While bank boards recognize the need to tie compensation to the performance of the bank in the long term, they continue to struggle with how to get the pieces in place to attract and reward the best leaders to meet the institution’s strategic goals. Many of the directors and senior executives that responded to Bank Director’s 2014 Compensation Survey, sponsored by Meyer-Chatfield Compensation Advisors, confirm that getting pay for performance right continues to challenge their boards. Less than half tie CEO pay to the strategic plan or corporate goals, and more than one-quarter of respondents say that CEO compensation is not linked to the performance of the bank. Flynt Gallagher, president of Meyer-Chatfield Compensation Advisors, says that boards should always keep the strategic plan and long-term goals in mind when determining compensation for executives, but many boards aren’t specific about the goals and objectives they expect the top executives of the bank to achieve.
Meyer-Chatfield Compensation Advisors offers the following advice for boards based on the results of the survey:
Executive performance goals should be clearly defined and tied to the bank’s strategic plan.
Make sure the bank is planning for the future and has a succession plan in place. Forty-two percent of executive hires were driven by executive departures in 2013.
Competitive pay is critical to attract and retain key talent, but it is not the determining factor. Culture can be the intangible that drives talent to—and from—an organization.
The board must determine its own pay—not the CEO.
Evaluate whether the board’s pay is fair and aligns with market practices.
For more on these considerations, read the white paper.
To view the full results to the survey, click here.
If you want to hire a tech expert, you might want to look outside the banking industry.
One-quarter of banks with more than $1 billion in assets report technology and information security hires at the executive level in 2013, according to Bank Director’s 2014 Compensation Survey. Technology hires range from experts in areas such as cyber security, data analytics, or mobile applications.
JPMorgan Chase & Co. has lately hired from Silicon Valley, poaching from tech giants such as Yahoo and Google. With startup cultures growing in places like the Midwest’s Silicon Prairie, which encompasses parts of several states including Illinois, Texas and Missouri, community banks might find opportunities to lure talent away from tech companies, says Stessa Cohen, a research director with technology research and advisory firm Gartner Inc. Culture is fundamental. Of those reporting a technology hire in 2013, 60 percent cited corporate culture as a factor that makes the bank attractive to candidates, according to the survey.
Acquiring a startup firm is another way to bolster a bank’s talent roster. Spanish banker Banco Bilbao Vizcaya Argentaria S.A. (BBVA) acquired banking startup Simple in February. For BBVA, Simple will not only be a means to innovate, but will also “bring new talent into the bank,” says Cohen. Simple promised to revolutionize the banking industry with an elegant mobile app, no branches, free access to ATMs everywhere, and financial management tools. One Boston-area mutual bank with a board focused on innovation recently brought on several new hires from a failed start-up.
In April, Eastern Bank, with $8.7 billion in assets, hired Dan O’Malley, the former CEO of PerkStreet Financial, as the bank’s chief digital officer, spearheading Eastern’s new digital technology and data analytics unit. The circumstances were serendipitous: PerkStreet, an online-only financial services startup that offered lucrative cash debit account rewards tied to online checking accounts, closed in August 2013, citing an inability to attract new investors. Its FDIC-insured partners had been Bancorp Bank in Delaware and New York-based Provident Bank.
Three other PerkStreet executives joined O’Malley at Eastern, all with extensive technology experience within and outside the banking industry. John Magee, now Eastern’s chief data scientist, headed analytics at Mullen, a Boston-based advertising agency, prior to joining PerkStreet. Laurence Stock, senior vice president, emerging technologies, and Sean Boice, vice president, technology and analytics, both worked for several e-commerce and financial technology companies. O’Malley has a background in payments as an executive at Capital One Financial Corp.
The team could see that joining an existing bank has advantages, says Bob Rivers, Eastern Bank’s president. Eastern is rich in capital, leaving O’Malley free to focus on innovation and not on chasing funding to keep the business afloat. “They understood that, unlike other larger banks…they would be not only a very high priority for us but they would have very top-of-the-house attention,” Rivers says. Eastern’s board is also committed to innovation. Several board members have backgrounds in innovation and technology, and O’Malley and his team meet with the board’s innovation committee quarterly.
The new team will focus on building enhancements to the business, including an updated mobile banking platform that will launch in the spring. Under Magee’s leadership, the bank also has plans to mine the data found in the bank’s 93 million annual transactions, which will help the bank identify opportunities to better serve clients. Eastern Bank is also looking for new ideas outside the bank. Part of Stock’s job is to find technology companies to invest in or acquire that fit within the bank’s business model.
While Rivers describes Eastern Bank as supportive of the technology team, he also says that, like most banks, its culture is conservative. “It causes us to not be as open [to] exploring as many things as we should and not move as quickly as we should,” he says. The PerkStreet team, he hopes, will make Eastern quicker to innovate and more attractive to those with technology backgrounds. “If we don’t further adapt our culture, we won’t get more talent,” says Rivers.
The imperative to grow revenues, particularly in today’s highly competitive lending environment, has replaced regulatory compliance as the driving force behind board agendas and executive hiring decisions, according to the findings of Bank Director’s 2014 Compensation Survey. With many regulatory rules now long-established, banks are focusing again on the business of making money—and for most banks, that means making loans.
For many bank boards, particularly for larger institutions with more than $1 billion in assets, there are also indications that director compensation is rising. However, at a growing number of banks, director pay is shifting from per-meeting fees to annual retainers. And despite improved stock valuations across the industry, directors and executives alike express a clear preference for cash over equity.
More than 300 directors and senior executives of banks nationwide responded to the survey, sponsored by Meyer-Chatfield Compensation Advisors. The survey was conducted by email in March and April, and additional data on director pay was collected from the proxy filings of publicly traded banks for fiscal year 2013.
Board pay is rising, and most directors, at 61 percent, feel that they are paid fairly. Almost half of the respondents have seen director pay increase within the last two years, and 40 percent expect director compensation to increase in 2015. However, 42 percent of respondents from the smaller banks, less than $500 million in assets, haven’t raised board pay since 2010 or prior.
Opinions are mixed on the value of equity. Fifty-five percent of respondents believe that equity is highly valued by executives, while only 43 percent feel that equity compensation is highly valued by directors. Forty-one percent of banks overall, and 65 percent of publicly traded institutions, report that the bank’s CEO receives equity grants.
Benefits are rising. Indicating a possible reversal of a trend in declining board benefits, 54 percent indicate that the board members of their bank receive some sort of benefit, an increase of almost 30 percent from 2013. Reimbursement of travel expenses, at 34 percent, is the most common benefit reported by participants, followed by deferred compensation at 28 percent.
Lending, compliance and risk executives were the focus of new hires and promotions in 2013. Loan officers, at 44 percent, are in strong demand at banks of all sizes, and an emphasis on top line growth drove almost 60 percent of all executive level hires. Executives with expertise in risk management accounted for 59 percent of hires at banks with more than $5 billion in assets, with a lesser demand for this skill set at smaller institutions.
Does culture and stability trump money when it comes to attracting new talent? Corporate culture, at 69 percent, and the stability of the company, at 53 percent, were cited as the top elements that make a bank attractive to potential hires. Just 13 percent cited the compensation program.
Tying compensation to performance remains a key challenge for bank boards as they work to develop compensation plans that will balance shareholder interests while still rewarding employees. As a renewed focus on growth makes loan officers even more desirable, the onus is on the board to stay on top of today’s compensation trends.