This excerpt taken from the FMSB DEF 14A filed Mar 17, 2005.
Board Compensation Committee Report
The purpose of the compensation program of the Company and the Bank, as its principal subsidiary, is to align executive compensation with the Companys business objectives and performance, the long-term objectives of shareholders, and the individual executives performance. This enables the Company to attract, retain and reward executive officers who contribute, and are expected to continue to contribute, to the Companys long-term success.
The Companys executive compensation program is administered by the Stock Option Committee and the Compensation Committee established as committees of the Board. Currently, the membership of these two committees is the same at the Company and the Bank board levels. The Stock Option Committee had three non-employee directors during 2004, and the Compensation Committee had three non-employee directors during 2004. The Stock Option Committee and the Compensation Committee work with management to develop compensation plans for the Company and the Bank and are responsible for determining the compensation of each named executive officer.
The Compensation Committee considers many factors in setting compensation for the President and Chief Executive Officer and the other named executive officers and in establishing guidelines for the compensation of other executive officers of the Company and the Bank. As the Bank is the principal operating subsidiary of the Company, among the most important of these factors is establishing compensation that is commensurate with the Banks performance, as measured by operating, financial and strategic goals. The Banks performance is measured against previous performance, budgeted goals, and the operating results of peer institutions, which are composed of FDIC-insured institutions of a similar asset size and complexity and market and industry conditions, including the economy as a whole. Individual performance in terms of both qualitative and quantitative goals (with the exception of assessing the performance of the Bank, the Compensation Committee does not have specific measures and its decisions are subjective) is an important part of this process. Industry surveys of compensation for comparable positions in financial institutions of a similar asset size (Peers) are considered. It is the Compensation Committees belief that officers who are among the owners of the Company not only have longer tenure but are also more focused on and aligned with the long-term performance expectations of shareholders. It therefore works to retain superior executives by providing some equity-based compensation, currently in the form of stock options.
Components of Compensation
At present, the executive compensation program is comprised of base salary, annual cash incentive compensation and long-term incentive compensation in the form of stock options. Executives also participate, along with other Bank employees, in the Banks ESOP and other benefit plans.
Base Salary. Base salaries of the President and Chief Executive Officer and the other named executive officers are based on surveys and data relating to the Banks Peers as defined in the Compensation Committee report section of this report. These surveys are used to determine whether compensation is competitive with that offered by other companies in the Banks banking and financial services industries. In addition, base salaries are based on an assessment of individual performance. In assessing performance, the Compensation Committee takes into consideration individual experience and contributions, level of responsibility,
department performance, and the Banks performance, which is measured primarily by net income, but without setting specific goals. With the exception of the Banks performance, the Compensation Committee does not have any specific measures, and its decisions are subjective. For 2004, the salaries for four of the five named executive officers, based on individual contributions, were increased an average of 10.9%. The compensation policy allows for total compensation of individuals to exceed the median Peers through incentive compensation plans based on achievement of the Banks operating, financial and strategic objectives.
Bonus Plan. The Banks named executive officers received a bonus for year 2004 that was paid in early 2005 as did other employees eligible for bonuses paid under other bonus plans. The existence of this incentive compensation is considered by the Compensation Committee in determining base compensation for executive officers.
Stock Option and Incentive Plan. Awards of stock options under the Banks Stock Option and Incentive Plan are designed to more closely tie together the long-term interest of the Banks employees and its shareholders, and to assist in the retention of officers and key employees. Future awards of options and restricted stock will be under the Companys 2005 Stock Option and Incentive Plan if it is approved by the Companys shareholders. The Stock Option Committee selects the employees, including executive officers, if any, to receive stock options and restricted stock and determines the number of shares subject to each grant. The Stock Option Committees determination of the size of option or restricted stock grants is generally intended to reflect an employees position with the Bank and his or her contributions, as described above relative to guidelines for compensation. Options are granted either as incentive stock options or as nonqualified stock options. The Plan has a 10-year term, and options become exercisable on a gradual basis as stated in each grant. Restricted stock is awarded subject to certain conditions with respect to vesting. The Stock Option Committee reviews the outstanding awards of the officers and key employees from time to time and may grant additional options and restricted stock to encourage their retention.
Employee Stock Ownership Plan (ESOP); Other Benefits. Each named executive officer participates with other employees in First Mutual Banks ESOP, health insurance and other benefits which are generally applicable.
In conclusion, the Compensation and Stock Option Committees believe the Bank has been managed well in a challenging business environment for financial institutions and has achieved above-average operating results when compared to other institutions which are the Banks Peers.
Submitted by members of the Stock Option Committee and Compensation Committee:
Compensation Committee Interlocks and Insider Participation
The Company does not have loans outstanding to any members of the Stock Option Committee or the Compensation Committee.