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 2019 were made by the Board of Directors of the Company and the Bank based upon recommendations by the Personnel Committee. Decisions regarding the non-equity compensation of the Company’s and the Bank’s executive officers that are not Named Executive Officers are made by the Chief Executive Officer in consultation with such officer’s supervisor. For these officers, the Chief Executive Officer is responsible for establishing the framework for how these individuals are compensated. The components of compensation of 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, and 2016 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 and 2018, 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 2018, Messrs. McDearman and Oakley were awarded stock options and Mr. McDearman was also awarded cash-settled SARs in recognition of each of them taking on additional responsibilities following the retirement of Elmer Richerson. In 2019, Mr. McDearman’ s base salary and bonus opportunity was further increased as he began to assume additional responsibilities in connection with Mr. Clemons’ retirement and as part of a plan to incrementally increase his compensation to the level of the Bank's previous President. 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 2019.

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 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. 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, utilized equity-based awards in 2016 and, in certain instances, again in 2018. The Personnel Committee may utilize equity-based awards more in the future in connection with, but not limited to, promotions or changes in duties.

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 2017 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 2016 executive compensation program. Of the 5,826,560 votes cast, 5,561,688, or 95.5%, were cast in favor of approval. The Personnel Committee has considered the results of the vote on our 2016 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 and encourages long-term retention. The Company’s strong financial performance in fiscal year 2019 reinforces the Personnel Committee’s view that our executive compensation program is achieving its objectives, and the Board 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 the say-on-pay vote described elsewhere in this Proxy Statement, 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 other financial institutions of a similar size in similar markets, 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 6.88% to the 2019 base salary of Mr. Clemons when compared to 2018. 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. Based on those criteria, the Personnel Committee approved an 11.96% increase to the 2019 base salary of Mr. McDearman, a 3% increase to the 2019 base salary of Mr. Whitaker, a 3% increase to the 2019 base salary of Mr. Oakley, and a 5% increase to the 2019 base salary of Ms. Pominski. Mr. McDearman’ s increase was based on the Bank’s overall performance as well as the Committee’s overall plan of incremental increases to his salary to achieve the level of the Bank’s previous President. It was also noted that Mr. McDearman’ s responsibility would continue to grow in 2019 as he prepared to assume the Chief Executive Officer role in 2020. Ms. Pominski’s salary adjustment was based on her leadership and influence on the Bank’s overall performance in her role as Chief Financial Officer. Her responsibility in a growing financial institution of the Bank’s size as well as the importance of her role on the Asset Liability Committee were key considerations in her increase. The increases for Messrs. Oakley and Whitaker were in line with raises for associates generally.

Annual Cash Incentive. Messrs. Clemons, McDearman, and Whitaker 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 that is based upon the Bank’s estimated after tax earnings for the fiscal year as of the date the bonus is paid. In 2019, Mr. Clemons was eligible for a cash incentive payment equal to 1.25% of the Bank’s estimated after tax earnings, while Mr. McDearman was eligible for a cash incentive payment equal to .96% of the Bank’s estimated after tax earnings. In total, Mr. Clemons and Mr. McDearman were paid cash incentive payouts totaling $473,071 and $363,318, respectively, based on the estimated performance of the Bank in 2019 as of the December 5, 2019 payment date. In 2019, Mr. Whitaker was eligible for a cash incentive payment equal to .47% of the Bank’s estimated after tax earnings. Mr. Whitaker was paid a cash incentive payment totaling $177,875 based on the estimated performance of the Bank in 2019 as of the December 5, 2019 payment date. The Bank’s estimated after tax earnings as of December 5, 2019 were $37.8 million.

Ms. Pominski and Mr. Oakley were eligible for, and received, a cash incentive payment determined by the return on assets (“ROA”) performance of the Bank, which payment was calculated on a basis consistent with the Bank’s other employees other than Messrs. Clemons, Whitaker, and McDearman whose cash incentive payments were calculated as described above. ROA is the quotient of the Bank’s 2019 net earnings divided by the Bank’s average assets for 2019. For 2019, the ROA targets and related cash incentive payouts as a percentage of the base salary of both Ms. Pominski and Mr. Oakley were as follows:

Ms. Pominski and Mr. Oakley were each paid cash incentive payments totaling $49,198 and $44,873, respectively, or 20.0% of their base salary, based on the Bank’s estimated ROA of 1.41% for 2019 as of the December 5, 2019 payment date.

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 $.35 from the Bank for each one dollar ($1) up to a maximum of 6% 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 2019. The Bank historically has also contributed additional funds into each employee’s 401(k) account under a profit-sharing arrangement. During 2019 Messrs. Clemons, McDearman, Whitaker and Oakley and Ms. Pominski received contributions under the 401(k) Plan and profit sharing arrangement totaling in the aggregate $26,880, $26,880, $26,880, $25,089 and $26,880, respectively, as compared to $26,400, $26,400, $26,400, $24,245 and $26,022, respectively, in 2018.

Post-Termination Benefits. The Bank has entered into Executive Salary Continuation Agreements with certain of its senior executive officers, including Messrs. Clemons, McDearman and Whitaker and Ms. Pominski, which agreements were amended on December 30, 2008, November 23, 2012, and September 26, 2016. The Bank has not entered into an Executive Salary Continuation Agreement with Mr. Oakley. 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, each of these agreements was amended to Named Executives Officers effective as of October 1, 2012 (the “2012 SERP Agreements”). On May 22, 2015, additional SERP Agreements were entered into with Messrs. Whitaker, McDearman, Oakley and Clemons and Ms. Pominski (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.

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.

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 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, 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).

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 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. 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, 2019, this annual benefit was $2,525 under the frozen Executive Salary Continuation Agreement for Mr. McDearman and was $3,093 and $2,620 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. Each of Messrs. Clemons and Whitaker and Ms. Pominski was eligible for early retirement as of December 31, 2019 and would not receive these “early termination benefits”. Mr. Clemons’ employment terminated on December 31, 2019 as a result of normal retirement.

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 under the terms of the Executive Salary Continuation Agreement, as amended, and the 2012 SERP Agreement, payable in equal monthly installments until the Named Executive Officer’s 65th birthday. 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 2012 SERP Agreement will be reduced to the normal retirement benefit under the 2012 SERP Agreement, which shall be paid annually for life thereunder. In addition, the Named Executive Officer is entitled to receive payment under the 2015 SERP Agreement in an amount equal to a percentage of his or her normal retirement benefit. The percentage of the Named Executive Officer’s normal retirement benefit payable is calculated based on the ratio of the account balance on the date of separation from service as a result of disability to the projected account balance at normal retirement age (65) multiplied by the amount payable at normal retirement age. This benefit will commence at normal retirement age and continue for the remainder of the Named Executive Officer’s life.

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 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 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, 2019 was approximately equal to $2,090,263, $458,000, $800,000, $549,382 and $335,000, in the case of Messrs. Clemons, McDearman, 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, 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 the Named Executive Officer in equal monthly installments 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 Messrs. Whitaker, McDearman and Oakley and Ms. Pominski and a Director Survivor Income Agreement (the “Director Survivor Income Agreement”) with Mr. Clemons. The Executive Survivor Income Agreements and the Director Survivor Income Agreement 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 case of Messrs. Whitaker, Oakley and Mr. McDearman and Ms. Pominski, or service on the Bank’s Board of Directors in, the case of Mr. Clemons.

In the event that Messrs. McDearman, Whitaker or Oakley or Ms. Pominski is removed from office with cause or Mr. Clemons is removed from the Board of Directors 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 or Director Survivor Income Agreement, as applicable, shall terminate. Cause under these agreements means the Bank has terminated the Named Executive Officer’s employment or service on the Board of Directors, as applicable, 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 the Named Executive Officers’ beneficiary under the Executive Survivor Income Agreements or the Director Survivor Income Agreement, as applicable, vary and, in some instances, are reduced based on the age of the Named Executive Officer at the time his or her employment or service on the Board of Directors is terminated. As of December 31, 2019, 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 and the Director Survivor Income Agreement 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 2019, the Company paid the employee portion of the premiums under the Company’s health insurance plan for each of Messrs. Clemons, McDearman, Whitaker, Oakley, and Ms. Pominski at a cost of $11,741, $16,947, $11,741, $16,947 and $13,042, respectively.

Fuel Allowance. In addition to the above-described compensation, the Company provides a company owned car for each of Messrs. Clemons, McDearman, 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 affective federal mileage reimbursement rate. In 2019, these allowances totaled $1,670, $1,754, and $4,454 for each of Messrs. Clemons, McDearman, and Whitaker, respectively. Mr. Oakley was provided an auto allowance for 2019 totaling $6,000 for business use of his personal vehicle.

2020 Officer Changes. Effective December 31, 2019, Mr. Clemons retired from the Company and the Bank. As discussed above, Mr. Clemons remains a member of the Board of Directors of the Company and the Bank. Effective January 1, 2020, Mr. McDearman became the Bank’s Chief Executive Officer and the Chief Executive Officer and President of the Company.

Effective January 1, 2020, John Foster, age 47, assumed the responsibilities of President of the Bank and Executive Vice President of the Company. From July 2018 to April 2019, he served as Executive Vice President/Small Business & Consumer Lending for the Bank. From April 2019 to January 1, 2020, he served as the Bank’s Executive Vice President/Chief Consumer/Commercial Banking Officer. Mr. Foster has held numerous positions within the Bank since he joined the Bank in January 1998.

2020 Base Salary Adjustment. In June of 2019, the Personnel Committee engaged Compensation Advisors, a consulting firm with experience providing compensation consulting services to compensation committees of financial institutions, to assist the Personnel Committee in the executive officer compensation process. The Personnel Committee considered the reports and information received from Compensation Advisors in setting the compensation for the Named Executive Officers in 2020. For 2020, base salaries have been set at $500,000, $295,000, $255,000, and 280,000 for Messrs. McDearman, Whitaker and Oakley, and Ms. Pominski, respectively. Mr. McDearman’s base salary for 2020 reflects his promotion.

Section 162(m). Section 162(m) of the Code limits the Company’s ability to deduct certain compensation in excess of $1 million paid to the Company’s Chief Executive Officer and the Company’s other Named Executive Officers; however, for 2017 and prior years, this limitation did not apply to compensation that qualified under applicable regulations as “performance-based.” In December 2017, the Tax Cuts and Jobs Act was enacted. Under the Tax Cuts and Jobs Act, the qualified performance-based compensation exception to Section 162(m) that generally provided for the continued deductibility of performance-based compensation was repealed, effective for tax years commencing on or after January 1, 2018. Accordingly, commencing with the fiscal year ending December 31, 2018, compensation to the Named Executive Officers in excess of $1,000,000 (excluding performance-based compensation that meets the requirements of Section 162(m) that was awarded pursuant to a binding agreement in effect as of November 2, 2017) is generally not deductible. The Company has not historically sought to qualify the Company’s annual cash incentive payments as performance-based compensation in light of the fact that the total compensation paid to the Company’s Named Executive Officers has not historically significantly exceeded $1 million. As a result, the removal of the performance-based compensation exemption has not had a significant impact on the Company’s results of operations and financial condition.

When establishing the Named Executive Officers’ compensation opportunities, the Company’s Board of Directors and Personnel Committee considers the deductibility limitations of Section 162(m), providing competitive and adequate incentives to remain with the Company, the executive’s impact on increasing the Company’s business operations, financial performance and prospects, as well as rewarding extraordinary contributions. In this regard, the Personnel Committee and the Board of Director each believes that shareholder interests are best served if the Personnel Committee and Board of Directors each retains discretion and flexibility in awarding compensation to the Company’s Named Executive Officers, and the Personnel Committee and Board of Directors may from time to time approve payment of compensation that is outside the deductibility limitation of Section 162(m).