The High Cost of Good Talent and the Value of Retention

How would your bank fare if your top-performing lenders
left tomorrow?

A bank succeeds because of its employees who grow the
bank and keep it safe. The departure of these employees can impose massive
costs to a bank in lost relationships and the effort to find new personnel. Has
management at your bank adequately assessed the financial cost and risk of
losing its key employees? What would be the financial impact to the bottom line
and shareholder value if a key employee is not retained?

The direct cost of replacing a high-performing employee is up to 213% of the annual salary associated with the position, according to research by the Society for Human Resource Management. Total costs can rise to as much as 400% when considering indirect expenses. Direct costs include screening, interviewing, acquisition cost, onboarding and training, while indirect costs include lost productivity, short-staffing, coverage cost and reduced morale.

The following are hypothetical examples that help illustrate
both the costs and risks associated with replacing a key employee at a bank:

Example 1:
A lender in their early 40s who maintains a $40 million loan portfolio with a
4% margin joins a competitor bank. The estimated earnings on the lender’s portfolio
were $1.6 million. If 30% of the portfolio moves to the competing bank, that would
create an annual impact of $480,000. The bank stands to lose $1.4 million in three
years. Assuming this lender generates $10 million in new loans annually, that adds
another $400,000 in additional lost income. Losing this one lender results in lost
annual revenue of almost $900,000.

Now imagine the bank has seven lenders with similar
portfolios and margins. If the entire team left, the lost revenue potential
could be over $6 million annually.

Example 2:
A bank loses its compliance officer. In addition to the direct financial costs
of replacing the officer, this could cause both short- and long-term regulatory
and financial risks and challenges. If the officer had a salary of $90,000, the
cost to replace them is between $191,700 and $360,000, using the 213% and 400%
of base salary replacement cost assumptions. There could also be additional
costs associated with potential outsourcing the compliance services until the
bank can hire a new compliance officer.

Fortunately, in both of these examples, management
preemptively responded by strategically designing compensation programs to
retain the officers. Quantifying the lost revenue and costs to replace the
employees demonstrated the substantial risks to the bank, and convinced
executives of the  inadequacies of the compensation
plan in place.

It is critical that banks design and implement competitive compensation plans that provide meaningful benefits. Some compensation committees believe a salary and an annual performance bonus are adequate to retain key employees. But based on our experience, banks with higher retention rates offer two to four types of compensation plans, in addition to salary and bonus. Examples include employee stock ownership plans, stock options, restrictive stock, phantom stock, profit sharing, salary continuation plans and deferred compensation plans. These plans provide for payments either at retirement or while employed, or a combination of pre- and post-retirement payments. Banks can strategically design and customize these plans in ways that incentivize strong performance but fit the demographics and needs of the key personnel. There is no one-size-fits-all plan.

Additionally, nonqualified executive benefit programs such as supplemental executive retirement plans (SERPs) and deferred compensation plans (DCPs) can help your key employees accumulate supplemental funds for retirement. Their flexibility allows them to be used alongside other forms of compensation to enhance your bank’s overall executive benefit program by offering additional incentives and incorporating special features intended to retain top performers who may not be focused on retirement. For example, a deferred compensation plan with payments timed to when the officer’s children are college age can be highly valued by an officer fitting that demographic.

The significant potential financial impact when your bank loses key employees quantifies and underlines the value and importance of retention, so it is paramount that executives meaningfully and competitively compensate these employees. Banks without a strong corporate culture and a competitive compensation plan in place are at a higher risk of losing key employees and may have an emerging potential retention problem.


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