The Final Lessons From HBO’s “Succession”

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I’ve previously written about three “lessons learned” from the hit HBO show “Succession.” As a refresher, those lessons are:

• Succession planning is always vital.
• Where was the board of directors?
• Separate economic ownership from executive leadership.

Now that the final chapter of the show has passed, there are final lessons to be remembered, particularly for boards of directors. One seemingly obvious lesson needs to be reemphasized here, as brilliantly portrayed in the show: Who will take over in a crisis to ensure that the proverbial trains stay on the right track?

In the case of “Succession,” the aging patriarch of the business and family, Logan Roy, dies early in the final season while aboard his private jet, with none of his children present. Once it is established that Logan has indeed passed away, the drama quickly moves to the questions of both who will take over and how this will be communicated, given that their company, Waystar Royco, is publicly traded though tightly controlled.

It was ridiculous to see company executives scrambling and attempting to decode handwritten notes in the margins of the patriarch’s important papers, trying to determine who Logan wanted to succeed him. Even on an interim basis, there is no clear plan — let alone one that provides clarity about succession for the CEO role.

The absurdity of this situation is exacerbated by the fact that while the three of his four children who are active in the business all believe that they should be the successor, none are truly qualified. In early episodes, the eldest son, Ken, appeared to be the most involved in working for the company, but he is emotionally unstable and becomes compromised by external events.

A plan of succession, both short and long-term, is lacking. In the very end, the board — including the siblings — votes to sell the company. This decision comes about because of one sibling’s deciding vote in opposition to the others. What are the parallels to community banking today?

First, there are still too many banks without real succession plans. Many boards acknowledge that there is a proverbial envelope with an interim CEO’s name in it, yet lack confidence in this choice as a longer-term solution.

Second, interim CEO plans need to be revisited annually. While a former CEO who remains on the board may be an excellent crisis solution in the first year or two after retiring, would that still be the case five or six years after stepping down? There is a practical limit to the expediency of this type of move.

Third, if the interim CEO is truly a planned short-timer, what has been done to ensure that the longer-term options are being prepared to step in when the time is right — and even when the time is less than ideal?

Our firm has been involved in over 100 president and/or CEO succession assignments; anywhere from 10% to 15% of these have occurred unexpectedly. These have arisen due to a variety of situations, including:

• Unexpected and untimely death.
• Termination for inappropriate behavior.
• Health reasons.
• Termination for poor performance.
• A change in the CEO’s planned personal timeline.
• Being recruited away for a bigger and better opportunity.

In each of these scenarios, the timeline for a succession plan was upended. In cases where no ready successor was waiting in the wings, the boards were forced to look to the outside. While an external search is always an option — whether for comparison purposes or because of a lack of strong contenders — community banks benefit the most from a well-planned orderly transition of leadership. Continuity of leadership often ensures the continuity of strategy, which is typically a healthy thing.

Boards have an obligation to regularly discuss succession plans with incumbent leadership, demand action on the development of potential long-term successors and regularly revisit the emergency succession plan. Anything less, and the board may find itself in the unenviable situation of Waystar Royco’s board in “Succession.” As we all now know, the lack of succession plans of any kind ultimately impacted the decision to sell the company. It would be a shame for that to happen to your bank.

The War for Talent in Banking Is Here to Stay

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It seems that everywhere in the banking world these days, people want to talk about the war for talent. It’s been the subject of many recent presentations at industry conferences and a regular topic of conversation at nearly every roundtable discussion. It’s called many things — the Great Resignation, the Great Reshuffling, quiet quitters or the Great Realignment — but it all comes down to talent management.

There are a number of reasons why this challenge has landed squarely on the shoulders of banks and organizations across the country. In the U.S., the workforce is now primarily comprised of members of Generation X and millennials, cohorts that are smaller than the baby boomers that preceded them. And while the rising Gen Z workforce will eventually be larger, its members have only recently begun graduating from college and entering the workforce.

Even outside of the pandemic disruptions the economy and banking industry has weathered, it is easy to forget that the unemployment rate in this country was 3.5% in December 2019, shortly before the pandemic shutdowns. This was an unprecedented modern era low, which the economy has once again returned to in recent months. Helping to keep this rate in check is a labor force participation rate that remains below historical norms. Add it all up and the demographic trends do not favor employers for the foreseeable future.

It is also well known that most banks have phased out training programs, which now mostly exist in very large banks or stealthily in select community institutions. One of the factors that may motivate a smaller community bank to sell is their inability to locate, attract or competitively compensate the talented bankers needed to ensure continued survival. With these industry headwinds, how should a bank’s board and CEO respond? Some thoughts:

  • Banks must adapt and offer more competitive compensation, whether this is the base hourly rate needed to compete in competition with Amazon.com and Walmart for entry-level workers, or six-figure salaries for commercial lenders. Bank management teams need to come to terms with the competitive pressures that make it more expensive to attract and retain employees, particularly those in revenue-generating roles. Saving a few thousand dollars by hiring a B-player who does not drive an annuity revenue stream is not a long-term strategy for growing earning assets.
  • There has been plentiful discourse supporting the concept that younger workers need to experience engagement and “feel the love” from their institution. They see a clear career path to stick with the bank. Yet most community institutions lack a strategic human resource leader or talent development team that can focus on building a plan for high potential and high-demand employees. Bank can elevate their HR team or partner with an outside resource to manage this need; failing to demonstrate a true commitment to the assertion that “our people are our most important asset” may, over time, erode the retention of your most important people.
  • Many community banks lack robust incentive compensation programs or long-term retention plans. Tying key players’ performance and retention to long-term financial incentives increases the odds that they will feel valued and remain — or at least make it cost-prohibitive for a rival bank to steal your talent.
  • Lastly, every banker says “our culture is unique.” While this may be true, many community banks can do a better job of communicating that story. Use the home page of your website to amplify successful employee growth stories, rather than just your mortgage or CD rates. Focus on what resonates with next generation workers: Your bank is a technology business that gives back to its communities and cares deeply about its customers. Survey employees to see what benefits matter most to them: perhaps a student loan repayment program or pet insurance will resonate more with some workers than your 401(k) match will.

The underlying economic and demographic trend lines that banks are experiencing are unlikely to shift significantly in the near term, barring another catastrophic event. Given the human capital climate, executives and boards should take a hard look at the bank’s employment brand, talent development initiatives and compensation structures. A strategic reevaluation and fresh look at how you are approaching the talent wars will likely be an investment that pays off in the future.

A Banker’s Story: What are Your Values?

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BEBC13-Postcard-article2.pngThere is hardly a more transformative story than the one that occurred at Huntington Bank during the past several years. In 2009, Stephen Steinour was brought in to right the struggling, Columbus, Ohio-based bank in the wake of the financial crisis. The bank lost $3.1 billion that year and had bad credit issues. It raised capital and went through extensive layoffs.

“It was a tough year for us,’’ Steinour said at Bank Director’s recent Bank Executive and Board Compensation conference. “We had to shift gears.”

One of the things the $56-bilion asset Huntington Bancshares did was rebrand Huntington Bank, capitalizing on the bad name banks got during the financial crisis. While other banks were criticized for making substantial sums in overdraft fees, Huntington rolled out a 24-hour grace period on overdraft. If a customer overdraws an account, that customer gets a notification and 24 hours to put the money in the account with no fees. It was an extremely difficult year in which to introduce the plan. The bank was losing money, and the new program cost $36 million that first year.

“It was a huge step by our board and boy are we glad we did it,” Steinour said.

On the tail of the program’s success in bringing in new business and cementing loyalty, Huntington introduced asterisk free checking on the recommendation of employees. The checking account has no minimum balance requirements or terms.

“Our colleagues loved it because they asked for it,’’ Steinour said. “It put them in an empowered position with our customers.”

Huntington Bank began marketing itself as a “fair play” bank that would “do the right thing.” A training and recruitment video for the bank portrays the bank as a contrast to Wall Street, featuring a guy smoking a roll of dollar bills as if it were a cigar.

“We want to give customers an advantage rather than taking advantage of them,’’ the video says.

The transformation of the bank seems to have worked. Branding was by no means the only way the bank has improved profitability, but it helped.

In Bank Director’s 2013 Bank Performance Scorecard, Huntington was the top performing bank above $50 billion in assets, beating out giants such as Wells Fargo & Co. and Capital One Financial Corp., on measurements such as profitability, asset quality and capital levels. Huntington’s core return on average equity was 11.95 percent in 2012 and its core return on average assets was 1.22 percent, compared to a median of 9.70 and .98, respectively, for banks above $50 billion in assets.

Nowadays, Steinour is also focused on recruiting employees, with a particular emphasis on attracting the millennial generation into banking. It’s a challenge heightened by a public perception of the industry as one that takes advantage of people and has benefited from government “bailouts.”

Steinour says young people expect advances in technology and they are outspoken about their career objectives. Getting them to stay more than a few years is a challenge, as they generally don’t plan to work for the same employer for their entire careers.

“You have to respond to that,’’ he said. “That’s the workforce we’re getting.”

In order to address the concerns of its millennial employees, Huntington has laid out explicit career pathways and expanded its internship program. In response to questions from prospective employees about diversity, the bank has started groups for particular ethnicities and persuasions, including a lesbian, gay and transgender group.

“The things I assumed from my era of banking are no longer valid,’’ Steinour said.

Some good business practices, however, are timeless.

“We are in a people business,’’ Steinour said. “It is critical to us to engender engagement and continue to build upon colleague satisfaction. Their enthusiasm every day translates into great customer service.”

Changing the Way We Pay

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Rewarding performance without increasing risk or running into problems with regulators or shareholder advisory groups has been a tough job for bank boards in recent years. Many have made changes to their long-term and short-term incentive plans and metrics. Bank Director asked some board member and management speakers at its upcoming Bank Executive and Board Compensation Conference in Chicago Nov. 4-5 to address what changes they have made recently.

Has your bank implemented any changes to compensation or to the compensation committee during the last year that you would view as an improvement? If so, please describe.

Samuels-Ron.pngAvenue Bank introduced a long-term incentive plan in 2012 for executives, key officers and directors. This is a performance-based plan. Based on achievement of annual goals, equity awards in the form of restricted stock will be granted at threshold, target or maximum and vested evenly over a four-year period. Objectives included the ability to attract and retain key employees in a highly competitive talent market; encourage ownership; provide a portion of total compensation in deferred compensation; minimize accounting expense and provide the most efficient long-term incentive vehicle.

— Ron Samuels, chairman & CEO, Avenue Bank, Nashville, Tennessee

Stephens-Barbara.pngFirst Business Financial Services, Inc., has undertaken two major projects over the past year to align compensation and performance.  CEO performance is now evaluated using a robust process, which incorporates both business results and excellence in leadership.  In addition, we have developed a new peer group that best reflects our business model, size and markets.  This peer group will be used in evaluating both our performance and our compensation.  When combining these tools with engaged directors, we believe we provide a solid foundation for both the art and the science of compensation.

— Barbara Stephens, compensation committee chairman, First Business Financial Services, Inc., Madison, Wisconsin

Holschbach-Leon.pngOur annual compensation review considers key factors such as: talent acquisition and retention needs, long term strategy of the bank, changes in competitive landscape, and the complexity of our growing company. In 2013, we continued the practice, established a few years ago, of shifting from options as our single, long-term incentive to a combination of options and restricted shares. Going deeper into our company with options has also allowed us to recognize the hard work and commitment of our management team as well as rewarding our promising young employees that have the potential to assume leadership roles in the future.

— Leon Holschbach, president and CEO, Midland States Bancorp, Effingham, Illinois

Sorrentino-Frank.pngAt ConnectOne Bank, we have recently focused on an alignment strategy for compensation. This was accomplished by creating both an annual cash incentive plan and a formal long-term incentive plan. The dynamic tension between these two different plans motivates and rewards short-term actions while making sure that those decisions also drive long-term value creation. For a high-growth, risk-compliant organization such as ours, retaining and rewarding our top talent has become a priority for our compensation committee. This balanced approach between short and long-term incentive aligns our employees’ goals with those of our shareholders, while also building leaders who reinforce our client-centric, sense of urgency culture. The result: good decision-making, added shareholder value and strategic focus.

— Frank Sorrentino III, chairman/CEO, ConnectOne Bank, Englewood Cliffs, New Jersey 

Hirata-Vernon.pngLast year, we changed one of the executive non-equity incentive plan performance measures from strategic/nonfinancial goals to a financial goal of measuring the holding company/bank’s nonperforming assets ratio against the company’s peer group. In discussions with some of our institutional investors and after reviewing some of our past proxies, we found that this previous goal was not easily explained and not clearly an objective performance measure.  As such, the old measurement might not clearly qualify for 162(m) treatment; which, if disqualified, would mean that part of the compensation awarded would not be tax-deductible by the company.

— Vernon Hirata, vice chairman, co-chief operating officer and general counsel, Territorial Bancorp Inc., Honolulu, Hawaii

Stumped on How to Pay the CEO?

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Tying compensation to performance is the top compensation challenge for bank boards, according to a survey of more than 300 bank directors and executives conducted by Bank Director in March. Some banks are approaching this challenge in unique ways. Bank Director asked upcoming speakers at its Bank Executive & Board Compensation Conference in Chicago Nov. 4-5 to share the most innovative compensation package they have seen.

What’s the most innovative CEO or employee compensation package you have seen?

Rodda-Daniel.jpgA privately-held bank was seeking to reduce its use of equity awards while maintaining a program that motivated executives and aligned their compensation with shareholder returns. The company replaced some equity grants with a new long-term cash plan tied to three-year return-on-equity goals, which reduced the equity grant rate while retaining alignment with the return provided to shareholders. The company continued to grant stock options, including some with a premium exercise price, to reinforce the link to value creation for shareholders. The long-term program also includes potential reductions in payouts if performance on credit and risk measures fails to meet expectations during the vesting period. While this program may not be appropriate for many banks, for this bank it aligned with their business objectives while maintaining a balance between risk and reward.

—Daniel Rodda, lead consultant, Meridian Compensation Partners, LLC  

Gustafson-Dennis.jpgIt’s not a bank, but the most interesting one I have seen is for the chairman and CEO of GAMCO Investors. He does not receive salary, bonuses, or stock options, but is paid a management fee of $69 million.

—Dennis Gustafson, senior vice president and financial institutions practice leader, AHT Insurance

Gallagher-William-Flynt.jpgA large financial institution wanted solutions to unintended consequences surrounding officer compensation plans. The bank annually awarded significant equity grants to all officers in the form of options or restricted shares. A deferred compensation plan also allowed officers to defer a portion of salary, annual incentive and/or equity grants in various funds, with disbursements made in company stock upon retirement. The bank officers were concerned regarding the concentration of compensation in the form of bank stock and the lack of diversification upon distribution from the deferred plan. We swapped existing equity grants in a value-for-value exchange for cash-settled restricted stock units, which were then deferred into a new fund using our patent-pending LINQS+TM design. The end result was a significantly reduced shareholder dilution, diversification for the officers, and a lifetime retirement benefit.

—W. Flynt Gallagher, president, Meyer Chatfield Compensation Advisors, LLC

ODonnell-Susan.jpgA bank I know focused its CEO pay on the success of its business strategy (driving profitable, risk- appropriate growth through acquisition). Base salary and annual cash incentives were minimized with stock based compensation representing the majority of his compensation. A modest portion of the grant consisted of restricted stock that would cliff vest after three years to provide retention and ownership perspective. The majority of shares would vest only if a balanced scorecard of measures were achieved (profitability, shareholder return, efficiency and asset quality). This encouraged the CEO to focus on long rather than short-term results. Ownership and holding policies, along with the CEO purchasing shares outside the program illustrated his “skin in the game” and alignment with shareholders. The business plan was exceeded, share value increased and the CEO was rewarded accordingly.

—Susan O’Donnell, lead consultant, Meridian Compensation Partners LLC

Swanson-Greg.jpgPearl Meyer & Partners worked with a compensation committee that, on the heels of the financial crisis, needed a more rigorous set of annual incentive goals. The committee members elected to remove some of the usual guess work in establishing annual incentive plan goals by taking a new approach to the concept of plan funding triggers. Rather than the common approach of using a single earnings-based trigger to determine whether the entire plan gets funded, they revised their plan to include “gatekeepers” based on performance relative to a peer group for each of the plan’s four corporate financial goals. Meeting the gatekeeper for a specific metric would then trigger a potential incentive payout if the bank also meets its budgeted goal for that metric. This approach promotes a more balanced assessment of performance relative to peers as well as to the bank’s budget. The result: a higher level of confidence by directors and investors that pay will be directly aligned with performance.

—Greg Swanson, vice president, Pearl Meyer & Partners