Evaluating BOLI in a High Rate Environment

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With the quick rise in interest rates over the past 18 months, a question many bankers ask is “When will my bank-owned life insurance (BOLI) yields increase?”

BOLI is a long-term investment for banks. Banks purchase BOLI as an asset intended to be bought and held on bank balance sheets, often for 30 years or longer, to optimize the tax and diversification advantages of life insurance. BOLI net yields are typically higher than yields on other taxable bank-eligible investments, especially when death benefits are recognized, according to the COLI Consulting Group’s BOLI Tracker in the first quarter. The account value of BOLI policies accumulates on a tax-deferred basis; the death benefit proceeds are generally income tax free.

Insurance carriers have long-term benefit obligations, including BOLI. To match the duration of their liabilities, they invest in long-term assets, typically resulting in intermediate-term portfolio durations. That means the increasing interest rates over the past 18 months have only recently begun to impact the average investment yields of carriers’ portfolios. If rates remain high, insurers’ portfolio returns will increase over time and crediting rates will increase on a lagging basis.

Banks should focus on the long-term structural characteristics of BOLI that allow it to outperform bank-eligible portfolios of similar credit quality over full market cycles. The ability of insurers to purchase assets unavailable to, and at a scale unachievable by, most banks is a key characteristic of BOLI. The long-term nature of BOLI provides an important hedge to reinvestment risk, which is especially important as many believe rates are nearing a high point in the cycle and reinvestment risk on shorter-term investments is material. Notably, investments in general or hybrid separate account BOLI incur no market value or accumulated other comprehensive income adjustment, or AOCI, unlike most alternate investments. That can be an attractive feature as higher interest rates have caused many banks to sustain significant reductions in equity capital due to AOCI adjustments to their bond portfolios.

Current BOLI Versus Higher-Rate New BOLI
While moving an insurance policy from one carrier to another can be accomplished with a tax-free exchange, provided all applicable state and federal regulations are complied with, policy owners should keep in mind:

  • BOLI is a long-term investment and banks should not be overly swayed by higher new money rates. Sometimes, new money rates will exceed portfolio rates; at other times, portfolio rates will exceed new money rates. Long term, they trend toward equalization.
  • The minimum interest rate guarantee for new BOLI products will likely be lower than the current BOLI policy’s minimum interest rate.
  • Exchange charges, including market value adjustments, could significantly reduce the potential pickup in yield from moving coverage.
  • To qualify as life insurance, the bank must have an insurable interest in each insured on a new policy’s issue date, and this requirement may not be as easy to meet with 1035 exchanged policies.
  • Banks should be encouraged to look at the total return of their BOLI, including expected future death benefits proceeds, rather than solely focusing on cash value growth.
  • Generally, a carrier won’t allow the bank to purchase additional BOLI in the future if the bank moves coverage, limiting the bank’s options for future purchases.

Exceptions where it may be appropriate to consider a 1035 exchange:

  • Credit concerns regarding the current carrier.
  • The carrier has exited the BOLI space and is not meeting customer expectations.
  • Rates have been higher for several years and the carrier has not increased its rates.

With recent increases in interest rates, it’s tempting to expect rapid increases in yields on existing BOLI portfolios. However, BOLI is a long-term investment; crediting rates move up and down gradually, consistent with the duration of carriers’ portfolios. This gradual movement was much appreciated when rates moved down to near 0%, as many BOLI carriers continued to credit interest close to 3%.

Now that rates have increased and the yield curve has inverted, the lag in BOLI crediting rate movement may cause BOLI yields to temporarily be less than yields on some other available investments. But when held to maturity, BOLI typically produces more earnings than other bank-eligible investments. If your bank is considering a 1035 exchange of existing policies, be sure to evaluate the alternatives thoroughly and beware of pressured pitches to chase higher rates.

Insurance services provided through NFP Executive Benefits, LLC. (NFP EB), a subsidiary of NFP Corp. (NFP). Doing business in California as NFP Executive Benefits & Insurance Agency, LLC. (License #OH86767). Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC. Kestra Investment Services, LLC is not affiliated with NFP or NFP EB. Investor Disclosures: https://bit.ly/KF-Disclosures

Life insurance products issued by Massachusetts Mutual Life Insurance Company (MassMutual) and its subsidiaries, C.M. Life Insurance Company (C. M. Life) and MML Bay State Life Insurance Company (MML Bay State), Springfield, MA 01111-0001. C.M. Life and MML Bay State are non-admitted in New York.

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3 Steps to Unlock a People-First Work Culture

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We all know how hard it is to attract and retain top talent in the competitive community bank market. The challenge is even more acute today, considering how macroeconomic conditions have changed during the past several months.

Investing in your bank’s culture can help it achieve growth and attract top talent. As a chief human resources officer, I have seen the value of creating and maintaining an agile, people-first work culture. Its daily contribution to operational effectiveness is enormous and serves as a stabilizing and steady force even in the face of external obstacles.

The High Cost of Employee Dissatisfaction
The cost of overlooking employee engagement and turnover can be significant. Gallup found that the cost of replacing a disengaged individual employee can range from half to two times the employee’s annual salary. Meanwhile, research has found that companies with the most engaged employees were 22% more profitable than those with the least.

Signs of disengagement can include slow working tempo, lack of interest in work, being easily distracted and minimal output. Additionally, disengaged employees often possess negative attitudes about their work and organization, which can hurt the productivity and morale of your other employees — not to mention your bottom line.

Three Stages of Culture Development
To avoid the cost and hassle of recruiting new talent, while maintaining an excellent relationship with your current employees, consider these three key points to create an agile, people-first company culture: Know Your Purpose, Know Your People, and Build Your Culture.

Know Your Purpose
Define your bank’s culture so that it becomes your North Star. Start by establishing new core values or refreshing existing ones. Conduct a thorough analysis to identify what values you want your employees to demonstrate, within the context of what is most important to your bank and to your community. This approach can provide your team with a specific direction to anchor expectations and an actionable road map for employee behaviors.

It is also important to recognize and acknowledge appropriate behaviors. These actions help reinforce and speed up the adoption of the culture you hope to build. Establishing a system of core values also helps serve as a guideline for the type of individual you want to hire and who you want to promote.

Know Your People
The needs of employees constantly evolve, especially during major macroeconomic events such as a recession or the recent pandemic. There are easy ways to regularly gauge your employees’ moods and attitudes. For example, a comprehensive semiannual employee survey can provide feedback about what is working, what is not and what can be done better. This information allows executives to see whether the culture is being embraced and internalized, and allows you to quickly address any unfavorable emerging trends.

Taking the time to build relationships with your employees and getting to know them on a personal level can also yield beneficial cultural impacts. Authentic connections between individual contributors and their senior leaders can forge a powerful “in it together” perspective that can increase employee satisfaction and spirit. Employees who feel respected, heard and seen can become personal ambassadors of your bank’s culture within your institution and community.

Build Your Culture
Offering programs, perks and experiences that matter to your employees is an essential component of successful engagement. There is no shortage of options, even if your budget and resources are limited. All it takes is a bit of research, a little creativity and some thoughtful planning.

To help spark your own imagination, here are several recent programs and initiatives that BHG Financial has introduced to enhance its work culture — many of which came from our employees’ feedback in surveys and other engagements. Recent BHG Financial programs include:

  • Transitioned to a permanent hybrid workforce with employees across the country.
  • Launched BHG Pulse, a program focused on the physical, emotional, social, financial and occupational well-being of our employees.
  • Introduced Wellness Weekends, which gives all employees get one Friday off each month to refresh and recharge. It has quickly become our team’s favorite benefit, while maintaining and enhancing productivity.
  • Created “Women in Tech,” our first employee resource group that provides training, connections and support to women within the tech industry.
  • Introduced BHG Together, a diversity, equity and inclusion program that provides monthly support, celebration and training.
  • Offered BHG LEAD, which provides employees with actionable steps they can take to become better leaders and grow their BHG careers.

Building your institution’s culture takes time. There may be highs and lows, but if you prioritize listening to and engaging within your team, you will persevere. We call this principle “winning together” — all oars rowing the same boat in the same direction.

More Banks Use Retention Bonuses to Keep Key Staff

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As baby boomers continue to retire from the workforce, bank leaders are increasingly looking to retention bonuses as a means to bridge the gap when key executives ponder retirement.

Almost a third of the board members, CEOs, human resources officers and other executives responding to Bank Director’s 2023 Compensation Survey in March and April say their bank has offered retention bonuses to key staff as an incentive to delay retirement. That represented an increase from 21% who said as much in last year’s survey. Privately-held and mutual banks were also significantly more likely to leverage this type of incentive.

Boards can use a retention bonus as a tool to extend the succession planning process. For example, a board might design a package to entice a chief executive to stay four more years, instead of three, to buy a little more time in choosing and preparing that person’s successor.

“It’s usually a good tool for those banks that know they have somebody retiring, they’ve had those conversations, and they don’t want to risk them leaving early,” says Scott Petty, managing partner of the financial institutions practice at Chartwell Partners, which sponsored the Compensation Survey. “They want them to delay to give [the board] enough time. It can take up to six months to figure that out, or maybe even a year.”

There’s not necessarily one right way to design a retention bonus, but there are some best practices for using these tools. And their use should also prompt discussions in the boardroom about the succession planning process.

First, a retention bonus should be significant enough to make it worth that person’s while, says Sean O’Neal, a partner with Chartwell Partners. A good starting point would be half of the executive’s total compensation package. He adds that the bank could pay out that retention bonus in stages — half now and half at retirement, for example.

“Staging it out is an option that needs to be considered versus one lump sum, because all of a sudden, they can just gear their retirement around that one date,” he says.

Publicly held companies, accountable to proxy advisory firms and investors, might consider tying a retention grant to the firm’s financial performance in some way, says Shaun Bisman, principal at Compensation Advisory Partners. This year, the proxy advisory firms Glass Lewis & Co. and Institutional Shareholder Services issued guidance recommending that shareholders vote against executive compensation packages when retention grants were not tied to performance metrics.

“When you make these retention awards, it’s really important to evaluate the impact,” Bisman says. “If you make these awards, are people staying? Are they leaving? Are we achieving the desired outcomes?”

Further down the ranks, some bankers say they have had success using other tools besides retention bonuses. Amy Roberts, chief human resources officer of PeoplesBank in Holyoke, Massachusetts, starts with a conversation with the prospective retiree to understand what that individual really wants. Sometimes, she finds that the employee wants more free time or flexibility, and in some cases, they don’t want to have to wait until full retirement to travel, for instance.

In those instances, Roberts says the $3.8 billion banking subsidiary of PeoplesBancorp, MHC has had some success working out alternative scheduling arrangements for key staff who are nearing retirement. PeoplesBank has also retained some staff as consultants, particularly when there’s a project involved that would benefit from that staffer’s continued expertise.

It’s unclear whether more banks will decide to employ retention bonuses in the year ahead. The murky economic forecast, as well as pressure by shareholders, could mean that larger, publicly traded companies think twice about awarding retention bonuses, as they have done this year, Bisman says.

On the other hand, the U.S. workforce is graying more broadly, as baby boomers — a generation that spans roughly 20 years — continue to retire. Petty and O’Neal have both seen more chief executives notify their boards of their intent to retire earlier than 65; these CEOs have enough money to retire earlier than anticipated, and some simply don’t want to stick around for the next downturn.

Some key roles could also be more affected by coming retirements than others, depending on the skill set required of the job, says O’Neal, particularly for the CFO or technical leadership roles in compliance and information technology.

In a perfect world, the board would never be caught off guard when a valued executive signals their intent to retire by a certain date, and they would generally have one or two candidates in line for the position. While the board may be only responsible for hiring the CEO, Petty says boards should also confer with the CEO about the rest of the executive team and what their timeline for retirement could look like.

Ultimately, if an employee really wants to leave, there may not be much the bank can do to persuade them to stay. A bonus only has so much allure if retirement is what an individual ultimately wants.

“I definitely don’t want to be in a position where I’m not ready [with a next-in-line candidate], so I’m trying to force this person to stick around,” Roberts says. “That’s not fair to them.”

Talent issues like these will be covered during Bank Director’s Bank Board Training Forum in Nashville Sept. 11-12, 2023.

A Framework for Incentive Plan Adjustments

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Over the last few years, compensation committees have used their discretion more readily to approve adjustments that impact incentive award payouts. These adjustments were a practical matter during the pandemic and a more recently, to address the rapidly changing interest rate environment. Compensation committees made decisions to achieve appropriate outcomes, given external forces, while holding management accountable for results.

While compensation committees often spend time determining whether adjustments lead to a balanced outcome, they often pay less attention proactively thinking through the process which could be used for future decision making. The following principles create a framework that operationalizes the use of adjustments to metrics from year to year.

Principle 1: Accountability
Compensation committees should determine whether a potential adjustment was due to material external changes or factors that could have been avoided through better decision making. For example, accounting and tax law changes are regularly excluded for the year in which they are enacted and after the goals have been set. Conversely, taking a certain accounting or tax position that ends up being faulty is unlikely to be excluded from actual results, since it was a management decision.

Principle 2: Impact
Any modifications should include documentation from management regarding the impact of the adjustment on the payout and a year-over-year history of adjustments. The document should walk the compensation committee through the issue, the rationale for the adjustment and the financial impact. Assessing the effect to ongoing operations is an important aspect, since adjustments may be made due to a mid-year decision but then incorporated into the banks budgeting process on a go-forward basis.

Compensation committees should discuss potential adjustments at the time business decisions are made, so that it builds in adequate time to review requests. Last-minute requests for adjustments put the compensation committee in the difficult position of understanding incentive outcomes and the rationale for adjustments at a time when agendas are jammed-packed with year-end decisions. The committee’s inclination may be to simply acquiesce and move the meeting along, leaving directors afterwards feeling strong-armed into a point of view.

Principle 3: Bank and Market Practices.
The compensation committee should develop a guideline document that identifies the categories of adjustments it may or may not exclude. For example, events outside of management’s control that could have a material impact to the business, such as tax and regulatory changes and natural disasters, are common adjustments. Certain non-recurring expenses due to mergers and share buybacks may also be excluded in the year in which a business decision is made but was not part of the annual budget. For these events, compensation committees should ascertain whether management’s decisions provided a positive impact to shareholders and the adjustment eliminated a potential disincentive to act in shareholder’s best interests.

There should be documentation summarizing current and historical adjustments the compensation committee could use as a reference to ensure consistency year-over-year. Often adjustment decisions are discussed in executive session, leaving little documentation around the rationale; and the actions become buried in multiple meeting minutes throughout the years. Listing the categories of potential adjustments and the history of past actions will help clarify which adjustments are acceptable while allowing flexibility for unique circumstances.

Principle 4: Timeframe of Adjustment
Compensation committees should assess whether the reason for adjusting is a short- or long-term issue. For example, a one-time management decision that would likely result in better performance over the long-term may reduce an annual incentive payment in the current year, but increase the value of future award payouts, in both the annual and long-term incentive programs.

Developing a framework that evaluates adjustments along with a process for deliberation is likely to result in more confidence in the outcomes, greater consistency in practice and a more efficient process for management and the compensation committee.

Lessons Learned from HBO’s “Succession”

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My wife and I recently completed watching all three seasons of HBO’s “Succession.” It’s a wild ride on many levels, full of deceitful and dysfunctional family dynamics, corporate political backstabbing, and plain old evil greed. Despite this over-the-top intertwined family and business drama, there are quite a few relevant lessons worthy of attention from bank leaders and board members. Three in particular stand out to me.

First: Succession planning is always vital, and never more so in an organization (public or private) with any element of familial involvement. As is well known, all boards of directors should be paying close attention to succession for the CEO role and other key leadership positions. In the HBO show, there is no clear line of succession, and the company’s 80-year-old patriarch (who experiences major health issues early in season 1) has not only failed to plan for his eventual departure but has all four children thinking they can and should take over the “family” business. Only one of the four is even close to qualified, and he becomes compromised by external events. Meanwhile, daddy plays each sibling against each other. It is a mess which devolves into chaos at various times, seriously impacting both the fortunes and future independence of the business.

Second: Where is the board of directors? In this instance, the company, Waystar Royco, is a publicly traded global media and entertainment conglomerate, but the board is not governing at all. The single most important responsibility of any board of directors is the decision of “who leads”. This goes beyond the obvious CEO succession process, ideally in a planned, orderly leadership transition or worst case, a possible emergency situation. It more broadly relates to an ongoing evaluation of the CEO and his or her competency relative to the skills, experiences, leadership capabilities, temperament and market dynamics. Too many boards allow CEOs to determine when their time is up, rather than jointly crafting a plan for a “bloodless transition of power,” that encourages (or even forces) a constructive change of leadership. In “Succession,” the board is comprised of cronies of the patriarch — and his disengaged brother — who are both beholden to and intimidated by their successful and highly autocratic CEO.

Lastly, in any company with a sizable element of family ownership, the separation of economic ownership and executive leadership is vital. While at times the progeny of a successful founder and leader prove extremely capable (see Comcast’s Brian Roberts), this is often the exception rather than the rule. Therefore, the board and/or owners ideally will address this dynamic head-on, accepting that professional management is indeed the best way to enhance economic value for shareholders and family members while encouraging the offspring and descendants to keep their hands off and cash the checks. Many privately held banks grapple with this same dynamic.

Such decisions, of course, are fraught with peril for those involved, which “Succession” endlessly highlights. Creating the proper governance structure and succession plans is rarely easy, especially when personal and financial impacts weigh heavily on the individuals involved. Still, with the board’s prime directive of leadership selection top of mind, and a commitment to candor and transparency, the outcome will likely be much better than simply ignoring the elephant in the room.

When season four of HBO’s “Succession” rolls around, it will surely provide more examples of how not to govern properly.

Lessons in Deferred Compensation

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Recently, NFP took the time to analyze several hundred executive benefit plans, and speak to bankers and consultants. With all that data, experience and untold hours of consulting on those plans, we identified some of the top issues — and unintended consequences — banks have encountered when it comes to compensation plans. Here’s what we’ve found, keeping the identities of our sources anonymous:

Banker’s Perspectives

  • Lifetime benefits. “Lifetime benefits are a throwback to the unsustainable pension days. Our former CEO retired in 2000 at age 65. He’s 87 and going strong, and we are expensing the full benefit every year.”
  • Vesting schedule. “I was wrong about the new 55-year-old CFO. He negotiated a three-year vesting schedule as part of an employment agreement and stated this was the last place he was going to work before retiring. He retired after three years, fully vested.”
  • Defined contribution versus defined benefit. “I wish we would have gone with a defined contribution approach versus a retirement-focused defined benefit plan. The long-time horizon is not very appealing to younger executives, and the board wished they had the ability not to contribute when times are tough.”
  • Interest crediting. “We tied the interest-crediting rate in our deferral plan to LIBOR +1%. I was informed later we could’ve had that provision ‘to be determined annually at the discretion of the board’ or even invested in numerous mutual funds. Flexibility from the start would have been better.”
  • Deferred compensation. “Our internal counsel referenced a future payment in an employment agreement subject to certain conditions. We accidentally created a deferred compensation plan. The missed Department of Labor notifications, unrecorded liabilities and missing claims language was a headache. We should’ve started with a complete plan from the beginning.”

Consultant’s Perspective

  • Inappropriate discount rate. A plan document had a stated rate of 9% to value the supplemental executive retirement plan, or SERP, liability and wasn’t pegged to an outside index. The audit firm did not question the rate for 10 years. The bank changed audit firms, and the new firm then determined the rate to be inappropriate for accounting purposes. This resulted in a dramatic increase in the liability that was greater than annual earnings, which triggered numerous issues.   
  • Offset issues. A SERP was designed in the early 2000s as a percentage of final pay, less the employer portion of the 401(k) and 50% of Social Security benefits. In the last few years prior to retirement, the executive stopped contributing to the 401(k) and missed out on the related employer match. There was also a significant market correction that resulted in a 401(k) balance that was much lower than projected, requiring the bank to record a large liability increase and the related expense to account for it.
  • Death benefit. A plan was intended to allow for accelerated future benefits in the event of death while employed, but the document referenced the current liability, not future benefit. An unexpected death occurred within six months of implementing the plan. The beneficiary received $10,000 instead of $200,000. Fortunately, there was a “key man” policy on the executive, and the bank chose to honor their original intent.
  • Disability. A plan’s payout terms in the event of a disability were the same as if the executive retired: a lifetime benefit. An executive became disabled for six months before dying. The plan paid out $20,000 over the six months, while the retirement benefit would have been $40,000 per year for life.
  • Change in control. During a plan design process, a bank wished to have maximum protection for executives recruited to start the bank, at their insistence. But they didn’t completely understand the change in control language as it pertained to vesting. The bank wanted to vest 100% in the accrued liability upon change of control, to be paid out when the executive separates service. They discovered during due diligence that the plan and the payout language did not match other provisions.. This created an unexpected “poison pill,” which greatly affected the purchase price. There was a lot of finger pointing.

No matter how long the compensation committee has been responsible for insurance or executive benefit plans, it’s not their full-time job. As fast as the industry and regulations are changing, it is impossible for decision makers to keep up on their own.

Working with a seasoned consultant who can leverage their expertise, resources and data analytics helps compensation committees make more informed decisions that have better outcomes, control costs and ensure that the bank, its directors, officers and executives are protected for the long term.

Insurance services provided through NFP Executive Benefits, LLC. (NFP EB), a subsidiary of NFP Corp. (NFP). Doing business in California as NFP Executive Benefits & Insurance Agency, LLC. (License #OH86767). Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC. Kestra Investment Services, LLC is not affiliated with NFP or NFP EB. Investor Disclosures: https://bit.ly/KF-Disclosures

The 30 Fastest Growing Salaries for Banks in 2023

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There has never been a year for compensation at financial institutions like the one coming in 2023.

BalancedComp is projecting a 5% labor budget increase — a historical high that may be eye-watering for many institutions. We project that the average midpoint movement will move up by 3.5%, which leaves 1.5% left to accomplish two important salary administration goals for institutions:
1. Differentiate for higher performance.
2. Move the pay levels of employees whose salaries are below the market rate.

Below, we’ve compiled the top 30 positions that have seen pay increases that are 150% to 500% faster than the average annual market rate, based on our primary research. Again, this is a historic year for compensation analysis. Based on 2023 projections, these salary figures attempt to correct a scorching labor market and record inflation.

Many executives think of the Great Resignation as mainly impacting non-exempt staff. While this continues to be an issue for recruiting starting, or entry level, positions, the surprising truth is that one out of three of the fastest-growing salaries are from jobs in the top 25% of your salary grade structure. For example, our research indicates that chief risk officer was the fastest-growing salary in 2021; while still on this list, this year it ranked 26th place.

Loan Departments Are Thriving
By comparison, nearly 25% of the fastest-growing salaries at financial institutions were related to the mortgage department. But demand for these roles may cool in the short term, as home buyers wait for interest rates and pricing to return to levels closer to the historical averages in the past five years.

Commercial loan officers and processors join the list, with a salary movement that is 200% faster than the average for the industry. For the second year, the consumer loan processor position has made the list. This position is typically a Grade 6 and requires only a high school degree and approximately one year of experience. Notably, the hottest jobs in the loan department include both production and support positions.

IT Positions Remain Key
Internal IT positions remain in high demand across multiple industries, making it more competitive to recruit new personnel and retain existing employees than ever before. Within this key area of support, there are several positions that appear on the list of fastest-growing salaries:
• Systems administrator
• Network administrator
• Chief information officer
• IT business analyst

Additionally, there are unique and highly technical IT positions that are starting to show up at banks that we have not seen in the past 20 years. These include full stack software developer, scrum master, senior business systems analyst, Salesforce administrator and more.

Clear Labor Market Demands
Workers remain scarce; it will be more critical than ever for banks to address the needs of of their employees. According to a report this year from SHRM, “this is the tightest labor market in the country’s history. Large manufacturers are offering health care and 401(k) on day one, large signing bonuses, and above-market rates, and they’re still coming up short.”

Most employees do not seek out high stress work environments that use subjective performance criteria to measure their contributions. They are no longer accepting lagging wages that fail to ever reach the salary midpoint. They want benefits that match their current lifestyle and work-life balance needs. What will it take to be a successful employer? Is it culture? Wages? Benefits? Remote work? Diversity? Yes to all of the above.

It can be overwhelming for even the most diligent human resource manager to deal with the confluence of strong market forces, regardless of their institution’s strength. Equipping HR managers and executives with the resources they need to succeed will spearhead their workforce to excellence no matter the economic or operating environment. A 2023 labor budget under 5% means HR will spend needless hours recruiting, onboarding and retraining.

According to 2022-2023 BalancedComp Salary & Incentive Survey research, these are the 30 fastest-growing salaries by job title in the financial sector for the upcoming year:

Fastest Moving Jobs Average Percentage Increase
Head of HR 17.8%
IT Business Analysts 17.0%
Mortgage Originators 14.25%
Digital Marketing Specialist 13.40%
Trust Officer 13.02%
Senior Project Manager 11.22%
Head of Mortgages 10.44%
Head of Marketing 9.97%
Chief Info Officer 9.88%
Mortgage Closers 9.05%
Network Administrator 8.72%
Marketing Specialist 8.64%
Help Desk Specialist 8.54%
Credit Analyst II 7.91%
Mortgage Processors 7.90%
Mortgage Loan Officer (base) 7.81%
Commercial Loan Manager 7.77%
Commercial Loan Processor 7.63%
CFO 7.54%
Collector II 7.53%
Mortgage Loan Officer (Commission) 7.23%
Graphic Designer 7.07%
Systems Administrator 7.06%
BSA Analyst 6.88%
Trainer 6.84%
Consumer Loan Processor 6.79%
Market President 6.37%
Mortgage Loan Officer 6.30%
Head of Risk (No. 1 highest in 2021) 6.19%
Collector I 5.93%
Chief Loan Officer 5.59%

Do Independent Chairs Reduce CEO Pay?

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In an advisory vote earlier this year, shareholders roundly rejected JPMorgan Chase & Co.’s executive compensation package, particularly a whopping  $52.6 million stock option award for CEO and Chair Jamie Dimon. But at the same time, shareholders voted against a proposal to split those roles.

The proxy advisory firms Glass Lewis and Institutional Shareholder Services favor separating the CEO and chair roles. “Executives should report to the board regarding their performance in achieving goals set by the board,” Glass Lewis explains in its 2022 voting guidelines. “This is needlessly complicated when a CEO chairs the board, since a CEO/chair presumably will have a significant influence over the board.”

An analysis of Bank Director’s Compensation Survey data, examining fiscal year 2019 through 2021, finds that CEOs earn less when their board has an independent chair. Most recently, the 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, found that banks with separate CEO and chair roles reported median total CEO compensation of $563,000, compared to $835,385 where the role was combined. 

The results are striking, but they should be taken with a grain of salt. The information collected from the survey, which is anonymous, doesn’t include factors like bank performance. Respondents skewed toward banks with an independent chair. And data alone can’t sufficiently describe what actually occurs in corporate boardrooms.

“I can’t really say which model works better. Look at Jamie Dimon; that’s worked really well for the shareholders of JPMorgan Chase, whereas I think there have been three or four initiatives to try to split that role,” says Jim McAlpin Jr., a partner at the law firm Bryan Cave Leighton Paisner. McAlpin also serves on the board of Bank Director’s parent company, DirectorCorps. “It was voted down every time by the shareholders.”

CEOs typically negotiate when and whether they’ll eventually be named chair when they join a bank, says McAlpin. “If you have a very impactful, strong CEO who wants to be chair — most boards will not deny him or her that position, because they want [that person] running the bank.” It’s a small price to pay, he adds, for someone who has such a dramatic influence on the bank’s performance. “There is nothing more important to the bank than a CEO who has a clear vision, who can show leadership, form a good team and can execute well,” says McAlpin. 

But it’s important to remember that boards represent the interests of the shareholders. “The most important thing a board has to do is hire and retain a quality CEO. Part of retaining is getting the compensation right,” says McAlpin. “It’s important for the board to control that process.” 

McAlpin favors appointing a lead director when the CEO also has the chair position, to provide input on the agenda and contribute to the compensation process. 

Truist Financial Corp., in response to shareholder pressure around chair independence in 2020, “strengthened” its lead independent director position, according to its 2022 proxy statement. Former Piedmont Natural Gas Co. CEO Thomas Skains has served as lead independent director of the Charlotte, North Carolina-based bank since March 2022. Skains has the authority to convene and set the agenda for executive sessions and other meetings where the chair isn’t present; provide input on the agenda, and approve board materials and schedules; and serve as a liaison between the independent directors and CEO and Chair William Rogers Jr. 

But one individual can’t single-handedly strengthen the board, says Todd Leone, a partner and global head of executive compensation at McLagan. The compensation committee is responsible for the company’s pay programs, including executive compensation, peer benchmarking, reviewing and approving executive compensation levels, recommending director compensation, evaluating the CEO’s performance and determining the CEO’s compensation. With that in mind, Leone says the strength of the compensation committee — and the strength of its committee chair — will influence the independence of these decisions.

Leone also believes that increased diversity in the boardroom over the years has had a positive effect on these deliberations. “A diverse board, in my experience, they’re asking more questions,” he says. “And through that process of asking those questions, various things get unearthed, and the end result generally is stronger pay programs.”

Twelve years of Say-on-Pay — where public company shareholders offer an advisory vote on the top executives’ compensation — has also benefited those decisions, he says. Today, most long-term incentive plans are based on a selection of metrics, such as return on assets, income growth, asset quality and return on equity, according to Bank Director’s 2022 Compensation Survey. And in August, the U.S. Securities and Exchange Commission passed a pay versus performance disclosure rule that goes into effect for public companies in the fiscal year following Dec. 16, 2022.

“There’s a much higher bar for getting these plans approved,” says Leone, “because the compensation committees feel much more responsibility for their role in that process.”

In McAlpin’s experience, the best CEOs have confidence in their own performance and trust the process that occurs in the boardroom. “If they don’t like the results, they’ll give feedback, but they let the process unfold,” he says. “They don’t try to overtly influence the process.”

Heading into 2023, Leone notes the whipsaw effects that have occurred over the past few years, due to the pandemic, strong profitability in the banking sector and looming economic uncertainty. These events have had abnormal effects on compensation data and the lens through which boards may view performance. “We’re in a very volatile time, and we have been on pay since the pandemic,” says Leone. “Boards, [compensation] committees and executive management have to be aware of that.” 

Back to the Office

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Although studies have shown most workers like hybrid or remote work opportunities, CEOs rarely like the concept.

A recent KPMG survey across industries this summer found that 65% of CEOs see in-person work as optimal over the next three years. It was even higher for bank CEOs: 69% of them envision their operations fully in-person during that time frame. Only 24% of bank CEOs envision a hybrid work environment, with both in-person and at-home work, during the next three years.

One of those who dislikes the idea of hybrid work is Fifth Third Bancorp CEO Tim Spence. But Spence has an interesting take on why hybrid or remote work doesn’t work well for banking. While many bank CEOs talk about the importance of in-person work to foster a certain culture, Spence sees another reason, too. While tech companies may embrace the concept of a diverse workforce throughout the world plugging in via videoconferences and online chat, banks have long been deeply rooted in their communities where they do business.

The questions every bank faces are now: Will workers feel as motivated to volunteer and make financial donations when they’re not working in local communities where the bank operates? What happens to a corporation’s philanthropic endeavors when its workforce is diffused through the country?

I met up with Spence in late October at the company’s headquarters in Cincinnati. “My biggest fear about the movement in some quarters of the economy toward remote work is that it’s severing the link between headquarters employers and their responsibilities to the communities where their employees live,” he says.

Like many banks, Fifth Third’s financial success is tied up in the success of its communities. The $206 billion bank traces its roots to Cincinnati back more than 160 years; today, it is a major philanthropic entity in the Queen City and its employees contribute sizable volunteer hours. For Spence, being in a community means physical presence and the ability to be out with clients.

“There’s not another regional bank with a more significant share of its balance sheet attached to manufacturing and transportation and logistics companies than Fifth Third,” he says. “Those folks had to [work in-person during the early days of the pandemic] and we needed to be there with them.”

That doesn’t mean no one works from home at Fifth Third. Spence says about 15% to 20% of positions are eligible for remote work. The rest of the employee base works with their managers if they need an alternative work arrangement, for example, to accommodate caregiving responsibilities. But there’s no across-the-board hybrid work that’s available to all employees.

These issues have been on my mind lately as I head to Bank Director’s Bank Compensation & Talent Conference Nov. 7 to Nov. 9 in Dallas. Compensation consultants, executive recruiters and human resources officers at banks will talk about designing compensation programs, attracting and retaining staff and the ever-shifting regulatory environment. Stay tuned for more on those topics in the days ahead.

Top Priorities for Compensation Committees Today

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The compensation landscape in banking is constantly evolving, and compensation committees must evolve with it. We want to highlight three priorities for bank compensation committees today: the rising cost of talent, the uncertain economic environment, and the link between environmental, social, and governance (ESG) issues and human capital and compensation.

The Rising Cost of Talent
The always-fierce competition for top banking talent has intensified in recent years, especially in certain pockets like digital, payments and commercial banking. Banks are using a variety of approaches to compete in this market and make their compensation and benefits programs more attractive, including special one-time cash bonuses or equity awards, larger annual or off-cycle salary increases, flexible work arrangements and other enhanced benefits.

In evaluating these alternative approaches, compensation committees must weigh the value each offers to employees compared to the cost to the bank and its shareholders. For example, increasing salaries provides near-term value to employees but results in additional fixed costs. Special equity awards that vest over multiple years provide less near-term value to employees but represent a one-time expense and are more retentive.

We expect the “hot” talent market, combined with inflation, to continue applying upward pressure on compensation. However, the recent rate of increase in compensation levels is untenable over the long-term, particularly in the current uncertain economic environment. Banks will need to optimize other benefits, such as work-life balance and professional development opportunities, to attract and retain top talent.

The Uncertain Economic Outlook
In 2021, many banks had strong earnings as the quicker-than-expected economic recovery allowed them to reverse their loan loss provisions from 2020. As a result, many banks could afford to pay significantly higher incentives for 2021’s performance than they did for 2020’s performance. The performance outlook for 2022 is unclear. Inflation, rising interest rates and macroeconomic uncertainty will impact bank performance results in 2022. Results will likely vary significantly from bank to bank, based on the institution’s business mix and balance sheet makeup.

Compensation committees will need to consider how the push and pull of these factors impact financial results and, as a result, incentive payouts. Some compensation committees may need to consider adjusting payouts to recognize the quantifiable financial impact of unanticipated conditions outside of management’s control, like the Federal Reserve’s aggressive interest rate increases. Banks may find it harder to quantify the financial impact of other economic conditions, like inflation. As a result, many compensation committees may find it more effective to use discretion to align incentive compensation with their overall view of performance.
Bank compensation committees considering using discretion to adjust incentive payouts for 2022 should follow three principles:

1. Be consistent: Apply discretion when macroeconomic factors negatively or positively impact financial results.
2. Align final payouts with performance and profitability.
3. Clearly communicate rationale to participants and shareholders.

Compensation committees at public banks should also be aware of potential criticism from shareholders or proxy advisory firms. The challenge for compensation committees will be balancing these principles with the business need to retain key employees in a tight labor market.

ESG and the Compensation Committee
Bank boards are spending more and more time thinking about their bank’s ESG strategies. The role of many compensation committees has expanded to include oversight of ESG issues related to human capital, such as diversity, equity and inclusion (DEI). Employees, regulators and shareholders are increasingly paying attention to DEI practices and policies of banks. In response, many large banks have announced public objectives for increasing diversity and establishing cultures of equity and inclusion.

In an attempt to motivate action and progress, compensation committees are also considering whether ESG metrics have a place in incentive plans. In recent years, the largest banks have disclosed that they are considering progress against DEI objectives in determining incentive compensation for executives. Most of these banks disclose evaluating DEI on a qualitative basis, as part of a holistic discretionary assessment or as part of an individual or strategic component of the annual incentive plan. Banks considering adopting a DEI metric or other ESG metrics should do so because the metric is a critical part of the business strategy, rather than to “check the box.” Human capital is a critical asset in banking; many banks may find that DEI is an important part of their business strategy. For these banks, including a DEI metric can be a powerful way to signal to employees and shareholders that DEI is a focus for the bank.