Retention Tools You Can Use

retention-1-17-18.pngEveryone knows compensation is not the only thing that matters. Retaining key executives and leaders in your organization is as much about the right work environment, collaboration, recognition for a job well done, feedback and opportunity for advancement as it is about a compensation plan. But effective compensation is important to retain key individuals. Here’s how.

When designed appropriately, nonqualified benefit plans have been powerful retention tools for many years. In fact, a Federal Deposit Insurance Corp. study published in 2014 titled, “Inside Debt, Bank Default Risk and Performance During the Crisis,” by Rosalind Bennett, et al, concluded that bank holding companies faced lower default risk and performed better during the credit crisis if the CEO held more inside debt such as pension benefits and deferred compensation relative to inside equity, such as stock options and firm equity.

What are bank boards and management doing today to keep senior executives and other hard-to-replace individuals inside their organizations? A market-based salary, annual cash bonus, 401(k) and group benefits are expected, so they are often not enough to attract and retain the talent needed to create a high-performing bank. For some banks, equity incentives such as stock options, restricted stock and phantom stock can be appropriate and valuable retention devices. In addition, banks often offer nonqualified benefit plans in order to provide executives and other leaders incentive to remain with the bank. The most common retention plans are:

  • Supplemental executive retirement plans (SERP)
  • Deferred compensation plans (DCP)
  • Split dollar plans
  • Survivor income plans/death benefit-only plans

We will talk about the first two here.

SERPs: A Tried and True Option
During the credit crisis, SERPs and other plans were put on the back burner. Now that the market has turned, they are once again being used as a tool that benefits both the bank and the executive.

SERPs have traditionally been the most common plan used and continue to be an effective tool for long-term retention and retirement planning. A SERP provides a specified benefit at a specified age or date. The benefit is not directly based on the performance of the bank or the executive.

DCPs Growing in Popularity
While SERPs are useful, especially for retirement planning, there has been a shift toward deferred compensation plans in the past few years. This is because DCPs provide increased flexibility of design by allowing the bank to make contributions to the executive’s account using a fixed dollar amount, fixed percentage of salary and/or bonus, or a variable amount using a performance-based methodology. Variable plans typically provide for a targeted monthly or annual contribution to the executive’s account, but allow the contribution amount to be increased or decreased at the discretion of the board. Even fixed dollar or percentage plans allow the bank to withhold contributions if the bank loses money or has a shortfall in regulatory capital. DCPs usually allow voluntary deferrals of compensation as well.

A few other things have changed during the last few years, as well. Banks now often include supplemental disability insurance and long-term care insurance as part of the nonqualified benefit package. Nonqualified benefit agreements frequently include strict non-solicitation and non-compete clauses that must be followed in order to receive the benefit. Boards are willing to offer generous benefits, but also desire to reduce their risks should the executive decide to leave before retiring.

Banks and their boards also realize the importance of retaining young, fresh talent and developing the next generation of leaders, so it is becoming more common to offer DCPs to younger “up-and-coming” officers. Three ways this is being accomplished are:

  1. Offering a DCP that allows for in-service distributions timed to coincide with major life events, such as a child entering college.
  2. Designing a DCP to be used in lieu of stock plans with cash distributions every three to five years. The regular cash flows are motivating to younger leaders who are looking to meet short- to mid-term financial needs.
  3. Offering a DCP catered to the recent college graduate, for instance, to pay down college debt.

The Bottom Line
These tools, when coupled with an effective compensation strategy, can position your bank to maintain a competitive edge.


Ken Derks

Managing Consultant

Ken Derks is a managing consultant in NFP executive benefits at NFP Corp. He has more than 30 years of professional services experience in the financial services industry. For the past 17 years, Mr. Derks has advised many banks regarding nonqualified benefit plans and bank-owned life insurance (BOLI) programs as well as overall bank compensation strategies. He is a frequent speaker at state and national trade association meetings and has authored numerous articles on compensation, BOLI and nonqualified benefit plans.

Prior experience includes 16 years with RSM (McGladrey), serving as principal and national director of financial institution consulting. Mr. Derks is a registered representative with Kestra Investment Services, LLC.


David Shoemaker