Guaranty Federal Bancshares : Compensation Committee Charter

COMPENSATION COMMITTEE CHARTER

PURPOSE

The Compensation Committee (the "Committee") of Guaranty Federal Bancshares, Inc. (the "Company") and Guaranty Bank (the "Bank") is responsible for human resource policies, salaries and benefits, compensation arrangements and executive development.

COMPOSITION

Committee members shall be elected by the Board of Directors annually. The membership of the Committee shall consist of at least three or more directors, each of whom shall satisfy the definition of independent director as defined in any qualitative listing requirements for NASDAQ Stock Market, Inc. issuers and any applicable Securities and Exchange Commission rules and regulations. The Committee shall maintain free and open communication with Bank management. The Committee may retain outside counsel and other advisors as it determines necessary to carry out its duties. The Committee shall have sole authority to approve related fees and retention terms.

ORGANIZATION

One member of the Committee shall be appointed as chair by the Board of Directors on an annual basis. The chair shall be responsible for leadership of the Committee, including scheduling and presiding over meetings, preparing agendas, and making regular reports to the Board. The chair will also maintain regular liaison with Bank management. The Committee shall meet at least annually, or more frequently as the Committee considers necessary.

RESPONSIBILITIES AND DUTIES

The general recurring activities of the Committee in carrying out its oversight role are described below. The duties specified below are not intended to limit the scope of activities of the Committee. The Committee shall have the following authority and responsibilities:

• Establish and provide oversight regarding the Bank's compensation and benefit plans and approve changes deemed appropriate and consistent with regulations and sound compensation principles and practices.
• Recommend adjustments to the compensation of the President/Chief Executive Officer based upon its assessment of individual performance and the Bank's performance, and make other recommendations, when appropriate, to the full Board of Directors.
• Review and approve base salary and all incentive compensation payments for other officers or employees of the Bank as designated by the Committee, taking into account corporate and individual performance, as well as peer group practices and any other considerations the Committee deems appropriate.
• Establish and provide oversight of all incentive compensation plans and approve changes deemed appropriate and consistent with regulations and sound compensation principles and practices.

• Serve as the administrative committee for the equity-based plans, which includes establishing, reviewing and approving all short- and long-term performance goals used to grant equity-based compensation. Establish, approve and recommend to the full Board of Directors the grant and issuance of stock options, stock awards, and other equity awards, establishing purchase discounts for the Company's stock purchase plans, interpreting plan provisions where necessary, and performing other administrative duties as set forth in the plan documents or from time to time as deemed appropriate.
• Establish, review and provide oversight of the Bank's compensation philosophy and composition of the peer group used for market comparison.
• Review and approve all employment contractual agreements, severance agreements, and change in control agreements with Bank management.
• Review and elect, on behalf of the Board, individuals proposed by Management to hold the position of Executive Vice President or equivalent position.
• Evaluate director compensation and recommend to the full Board the appropriate level of director compensation, including compensation for service as a member or chair of a Board committee.
• Establish and periodically review stock ownership guidelines for directors and officers.

• Monitor the Bank's compliance applicable laws, regulations and Executive Officers.

with the requirements of the Sarbanes-Oxley Act of 2002 and other rules relating to compensation arrangements for directors, CEO, and

• Make an annual report on executive compensation for inclusion in the Company's annual proxy statement as required by the rules or regulations promulgated by any Regulatory Authority.
• Report regularly to the Board on its activities with such recommendations and other matters as the
  Committee may deem appropriate, so that the Board is informed of the Committee's activities.
• Periodically, but no less than annually, review and assess the adequacy of this Charter to ensure compliance with any rules or regulations promulgated by any Regulatory Authority and, when appropriate, recommend any modifications to the Board for its approval.
• The Committee may, in its discretion, delegate any portion of its duties and responsibilities to a subcommittee of the Committee.

RESOURCES AND AUTHORITY

The Committee shall have the authority and resources appropriate to discharge its duties and responsibilities at the Bank's expense, and may obtain advice from external legal, accounting, or other advisors. The Committee shall have the authority to select and retain consultants to assist in the

evaluation of executive compensation, to terminate the services of any such consultant, and to approve the consultant's fees and other retention terms, all at the Bank's expense.

Ultimately, the Committee acting on behalf of the Board of Directors is responsible for ensuring that the Bank's incentive compensation arrangements for all covered employees -- not solely senior executives -- are appropriately balanced. The Committee should receive data and analysis from Bank management or other sources that are sufficient to allow the board to assess whether the overall design and performance of the Bank's incentive compensation arrangements are consistent with the Bank's financial condition.

In performing their responsibilities, Committee members are entitled to rely in good faith on information, opinions, reports or statements prepared or presented by:

• One or more officers or employees of the Bank whom the Committee member reasonably believes to be reliable and competent in the matters presented.
• Counsel, independent auditors, or other persons as to matters which the Committee member reasonably believes to be within the professional or expert competence of such person.
• Another committee of the Board as to matters within its designated authority which the Committee member reasonably believes to merit confidence.

MANAGEMENT RESPONSIBILITIES

The Committee recognizes that incentive compensation serves as a key tool to attract and retain skilled staff. As such, a goal of the Committee is to properly balance such compensation arrangements with prudent operations that do not encourage excessive risk-taking. In doing so, the Committee also recognizes the following three key principles for consideration in compensation arrangements: (1) incentive compensation arrangements at the Bank should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose the Bank to imprudent risk; (2) such arrangements should be compatible with effective controls and risk-management; and (3) these arrangements should be supported by strong corporate governance, including active and effective oversight by the Board of Directors.

To reinforce and support the development and maintenance of balanced incentive compensation arrangements, the Committee requires that appropriate Bank personnel, including risk management, have input in the design and assessment of such arrangements. Therefore, the Committee designates that the following members of Bank management should be involved in design recommendations, monitoring, and/or assessment of incentive compensation arrangements and payouts:

• President/Chief Executive Officer & Executive Vice President Incentive Plans: President/Chief Executive Officer, Director of Risk Management, and the Human Resources Director.
• Senior Vice Presidents, Vice Presidents, Mortgage Banking Personnel, Operations Personnel & Other Applicable Personnel Incentive Plans: President/Chief Executive Officer, Executive Vice Presidents, Director of Risk Management and the Human Resources Director.

These members of management are responsible for the design of incentive compensation plans as directed by the Committee. All incentive compensation plans and payments for Vice Presidents and above must be approved by the Committee prior to implementation. Additionally, upon approval and implementation these individuals will evaluate the effectiveness and success of the plans to be

balanced from a risk and reward perspective and will provide feedback and/or make recommendations to the Committee based

upon such evaluations. Furthermore, at the end of the incentive period, management will make recommendation for payout under the incentive plan to the Director of Risk Management for verification purposes. Once verification and eligibility of payout in accordance with the established plan has been conducted, members of management will make such recommendations for payment to the Committee. The Committee will review such recommendations and any other pertinent information in consideration of approved payments.