A “lift-out” is often used to describe the hiring of a group of individuals from the same company who have worked well with each other and can make an immediate and long-term contribution. A successful lift-out can create financial gain or provide competitive advantage such as replacing or crowding out a competitor. It can help expand the bank’s geographic markets or solidify its existing footprint.
Lift-outs, however, are not without risk. Management that becomes too enamored with a team can overlook essential steps required to determine whether it would be accretive. Inadequate due diligence or simply “paying up” on compensation without having a reasonable understanding of the expected results can cause a myriad of issues. In order to mitigate the risk, bankers should follow a standardized process, as outlined below:
Stages of a Successful Lift-Out
|Initial Conversation||Due Diligence||Team Transfer||Cultural Integration|
|Bank and team leader discuss potential market opportunities and competitive advantages.||Team leader gauges interest of other members, develops market projections and business plan for the bank’s review. Both sides investigate reputation, culture, resources and viability of a union.||Team joins bank and transfers client relationships in accordance with any contractual agreements. The bank plans for and announces the acquisition of the team internally and externally.||The team, which is now on the bank’s operational platform, becomes fully integrated and establishes relationships with other groups within the bank.|
The compensation structure for the lift-out team should also support the four stages:
During the Initial Conversation stage, discuss high-level compensation expectations. Often, these conversations provide insight into the team’s current compensation levels and programs. It can help the bank determine whether the team can easily fit into the current compensation structure or whether additional compensation is required to entice the team to come onboard. If additional compensation is required, it is important to determine (i) how much?, (ii) in what form?, (iii) for how long?, and (iv) whether it will create any internal equity or pay compression issues for existing talent.
During the Due Diligence stage, the bank must determine compensation levels that are commensurate with the economic value of the lift-out. Understanding the amount and the timing of each team member’s individual production is essential. It can also help the bank make the determination about which team members are essential and truly accretive. Determining the expected production streams can help determine who needs a compensation package outside of the current structure and who within the team could readily be integrated into the current structure.
It may be helpful to create a program where the additional pay phases out over a period of time or is only paid if the individual (or team) meets the production expectations agreed on at the time of the lift-out. For example:
- Special equity awards could vest based on the achievement certain levels of production within a specified period of time or could cliff vest (e.g., after 3 years) providing time to assess talent prior to vesting
- Special bonuses could be paid if certain levels of production are achieved.
During the Team Transfer stage, care should be taken to address any internal equity concerns and ensure that non-competition/non-solicitation commitments are upheld.
Possible rationales for accepting differing levels of compensation among like positions could include the limited nature or timing of the differences or the financial impact of the additional revenue stream.
Revenue producing roles are increasingly subject to non-competition and non-solicitation agreements. To avoid litigation, it is extremely important to ask lift out team members for any documents that involve their interaction with clients or the solicitation of former employees. The bank should review these and seek the advice of legal counsel.
During the Cultural Integration Stage, the Bank should assess whether pay differences should (a) remain given the structure and/or economics of the team or (b) be discontinued.
Maintaining pay differences makes sense if the team continues to outperform or if the group is highly-sought after by other institutions. However, if the results are commensurate with those in similar roles, it may become increasingly divisive to maintain special programs. Integration into the existing pay programs is a more natural choice.
In summary, team lift-outs provide a way for banks to accelerate growth by acquiring, rather than developing, proven revenue producers. Thoughtful management of compensation during the stages of a lift-out ensures that individuals are enticed to move and are motivated to produce for the bank.