New York Community Bancorp May Be an Exceptional Bank, But It Still Makes Mistakes

There is little doubt that New York Community Bancorp (NYSE: NYCB  ) is one of the best-run banks in the country. However, it isn't perfect.

Earlier this month, shareholders in the high-yielding regional bank voted against its executive pay practices. According to a regulatory filing dated June 30, a total of 142.7 million shares rejected its executive compensation plan while only 122.5 million shares voted for it.

Why would shareholders reject NYCB?
At first glance, this seems odd. Led by longtime CEO Joseph Ficalora, New York Community Bancorp was one of the few lenders to emerge from the financial crisis unscathed.

Its financial strength was so undisputed, in fact, that it was able to reject bailout money from the government in 2009. The decision not only protected current shareholders from dilution, it also allowed the bank to continue distributing nearly all of its earnings to shareholders.

It's worth noting, moreover, that New York Community Bancorp's historical shareholder returns are second to none. Since going public in the mid-1990s, its stock has returned more than 3,000% after accounting for dividends. Indeed, even a bank as exceptional as US Bancorp (NYSE: USB  ) has struggled to keep pace.

NYCB Total Return Price Chart

With this in mind, you'd be excused for wondering why shareholders in New York Community Bancorp would reject the pay policies of such clearly exceptional executives.

Two problems with NYCB's compensation policy
The answer to this appears to be twofold.

Here's an excerpt from a document distributed by Institutional Shareholder Services, an influential consulting firm to institutional investors, which advised its clients to vote against the current plan.

A vote AGAINST this proposal is warranted as the company continues to provide excessive tax gross-up payments to executives related to the vesting of their equity awards. Further, the company utilizes the same goals and performance period for short- and long-term incentives which leads to redundant payouts despite delivering the same set of results.

The second concern speaks for itself. Consequently, it's the first one -- related to "tax gross-up payments" -- that bears explanation.

A tax gross-up is a fancy way of saying that an employer agrees to pay an employee's individual income or excise taxes.

For instance, let's say Bob earns $1 million from ABC Company, equating to a tax bill of $300,000. If Bob's employer includes a tax gross-up in his employment agreement, then it would compensate him such that Bob's after-tax income equals his pre-tax compensation, or $1 million instead of $700,000.

Although plans like this have been popular in the past, they've since fallen out of favor.

According to Margaret Black, a managing director of Pearl Meyer & Partners, an executive compensation consulting firm, gross-ups "have been the poster child of problematic pay practices in the press and also with institutional shareholders."

Additionally, in a list of executive compensation practices that it specifically doesn't employ, US Bancorp's latest proxy states: "We do not provide tax gross-ups on our limited perquisites."

To get back to New York Community Bancorp, in turn, this probably wouldn't be a problem if the amount of money at issue was nominal. But in 2013 it added up to $1.8 million for Ficalora alone.

The takeaway here is simple. While Ficalora and his team have more than earned their keep over the past two decades, the bank's compensation structure nevertheless needs to keep pace with the times to avoid having its otherwise pristine reputation needlessly dragged through the mud.

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