Re-Thinking Long-Term Incentives

As directors review their banks’ strategic direction, reviews of talent management and succession plans and, ultimately, compensation to attract and retain mid-career and next-generation leaders is rising to the top of priority lists.

In a banking environment that includes compressed net interest margins, uncertain commercial real estate values, underwater securities and lower bank valuations, strategic plans are getting more scrutiny, with responses ranging from accelerating digital transformation plans to exploring mergers and acquisitions – either as a buyer or a seller.

A challenge for directors and senior executives pursuing these strategies is finding mid-career executives and junior managers who embrace the bank’s strategy. As the pace of executive retirements accelerates, competition for mid-career executives is fierce for demographic and professional reasons.

Many senior executives are nearing retirement without having well-developed successors who believe in the long-term acquisition strategy. The next generation of professionals are privately wondering if the vesting public or phantom stock grants will be as valuable to them in the long term as they are to those nearing retirement.

Mid-career executives focusing on acquisitions wonder how long they will want to endure the challenges tied to assimilating new banks into their culture, while executives at potential sellers wonder if the one-time equity payout will give them the freedom to consider other career options.

The collapse of Silicon Valley Bank (SVB) had a sobering effect on mid-career leaders at all banks. The combination of SVB managing the credit risk of emerging industries and the complete wipeout of SVB’s stock in a week was very disturbing. Leaders are reconsidering the long-term attraction of compensation rewards such as short-term cash and long-term stock grants.

A financial advisor specializing in executive compensation said: “We develop individualized executive financial plans to manage risks ranging from 10b5-1 trading plans to personalizing employment agreements. For those who think they’re being disloyal by selling vested stock, I remind them that even Jeff Bezos has a 10b5-1 plan to mitigate his stock concentration risk in Amazon.”

In the last decade, private direct lenders and disruptive fintech firms have threatened to take market share from traditional brick-and-mortar commercial banks. In response, some traditional bank boards pivoted strategically toward a fully digital customer experience.

As one director recently stated: “We positioned the bank for this moment years ago with great technology, low operating costs and a limited number of branches nationwide. We can out-compete anyone on deposit and lending rates while our customer demographic is already digital and growing.”

Many senior executives with traditional brick-and-mortar operations are tasking the next generation of executives with accelerating digital transformations to meet the competition. As this generation learns to cope with perpetual reorganization, internal resistance and regulatory compliance problems, some are meeting the challenge, while others are burning out.

High potential digital natives often see working at fintech firms as a more enjoyable option as they improve processes on nimbler technology platforms. If a bank buys a fintech firm, it’s likely acquiring talent and technology – not just the customer portfolio. This is as true for those building business lending relationships as it is for those who focus on the digital customer experience.

The new generation of leaders are comfortable with engaging clients outside the walls of a traditional office or bank branch. They solve treasury, lending, industry, capital and other problems side by side with their clients. The more forward-looking board members and executives are considering top to bottom long-term incentive programs to reward and retain next-gen bankers.

Directors and senior executives are looking to maximize the shift in consumer and commercial clients’ experience, both personally and digitally. One approach is to engage professionals with experience in other industries to design and align compensation to reward beyond banking peer group performance while looking at internal metrics to drive total enterprise value.

As one of our consulting partners, who serves as outside counsel for plan design and compliance, recently said: “As most mature industries go through disruption, the incentive plans of the past may not be the most motivating plans for the present and foreseeable future. We enjoy being part of a team building long-term value for our clients and society.”