Committees : Compensation

Keeping, and Compensating, Generations of Bank Talent

It happens all too frequently: A community bank experiences the sudden, unexpected loss of key talent at the bank.

Perhaps it was the 20-year veteran CEO who served as the face of the bank to the community, a top-producing lender with an extensive commercial pipeline, or a young operations manager who excelled at motivating her team to succeed.

Regardless, the story is usually the same: A sophisticated compensation program from another firm enticed the talent away, and the board didn’t stand a chance of a comparable offer. What should the board do now to ensure they can retain their remaining key talent and replace what was lost? Boards should start by understanding the nuances and motivations of the three generations working alongside each other in their banks. This is integral to retaining key talent in today’s competitive environment.

The Baby-Boomer Generation
Baby boomers account for over 80% of personal financial assets and more than half of all consumer spending; however, many of the almost 75 million who have reached retirement age are unprepared financially and plan to keep working beyond age 65. Supplemental retirement benefits, offered through an equity plan or traditional salary continuation plan, are an ideal way to retain and reward this generation of executives.

The bank has the freedom to structure benefits in strategic ways. For example, the retirement benefit might be a percentage of the executive’s projected final salary, with payments commencing on a designated date or event, and paid for a pre-determined number of years. It can require continuous employment until a stated retirement age to receive full benefits, and include vesting schedules as a plan component to retain the executive.

Generation X
“Gen Xers” tend to be independent, resourceful and self-sufficient. They also tend to be less committed to a single employer and more willing to change jobs to get ahead compared to previous generations, possibly in part because they watched their boomer parents lose hard-earned positions during difficult economic times.

In addition to planning for a secure retirement, they’re attracted to opportunities to accumulate wealth mid-career due to planned major purchases and children entering college. Short-term deferred incentive plans and synthetic equity plans such as stock appreciation rights offer these executives the potential to earn an annual incentive award if they meet certain performance targets. The award is deferred for a certain period and earns interest at a rate determined by the board as a way to promote retention. At the end of the deferral period, the employee receives the initial award plus earned interest. Banks can structure these payouts to coincide with the employee’s financial goals while accumulating wealth for future years.

The Millennial Generation
Millennials now outnumber boomers at 75.4 million people and are on track to be the most highly educated generation in American history, with many earning graduate degrees. A 2016 survey of millennials by accounting and consulting firm Deloitte indicated that 66% expected to leave their current employer within five years because their “leadership skills [were] not being developed.” However, of those planning on staying at least another five years, 82% said it is because they believe their personal values were shared by their employer.

Identifying millennials that will lead your bank in the future is crucial. But providing the right incentives to prevent their premature exit can be difficult. They find traditional supplemental retirement plans to be less enticing because of the time horizon required for payout. A more-effective compensation structure can offer an annual cash incentive, based on certain performance requirements and include a deferral that  encourages the employee to stay at the bank. Properly structured short-term deferred incentive plans and synthetic equity can achieve both objectives.

Effective incentives that retain and reward key talent are not “one-size fits all.” Employees’ concerns with compensation delivery vary, based upon where they are in their careers. The most successful programs provide the right incentives at the right times for employees to transition to the next stage of their lives.

Historically, shareholder proxy firms favored restricted stock, which can limit the creativity in deploying compensation for executive performance. If a shareholder proxy firm perceives a conflict, a bank must decide whether the proxy firm’s approval or the design creativity of the compensation plan is more important. Directors must ensure that proposed compensation structures are concurrent with the bank’s strategic plan, consistent with safe and sound banking practices and are affordable. Structuring a compensation plan to provide meaningful incentives for each generation can be a daunting task without the right expertise and guidance.