Teardown 2: LendingClub
Advance a successful transformation and drive financial performance while retaining talent in the competitive market
LendingClub is a fintech operating America's leading digital marketplace bank. The company started in 2006 as an online peer-to-peer lending platform, offering installment loans and other traditional credit products in the virtual space.
Since then, they went public in 2014 and grew to be the largest provider of unsecured personal loans in the US, with over 4 million members, 1400 employees, and a market cap of $1.32 billion. In 2021 the company acquired Radius Bancorp Inc, a chartered digital bank, becoming one of the select few exclusively online fintechs with a national bank charter.
The acquisition resulted in the company's transformation from a lending resource to a bank holding company operating a national bank. This significantly altered LendingClub's business and financial performance since the firm ceased to operate as a peer-to-peer lender and now markets itself as a full-spectrum online credit marketplace.
Executive compensation plans at LendingClub
Main goal: Retain key employees in a highly competitive talent market and satisfy the shareholders' demands for executive performance-based pay in line with the stockholder's interests.
Means: LC achieves this goal by implementing a typical executive compensation plan for American public companies. The executive compensation packages consist of a sizeable base salary, an annual incentive plan, each amounting to 7.3% of the total executive pay, and long-term incentive plans in the form of restricted stock and performance-based restricted stock units.
In 2019 LendingClub conducted extensive outreach to the shareholders regarding their named executive officer compensation plans. As a response to the feedback and post-Radius acquisition, the compensation committee significantly reworked the executive compensation packages and the incentive program in line with the recommendations of the FW Cook independent consultant. The results were as follows.
Elements of LendingClub's executive compensation plan:
Base salary:
The CEO, Scott Sanborn, receives a yearly cash compensation of $500 000, while the rest of the named executive officers get between $350 000 to $425 000.
The compensation committee wanted to ensure the base cash compensation is competitive in the face of aggressive and well-funded war for talent in the San Francisco Bay Area. This is why the executive pay was calibrated not only with respect to the peer group of public companies of similar complexity in the financial services industry but also those based in the exact geographical location.
Annual STI bonus:
LendingClub offers its executives annual incentives equal to base pay as a reward for achieving the firm's strategic objectives.
In 2021 these goals included the successful integration of Radius post-acquisition, transitioning to a holding operating a chartered bank, and resuming growth and profits in the face of challenges resulting from the Covid-19 pandemic.
Since the Radius acquisition substantially altered the operational nature of the business, establishing the financial targets and metrics for 2021 was particularly challenging. The 2021 performance metrics consisted of net revenue (48.75%), GAAP consolidated net income/loss (26.5%) and loan originations in dollars (25%). The payout caps were set at 125%, and unmet thresholds result in the award's forfeiture.
Every single of LendingClub's NEOs exceeded the 2021 targets and received the bonus executive pay of 125% salary, ranging from $285 000 for NEOs to $625 000 for the CEO.
125% target bonus is in line for the CEO and high for other NEOs.
Jack Connell
Leading Expert Consultant and CEO at Jack Connell Compensation Consulting
Long-term incentive plan:
Since 2017 the company had been experimenting with different types of equity awards, metrics, and performance periods.
After consultations with FW Cook, the compensation committee arrived at the final form the deferred compensation should take in the coming years, including a plan entirely based on restricted stock units with a 3-year vesting period paid out in quarterly tranches equal to 1/12th of the total grant.
The plan is also based 100% on the relative TSR as measured to the TSR of the companies listed in the KBW Bank Index (a benchmark stock index for the banking sector, tracking 24 stocks selected to be representative of the US industry group, such as JP Morgan Chase, Bank of America, Citigroup, State Street, and Wells Fargo).
For 2021 stock awards ranged in amounts from $1 400 000 - $3 170 393 for NEO compensation and $5 805 143 for the CEO.
Shareholders push to rely on the proven standards
LendingClub's executive compensation plan is an excellent example of a typical executive compensation package for a medium-size American public company. With 92.7% at-risk pay and 7.3% fixed salary, it pretty much matches the median percentwise.
Relatively high base salaries with solid stock ownership endowments allow the organization to compete effectively in the war for executive talent. The shorter vesting periods of 3 years present a low to moderate safeguard against possible buyouts compared to the typical three to five years, yet the quarterly vesting installments provide more frequent compensation, somewhat alleviating the risk of an executive being poached.
Silicon Valley is hyper-competitive due to Google, who pays at the 99th percentile.
Jack Connell
Leading Expert Consultant and CEO at Jack Connell Compensation Consulting
In addition, the plan meets the shareholders' expectations expressed in the feedback. Compared to the previous years, the changes to the plan included a reduction of the relative performance metrics number to a single metric, TSR, and unification of the vesting periods. LendingClub's new long-term incentive plan is thanks to that more straightforward, transparent, and aligned with shareholders' interests.