate the incentive potentials of the CTBI CEO, Jean R. Hale, and the CTB CEO, Mark A. Gooch, from other executive officers in order to reflect their job responsibilities
This approach will continue to shift the mix of executive compensation so that a larger portion of executive pay is contingent upon performance. By implementing these and other changes gradually, the Committee and the executives are adjusting to the new approach, and CTBI is budgeting for any increase in compensation expense that may result. Although the Committee is making adjustments gradually as it implements the executive compensation strategy, any changes are determined annually, so that the Committee can slow or accelerate the pace of change depending on circumstances at the beginning of each year.
The following table shows the target (base) level of ROAA performance and the cash incentive awards that may be earned by the CTBI CEO, the CTB CEO, and other Named Executive Officers (“Other NEOs”) for various levels of performance in 2014:
Target/ROAA
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Cash Incentive Award as a % of Salary
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CTBI CEO
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CTB CEO
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Other NEOs
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1.15%
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45%
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36.0%
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27%
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Base
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1.28%
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50%
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40.0%
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30%
|
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1.29%
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75%
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60.0%
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45%
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1.30%
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100%
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80.0%
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60%
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1.31%
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125%
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100.0%
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75%
|
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1.32%
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150%
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120.0%
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90%
|
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1.33%
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175%
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140.0%
|
105%
|
|
1.34%
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200%
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160.0%
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120%
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1.35%
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225%
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180.0%
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135%
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As shown in the table on the previous page, executives would earn no incentives for performance below the minimum required level. To ensure that executive pay varies with company performance, executives earn less than target for results below the expected (base) level, and they may earn larger incentives if results exceed the target (base) level. Payments are “capped” at a maximum level to preclude overpayment and control the cost of the plan.
Other senior officers consisting of the officers responsible for the divisions of commercial lending, consumer lending, residential real estate lending, finance, sales and marketing, human resources, compliance, and facilities management and the presidents of each market (“Group II Participants”) may receive awards for the year ending December 31, 2014 based on the same performance measures and targets applicable to executive officers. Target cash incentive awards for Group II participants, expressed as percentages of base salary, range from 6.30% to 16.45% of salary. Other members of senior management consisting of Senior Vice Presidents of consolidated functions as well as others below the Senior Vice President level who are selected for participation by the Compensation Committee (“Group III Participants”) may receive awards for the year ending December 31, 2014 based on the targets applicable to executive officers, ranging from 4.95% to 11.00% of salary. The 2014 bonus targets for participants in Groups II and III are the same as those used in 2013.
The following table shows the target (base) level of ROAA performance and the stock option awards that may be earned by the CTBI CEO, the CTB CEO, and other executive officers, including the Other NEOs, for 2014 performance. The stock option awards shown below as percentages of salaries are the same as those used in the 2013 Incentive Plan:
Target/ROAA
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Stock Option Award as a % of Salary
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CTBI CEO
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CTB CEO
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Other NEOs
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1.15%
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18%
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15.750%
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13.50%
|
Base
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1.28%
|
20%
|
17.515%
|
15.00%
|
|
1.29%
|
21%
|
18.375%
|
15.75%
|
|
1.30%
|
23%
|
20.125%
|
17.25%
|
|
1.31%
|
24%
|
21.000%
|
18.00%
|
|
1.32%
|
25%
|
21.875%
|
18.75%
|
|
1.33%
|
26%
|
22.750%
|
19.50%
|
|
1.34%
|
27%
|
23.500%
|
20.25%
|
|
1.35%
|
30%
|
26.250%
|
22.50%
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Group II Participants may receive stock option awards for the year ending December 31, 2014 based on the targets applicable to executive officers, ranging from 9% to 15% of salary. Group III Participants may receive stock option awards for the year ending December 31, 2014 based on the targets applicable to executive officers, ranging from 4.05% to 7.50% of salary. Target awards for participants in Groups II and III are the same as those used in 2013.
The Committee at its sole discretion may choose to issue restricted stock or a combination of options and restricted stock of an amount deemed equivalent to the options earned under the terms of the 2006 Stock Ownership Incentive Plan. For the last several years, the Committee has determined that any stock awards earned under the Incentive Plan would be granted as restricted shares, and the restrictions would lapse pro-rata over 4 years from the date of grant, contingent upon the executive’s continued service with CTBI. In the event of a change in control of CTBI or the death of a participant, the restrictions will lapse. In the event the participant becomes disabled, restrictions will lapse on a pro-rata basis, dependent on time served from the date of grant through the date of termination due to disability. In the event of a participant’s retirement prior to the lapse of all restrictions, the Committee will have discretion to review and revise any restrictions and may choose to waive them. The actual number of any restricted shares granted will be determined based on the stock price on the date of grant (which would be in early 2015, after the Committee has the opportunity to review the achievement of performance goals for 2014).
For reference, the EPS and Net Income targets associated with the 2014 target (base) level of ROAA are $2.97 and $46,923,000, respectively. For comparison, in 2013, the cash incentive percent of salary at target (base) levels was 35% for the CTBI CEO, 27.5% for the CTB CEO and 20% for Other NEOs. The stock award percent of salary at target (base) levels was 20% for the CTBI CEO, 17.515% for the CTB CEO, and 15% for Other NEOs. The Committee may further adjust the cash and stock incentive percentages of salary in future years as it continues to implement the executive compensation strategy it adopted in 2012. By gradually increasing the cash portion of the Incentive Plan and the total annual incentive opportunity, the Committee will bring CTBI’s plan more in line with typical market practices and increase the portion of total pay that is earned for performance.
CTBI has structured its incentive compensation plans in a manner which is designed to permit a large percentage of the total potential incentive compensation to be paid to participants who are not Named Executive Officers. During 2014, executive officers, other members of senior management, and employees are eligible to participate in various company incentive compensation plans. Based on the number of participants and structure of CTBI’s incentive compensation plans, if CTBI achieves its 2014 targets at the target (base) level, participants other than the Named Executive Officers will receive 76% of the total amount paid under all company-sponsored incentive compensation plans.
Long-Term Incentive Plan
When it reviewed CTBI’s executive compensation arrangements during 2011, the Committee determined that the implementation of a forward-looking, performance-based long-term incentive plan would accomplish a number of its objectives for improving the executive compensation program, including: provide balance to other short-term components of pay (such as base salaries and annual cash incentives), increase the portion of total pay that is contingent upon performance, and improve the competitiveness of pay versus comparable bank holding companies.
After considering a variety of alternatives for performance-contingent long-term incentives, the Committee recommended and the Board approved the use of performance units beginning in 2012. Performance units are cash-based long-term incentives which are earned for achieving one or more financial performance goals over a multi-year period. Awards of performance units are permitted under CTBI’s shareholder-approved 2006 Stock Ownership Incentive Plan. Only executive officers of CTBI (including the CEO and the other NEOs) will participate in the performance unit plan, as these are the executives who are held accountable for creating shareholder value. As it reviewed the executive compensation program in late 2013 and early 2014, the Committee determined it would be appropriate to continue granting performance units. Accordingly, in early 2014 the Committee approved awards to the CEO and other NEOs, as further described below.
The Committee believes that earnings growth, when sustained over a period of time, will create value for CTBI shareholders. For this reason, the Committee approved awards of performance units that require executives to achieve a target for cumulative net income over a three-year period. Awards granted in 2013 had a performance period that included 2013, 2014, and 2015. In early 2014, the Committee approved grants for a three-year period covering 2014, 2015, and 2016. The Committee believes the cumulative net income performance requirement is achievable but challenging, given the gradual improvement in the U.S. economy, but notwithstanding the increasing regulatory burden on the banking industry and the challenges to the local economy. Targets for cumulative net income growth were set after giving consideration to CTBI’s results in prior years, CTBI’s forecasts of future results, the local economy, and industry performance.
The Committee believes the implementation of the performance unit plan will further: (i) focus the executive officers on creating shareholder value through sustained growth in earnings, (ii) improve the alignment of pay with performance for all executive officers, and (iii) create a more balanced incentive compensation program. Also, the use of cash-based performance units will avoid any potential dilution to existing shareholders (as might occur if awards were stock-based). In keeping with its plan for gradual adjustments to executive incentive potentials under the annual incentive plan, the Committee also plans to periodically adjust the target incentive percentages of salary associated with the awards of performance units. This approach will enable the Committee to gradually change the mix of executive compensation, ultimately resulting in a greater portion of executive compensation being contingent on performance.
The table below shows the percent of salary that may be earned by the CTBI CEO, the CTB CEO, and other executive officers, including the Other NEOs, based on achievement of the cumulative net income goal for 2014 through 2016. Any earned performance units will be paid in early 2017, after the Committee evaluates actual results for 2014 through 2016 versus the cumulative net income goal.
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Performance Unit Award as a % of Salary
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Cumulative Net Income vs. Target
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CTBI CEO
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CTB CEO
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Other NEOs
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90% of Target
(Minimum)
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10.0%
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7.5%
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2.5%
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93% of Target
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20.0%
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15.0%
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10.0%
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96% of Target
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30.0%
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22.5%
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15.0%
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100% of Target Cumulative Net Income (Target)
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40.0%
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30.0%
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20.0%
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103% of Target
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48.0%
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36.0%
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24.0%
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107% of Target
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54.0%
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40.5%
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27.0%
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110% of Target
(Maximum)
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60.0%
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45.0%
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30.0%
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For reference, the 2013 performance unit awards for the CTBI CEO, the CTB CEO and the Other NEOs (expressed as percentages of salary at target performance) were 30%, 25%, and 20%, respectively. The increases for the CTBI CEO and CTB CEO in 2014 are consistent with the changes contemplated in the executive compensation strategy adopted by the Committee and the Board of Directors in January 2012.
Voluntary or involuntary termination of employment prior to the end of the performance period and/or prior to the payment of any earned performance units will result in forfeiture of any outstanding performance units, except as noted below. In the case of termination of employment by reason of death or disability prior to the expiration of the performance period, any outstanding performance units will be deemed to have been earned in an amount equal to the amount payable at target level multiplied by the percentage that would have been earned, assuming that the rate at which the performance goal has been achieved as of the date of such death or disability would have continued until the end of the performance period. In the case of termination of employment by reason of retirement prior to the expiration of the performance period, the performance units will be payable in an amount equal to: (a) the amount to which the participant would have been entitled if employment had continued to the end of the performance period multiplied by (b) a fraction, the numerator of which is the number of full months the participant was employed during the performance period and the denominator of which is the number of months in the performance period. Upon a change in control, any outstanding performance units will become fully vested and payable in an amount which is equal to the greater of (a) the amount payable under the performance unit at the target level multiplied by the percentage that would have been earned, assuming that the rate at which the performance goal has been achieved as of the date of such change in control would have continued until the end of the performance period or (b) the amount payable under the performance unit at target level multiplied by the percentage of the performance period completed at the time of the change in control.
Benefits and Perquisites
CTBI’s policy is to minimize the use of executive benefits and perquisites. The Named Executive Officers participate in the same benefit plans as other CTBI employees, with the few exceptions described below. During 2013, there were no changes to the benefits and perquisites provided to Named Executive Officers, and none have been approved for 2014.
To align the interests of all employees, including Named Executive Officers, with those of shareholders, CTBI has implemented an Employee Stock Ownership Plan (“ESOP”) which provides awards of CTBI stock subject to vesting requirements. Participation in the ESOP is available to any employee of CTBI or its subsidiaries who has been employed for one year, completed 1,000 hours of service, and attained the age of 21. CTBI currently contributes 4.0% of covered employees’ gross wages to the ESOP. ESOP contributions are used to acquire shares of CTBI stock on the open market.
CTBI has established a 401(k) Plan under which employees can contribute from 1.0% to 15.0% of their annual salary; CTBI provides a matching contribution equal to 50% of the first 8.0% of salary contributed by the employee. CTBI also provides health insurance, life insurance, and other benefit programs that are usual and customary within the banking industry in order to attract and retain employees. Named Executive Officers are eligible to participate in these plans on the same basis as other employees, subject to IRS limits.
CTBI provides supplemental life insurance to its Named Executive Officers, as well as other senior and key management. The plan provides a split-dollar share of death benefits at an amount necessary to provide the Named Executive Officers with a total company-provided death benefit of three times their annual salary. This amount is consistent with the death benefit provided to other eligible employees. Additionally, each Named Executive Officer and other senior and key employees are provided a post-retirement death benefit equal to one times his or her annual salary at the time of retirement. The benefits are funded with bank-owned life insurance policies. CTBI will recover its plan costs upon the death of the covered individual, and the executive’s beneficiary will receive a portion of the insurance proceeds. The Committee believes the supplemental life insurance program is common within the banking industry and provides an incentive for long-term employment with CTBI.
CTBI does not provide significant perquisites or personal benefits to executive officers. The Named Executive Officers, as well as other executive officers, members of senior management, and key employees, are provided country club memberships and other perquisites with an aggregate individual annual value of less than $10,000.
Unlike some other banks in its Peer Group, CTBI does not provide any supplemental executive retirement plan. CTBI allows executives to voluntarily defer receipt of any cash bonuses earned under the annual incentive plan.
Employment Contracts, Termination of Employment, and Change in Control Arrangements
CTBI has established termination of employment and change in control agreements (“Severance Agreements”) with each of its Named Executive Officers, certain other executive officers, and senior officers. Severance Agreements are provided in order to attract and retain key executives by protecting them in the event of a change in control. The Severance Agreements are effective for a term equal to the longer of three years or the covered period should a change in control of CTBI occur during such three-year period. These agreements are automatically renewable for additional one-year periods. The covered period during which the terms and conditions of the Severance Agreements are effective is the period of time following a change in control equal to: (i) two years following the occurrence of the change in control in the event of an involuntary termination or a voluntary termination following a change in duties or (ii) the thirteenth month following the change in control in the event of a voluntary termination not preceded by a change in duties.
The Severance Agreements require the payment to a Named Executive Officer, other executive officer, or senior officer of a severance amount in the event of an involuntary or voluntary termination of employment after a change in control of CTBI during the covered period. The severance amount payable under the Severance Agreements is equal to: (i) 2.99 times the Named Executive Officer’s or other executive officer’s base annual salary in the event of involuntary termination or in the event of a voluntary termination of employment preceded by a change in duties subsequent to a change in control of CTBI, or (ii) 2.00 times the Named Executive Officer’s or other executive officer’s annual base salary in the event of a voluntary termination of employment not preceded by a change in duties subsequent to a change in control of CTBI.
For purposes of the Severance Agreements, a change in control occurs when: (i) any person, including a group under Section 13(d)(3) of the Securities Exchange Act of 1934 is or becomes the owner of 30% or more of the combined voting power of CTBI’s outstanding securities, (ii) as a result of, or in connection with, any tender offer, exchange offer, merger or other combination, sale of assets or contested election, the persons who were directors of CTBI before such transaction(s) cease to constitute a majority of the Board of Directors of CTBI or successor of CTBI, (iii) a tender or exchange offer is made and consummated for the ownership of 30% or more of the combined voting power of CTBI’s outstanding voting securities, or (iv) CTBI transfers substantially all of its assets to another corporation that is not a wholly-owned subsidiary of CTBI.
The Compensation Committee believes the use and structure of the Severance Agreements are consistent with CTBI’s compensation objectives to attract, motivate, and retain highly qualified executives. The Committee also believes that the Severance Agreements promote job stability, provide a measure of financial security, preserve morale and productivity, and encourage retention during the period of uncertainty that accompanies an actual or potential change in control. The Committee periodically reviews the terms of the Severance Agreements in the context of CTBI’s other executive compensation arrangements, changes in government regulations and trends in competitive practices.
No termination of employment or change in control payments were made under the Severance Agreements in 2013, and there were no changes made to the terms of the Severance Agreements during 2013 or to date in 2014.
Compensation Risk
The Compensation Committee is responsible for the oversight of compensation risk. The Committee annually reviews the Senior Management Incentive Compensation Plan, the Long-Term Incentive Plan, and the Employee Incentive Compensation Plan, as well as other compensation arrangements, to evaluate their potential for creating or increasing risk to CTBI. During 2013, the Committee reviewed the compensation risk assessment performed by management and concluded that CTBI’s compensation plans do not motivate or reward management for taking inappropriate risks and do not create any risks that are reasonably likely to have a material adverse impact on CTBI.
Tax Deductibility
The Omnibus Budget Reconciliation Act of 1994 (“OBRA”) prohibits the tax deduction by publicly traded companies of compensation of certain executive officers in excess of $1.0 million, unless certain criteria are met. The compensation of CTBI’s executive officers has not exceeded this amount; however, the Committee has taken steps to facilitate the potential tax deductibility of certain components of executive compensation and will continue to monitor the tax deductibility of CTBI’s compensation arrangements.
Say on Pay Resolutions
In 2013, we submitted our executive compensation program to an advisory, nonbinding vote of shareholders (i.e., “say on pay”). At the 2013 annual shareholders meeting, approximately 96% of votes cast were voted in favor of a resolution approving our executive compensation program. Based on these results, the Committee concluded that shareholders supported CTBI’s approach to executive compensation. In addition, at the 2011 annual shareholders meeting, more than 85% of votes cast were in favor of having an annual say on pay vote. Accordingly, at the 2014 annual meeting, shareholders again are being asked to approve an advisory, nonbinding resolution in favor of CTBI’s executive compensation arrangements. Although the results of annual say on pay resolutions are not binding on CTBI, the Committee welcomes feedback from shareholders, and it will consider the outcome of each year’s say on pay vote as part of its ongoing review of the executive compensation program.