Keeping Pace with Wages After Corporate Tax Cuts

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compensation-4-12-18.pngSince the reduction of the corporate tax rate from 35 to 21 percent, 64 banks nationwide have raised their minimum salaries to $15 per hour or given bonuses that range from $500-1,500, or both.

This number has increased by 50 percent since Jan. 1. Some have increased their 401(k) matching contributions. Some have made significant donations to nonprofit organizations in their communities.

Companies in the market at-large with whom financial institutions often compete for frontline talent are increasing their starting wage. For example, Target has announced it will raise its salaries to $15 per hour by 2020. Apple has announced it will reinvest $350 billion and add 20,000 jobs in the U.S. over the next five years. Companies with freed up capital are investing in the war for talent and in their communities.

All of this has caused concern for community banks and credit unions as they wrestle with whether they should follow suit and raise pay to $15 an hour. Here are our suggestions:

  • Know the market rate for wages. This requires examining external data and internal equity by a professional who is not bound to internal politics and long-term relationships between incumbents. You may need a midpoint that is 10 percent above the market as a competitive advantage.
  • Have a compensation philosophy and salary administration guidelines. Audit against those standards for consistency. If the next administration reduces the tax advantage, you would not need a knee-jerk reaction to adjust.
  • Don’t overpay for inexperienced new hires. We strongly recommend new employees with little or no background receive a starting salary of approximately 85 percent of the midpoint for most jobs and 90 percent of midpoint for “hot jobs.”
  • Develop a salary increase process that ensures that pay levels are getting to their midpoint in a reasonable period of time. Non-exempt employees with three years of experience in their job would have a pay level at 100 percent of the midpoint. Exempt employees with five years of experience in their job would get to their midpoint in five years. (This is where most salary administration programs fall down.)
  • Pay for Performance. The average salary increase differential by performance is 2 percent. If the difference between a high performer and an average performer is 1 percent, you are not differentiating the salary increase significantly enough to “pay for performance.”

When I review the pay levels of clients that have contacted us about an appropriate response to the market, it is easily to determine they were inconsistently applying their own salary administration guidelines. This should have been an obvious step even before the tax cut incented companies to offer more competitive pay.

If your competitive advantage is your people, then the war for talent is growing more heated. Have a well thought out compensation plan. Get out of the guessing game. Live up to your plan consistently. Update your salary ranges annually. Reevaluate and commit to your compensation strategies.

How to Give Employees a Slice of the Tax Reform Pie

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compensation-3-2-18.pngThe $1.5 trillion tax law that was signed in December reduces the corporate tax rate from 35 percent to 21 percent, and should provide an economic windfall for U.S. companies as well as the banking industry. The legislation does include some negative impacts to executive compensation by ending the performance-based exemption through Internal Revenue Code Section 162(m) for compensation over $1 million, but overall, the change in tax rate should bring additional revenue to all companies. Employees are expecting a slice of the pie.

Several Fortune 500 companies, including Wells Fargo & Co., AT&T, JP Morgan Chase & Co., U.S. Bancorp, Wal-Mart, Apple and The Walt Disney Co. have given employees special bonuses, and in certain instances have raised the minimum wage to $15 per hour. These bonuses and raises were given without consideration to employee or company performance, and may set expectations or encourage a feeling of entitlement to future compensation increases regardless of performance.

Community banks should exercise caution when making special salary adjustments and bonus payouts. Salary increases and bonuses without performance or market-driven reasons will drive up fixed costs for the bank, which could impact the achievement of future budget or profitability goals. Raising the minimum wage may also cause salary compression at lower levels of the organization, and make differentiating pay between managers and employees, or high performers and low performers, difficult.

Be Strategic with Salary Increases
Because employee expectations for pay increases are high in relation to the potential for the organization to reap additional profits, we recommend that banks make strategic changes to their salary increase methodology.

One such change is to increase the overall budget for salary increases. A study conducted by Blanchard Consulting Group at the end of 2017, which included over 100 banks, found that the average projected salary increase in the banking industry is 3 percent for 2018. Instead of raising the minimum wage, an alternative would be to increase the salary increase budget from 3 percent to 3.25 or 3.5 percent. This would allow all employees to enjoy the windfall from the additional income projected from tax reform, and maintain the bank’s ability to tie performance and market position into the salary increase process. For example, if an employee is meeting performance expectations, that person would be eligible for the higher base salary increase of 3.25 percent. If the employee is exceeding performance expectations or the salary is below market, that employee may get a higher increase. If the employee is meeting some expectations or no expectations, that individual may get half of the budgeted increase or no increase at all.

Use the Windfall to Increase the Bonus Pool
In regard to employee bonus plans, your bank may consider increasing its annual incentive plan payout levels to coincide with the anticipated increase in bank profitability. For example, if the target bonus payout was 4 percent of salary (or about two weeks’ pay) for staff-level employees, the bank may want to increase the target payout to 6 percent of salary because of the additional profits from the tax reform law. In order to pay out this 6 percent bonus, end-of-year bank profitability goals still need to be met, which keeps the employee’s focus on performance and does not encourage a feeling of entitlement to the bonus payout.

We also recommend that a threshold payout—the minimum performance level at which a bonus may be paid—be incorporated into the incentive plan design. The payout may be linked to a performance goal that is similar to the previous year’s profitability level, with a bonus amount equal to the previous year’s payout. This methodology could also be used for officer and executive plans that typically incorporate higher payout opportunity levels.

If your bank considers this approach, we recommend testing the reasonableness of the program by examining the total payouts of your bonus plan for all employees (staff and executives) as compared to total profits. Typically, if a bank is meeting budget, the bonus plan will share approximately 10 percent of the profits with all employees through cash incentive payouts. If the bank is exceeding budget—for example, profits are 20 percent above the target—the bank may share 15 to 20 percent of the profits with employees.

The passage of tax reform has created an expectation with employees across the nation that their compensation packages will be positively impacted. Despite the expected positive effect on bank income, it is still a difficult environment for banks due to regulations and increased competition. We recommend that banks be strategic in allocating increased profits into a compensation plan that rewards employees for performance and ensures that the bank is meeting or exceeding its annual goals.