Bank of America (NYSE:BAC) announced in February that its chairman and CEO, Brian Moynihan, got a $3 million raise for his efforts in 2015. But it wasn't until last week that the nation's second-biggest bank by assets explained exactly why its board felt that the 56-year-old chief executive deserved the boost.
Moynihan received a pay package totaling $16 million last year, split between fixed and incentive-based compensation. That was up from $13 million in 2014, though the structure of the pay packages in both years was largely identical.
This doesn't mean that Moynihan got a check for $16 million. Beyond his $1.5 million base salary, most of Moynihan's compensation depends on the bank's performance over the next three years. For instance, Bank of America must generate an average annual return on assets of 0.8% in the three years ended 2017 for Moynihan to qualify for the entire $16 million allotment.
This aside, it's worth noting why Bank of America's board felt that Moynihan deserved a raise. This information is disclosed in the bank's latest proxy statement, which was published at the end of last week. In it, the bank lays out seven overarching reasons:
- Net income climbed to $15.9 billion in 2015 from $4.9 billion in 2014.
- The bank achieved record capital and liquidity levels, increasing tangible common equity by $10.4 billion.
- Tangible book value per share increased 8% to $15.62.
- Noninterest expenses, excluding litigation, declined by 5%.
- B of A improved client and customer activity in all areas by, among other things, increasing business referrals (i.e., cross-selling) by 19%, total loans by nearly $22 billion, and deposits by $78 billion.
- Strong asset quality discipline resulted in low levels of net charge-offs and declines in delinquencies and nonperforming loans.
- $4.5 billion was returned to common stockholders through repurchases and dividends.
While it's hard to argue with this overall assessment, it's worth noting that some of these accomplishments have more to do with the overall business and regulatory environment than to outstanding performance by Bank of America. For example, asset quality is good because that's where we're at in the credit cycle. The true test in this regard won't come until the next recession. If Bank of America's net charge-offs are lower than its peers' at that point, we'll know that its "asset quality discipline" is indeed strong enough to merit an increase in Moynihan's compensation.
With respect to capital, moreover, one of the principal reasons that Bank of America's tangible book value per share increased 8% is that the Federal Reserve has tightly constrained the amount of capital that the Charlotte, North Carolina-based bank can return to shareholders. That's why Bank of America has been allowed to increase its dividend only once since the crisis, while many of its peers have boosted their quarterly payouts annually.
To be clear, I'm not arguing that Moynihan didn't deserve a raise. Even after the additional $3 million, he's still the lowest-paid big bank CEO and is even out-earned by some of his subordinates -- his chief operating officer, Thomas Montag, in particular.
What I am trying to say, however, is that Bank of America's board needs to be more cognizant of the signal that it's sending to shareholders of its own competence. These folks run a $2.1 trillion organization. They should know better than to cite asset quality and capital accumulation/distribution as reasons to pay Moynihan more when, in fact, the bank has much less control over these issues than its proxy statement might otherwise lead shareholders to conclude.
I still believe that Bank of America's shares are a buy -- that's why I own its stock. But my optimism is based less on the bank's performance, which continues to lag far behind the likes of Wells Fargo, and more on the fact that Bank of America's shares are too cheap to ignore, trading, as they do, for a double-digit discount to book value.