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Committees : Compensation

Compensation Down the Ranks

December 1st, 2010 |

It’s no real secret that the key to a successful organization is a strong and talented team of people. However, in today’s competitive and changing market, recruiting, rewarding and retaining top employees is a challenge. On the last day of our annual Bank Executive and Board Compensation event held at the InterContinental hotel in Chicago, this session focused on the role the compensation committee should take when planning competitive yet acceptable compensation plans for employees past the CEO.

Moderated by Jack Milligan, editor for Bank Director magazine, our panelists included Gayle Applebaum, managing director and founder of Amalfi Consulting, Kimberly Ellwanger, compensation committee chair at Heritage Financial Corp. in Olympia, WA and Donald Norman, partner at law firm, Barack Ferrazzano.

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Oversee Not Micro-Manage

To begin the session, panelists addressed the less than obvious question of the compensation committee’s role when it comes to employees below the senior management team. With the liability now resting on the compensation committee, their responsibility for managing performance incentive plans now requires a more holistic approach. As Applebaum points out, the responsibility of the board is not to micromanage each plan, but rather to be aware of how they are designed. Compensation committees should actively review and evaluate the structure of all plans from the executive team down to the teller staff.

Don’t Have to Go it Alone

Sounds overwhelming? It can be, although the panelists agreed that the burden should not rest on the compensation committee alone, and that committee members should work in conjunction with the management team. While the board is ultimately responsible for oversight, they will most surely need input from the CEO and other senior team members.

The concern of some audience members was how to determine who was objective and well-versed enough in the requirements to help the board evaluate these plans thoroughly. Ellwanger openly shared that Heritage Financial Corp. had taken on a Chief Risk Officer whose responsibilities included sharing the list of all compensation plans semi-annually with the board for review. For those banks with limited resources, the following personnel should be able to help committee members analyze the plans on a regular basis:

  • Chief Risk Officer
  • Human Resources Officer
  • CEO/Executive Team
  • Inside Legal Counsel
  • Outside Compensation Advisor

Global Metrics Less Risky

Of course, assembling a qualified team of people to review and oversee all significant compensation plans at an institution is only part of the equation. Designing plans that are attractive to top talent is a critical piece of the puzzle. The panel encouraged smaller banks to not be hasty by cutting out bonuses and raising salaries as this would certainly result in the loss of key employees. Instead, banks should consider varying the levels of performance in their incentive plans by employee rank and then base those on individual and/or company-wide goals. Ellwanger provided the following example:

  • Top Level Team (Executives) = Metrics are driven by corporate performance
  • Next Level Team = Metrics are driven by bank and individual performance

As it turns out, regulators tend to lean more towards global metrics used in compensation plans as these are deemed less risky than behavioral based incentive plans.

Document, Document and then Document

Norman suggested that boards conduct at least a semi-annual risk analysis to evaluate the risks, goals and metrics developed. Throughout those sessions, it’s important to document thoroughly including meeting minutes, review changes and anything that speaks to the thought process behind the plans. A constant theme heard throughout the two-day conference was again reiterated in this session -- be prepared to tell your story.

mika

Mika Moser is the VP of Digital Strategy for Bank Director, an information resource for directors and officers of financial companies. You can follow her on Twitter at twitter.com/bankdirector or get connected on LinkedIn. You can also get updates or view articles on topics like these by visiting www.BankDirector.com.

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