Dealing With Change In The BOLI Marketplace

What are the major concerns for banks that are learning that their BOLI service provider is now exiting the market?

Bennett Meyer: Bank directors who thought they had made the “safe choice” by choosing one of the industry’s largest service providers now find that their BOLI and compensation consultant is facing the loss of back office support, including product, technical and administrative support. As a result, they must reevaluate how they receive these services.

They might be tempted to automatically switch to the service provider selected by their original consultant. However, it is important for a bank to perform due diligence and investigate any organization to ensure that the consultant is aligned with a service provider that can provide full back office support.

So what should banks look for in a service provider?

Bennett Meyer: The obvious place to start is to make sure the firm has a proven record and a solid reputation. Next, it is critical that the service provider rigorously monitor the plan’s regulatory compliance, review product performance and, working with the consultant, recommend appropriate changes. Collaboration between the consultant and service staff can help the bank achieve the highest level of compliance and optimize the return on its investments.

The consultant and the service staff should have a strong, personal relationship with the bank. The bank should be able to talk with a BOLI professional about any aspect of its BOLI program—whether tax, accounting or regulatory. Electronic reports will provide information, but they don’t always provide the specific answers available from a live, knowledgeable and experienced person.

Banks should also evaluate how the service provider is funded. The two most common funding models are fee-supported and business-supported. If a service provider is dependent upon a BOLI salesman or the bank to pay ongoing fees, the bank incurs a real cost and might eventually find itself paying higher fees to the service provider. If, however, a service provider is self-supported from the business it administers, without cost to the bank, there is a much greater likelihood that the service provider will remain financially stable well into the future.

With the recent changes in the marketplace, what advice would you offer to bank directors struggling with compensation issues?

Flynt Gallagher: The best piece of advice we can offer is: Don’t go it alone. It is virtually impossible for committee members to stay abreast of the latest regulations. Just as it is prudent to engage an attorney to handle complex legal issues, it has become a “best practice” for compensation committees to retain professional consultants to help them understand the legal, tax, accounting and regulatory changes affecting compensation.

Committees should also enter into year-round consulting arrangements so that their advisors are always available. This ongoing relationship is important if they are to understand how the bank’s compensation plans interrelate and how they will operate under various scenarios, such as a separation from service or a change in control.

TARP and shareholder value continue to be major areas of concern. What can banks do to protect themselves?

Flynt Gallagher: We suggest that every bank comply with the spirit of TARP, SEC and/or the Dodd-Frank Act, even if it did not receive TARP funds. The fact is that many of these regulations are becoming industry best practices.

We also advise board members to be acutely aware of how executive compensation impacts shareholder value. This is especially true in the case of incentive compensation. Regulatory agencies require a compensation committee to identify and manage the inherent risks embedded in their compensation arrangements.