Compensation Survey Results: An “Untenable” Talent Climate

Intensifying competition for talent is forcing banks to pay up for both new hires and existing employees.

There were two jobs for every job seeker as recently as March, according to the Bureau of Labor Statistics, and employers of all stripes may be feeling like the balance of power has shifted. The results of Bank Director’s 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, show the banking industry is no exception to these dynamics.

Seventy-eight percent of responding directors, human resources officers, CEOs and other senior executives say that it was harder in 2021 to attract and keep the talent their bank needs than in past years. They’re responding to that challenge, in large part, by raising pay. Ninety-eight percent say their organization raised non-executive pay in 2021, and 85% increased executive compensation. Overall, compensation increased by a median 5%, according to participants.

That’s led bankers to shift their priorities. Managing compensation and benefits costs (46%), paying competitively (40%) and recruiting commercial lenders (34%) have emerged as respondents’ top compensation-related challenges this year. The proportion of respondents most concerned with tying compensation to performance — the top challenge identified in past surveys, going back to 2019 — fell sharply to 21% from 43% last year.

Even in the face of rising compensation costs, they’re also focusing on retaining and keeping staffing levels stable. Fully half of respondents say their bank added staff over the past year and 34% maintained staffing levels. Just 16% decreased their total number of employees. More than half (54%) of those whose bank decreased head count cite competition from other financial institutions and companies in their markets as the primary reason for the decline.

When asked about the specific challenges their organization faces in attracting and retaining talent, bankers and directors point to an insufficient number of qualified candidates (76%), rising wages in their markets (68%) and rising pay for key positions (43%). In anonymous comments, respondents describe other difficulties, such as competition from other industries, challenges with remote or hybrid work and younger workers’ disinclination for certain types of long-term compensation.

“[W]age pressure is incredible,” writes one community bank executive . “Our most significant competitor just implemented [four] weeks of vacation for ALL new hires and pays up to 25% higher for retail banking positions. That cost structure is untenable unless we earn more. We are under extreme pressure for talent at the same time we are building out revenue business lines.”

Key Findings

Banks Pay Up
Banks almost universally report increased pay for employees and executives. Of these, almost half believe that increased compensation expense has had an overall positive effect on their company’s profitability and performance. Forty-three percent say the impact has been neutral.

Lenders In Demand
Seventy-one percent expect to add commercial bankers in 2022, which is almost certainly driven by a desire to grow commercial portfolios and offset expense growth. Over half of respondents say their bank did not adjust its incentive plan for commercial lenders in 2022, but 34% have adjusted it in anticipation of more demand.

Additional Talent Needs
Banks also plan to add technology talent (39%), risk and compliance personnel (29%) and branch staff (25%) in 2022. Respondents also indicate that commercial lenders, branch and entry-level staff, and technology professionals were the most difficult positions to fill in 2020-21.

Image Enhancement
Forty percent of respondents say their organization monitors its reputation on job-posting platforms such as Indeed or Glassdoor. Further, 59% say they promote their company and brand across social media in an effort to build a reputation as an employer of choice, while just 20% use Glassdoor, Indeed or similar platforms in this manner.

CEO Turnover
Sixty-one percent of respondents indicate that they’re not worried about their CEO leaving for a competing financial institution, while a third report low to moderate levels of concern. More than half say their CEO is under the age of 60. Respondents report a median total compensation spend for the CEO at just over $600,000.

Remote Work Persists
Three quarters of respondents say they continue to offer remote work options for at least some of their staff, and the same percentage also believe that remote work options help to retain employees. Thirty-eight percent of respondents believe that remote work hasn’t changed their company’s culture, while 31% each say it has had either a positive or negative impact.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the survey results. Members can click here to view the complete results, broken out by asset category and other relevant attributes. If you want to find out how your bank can gain access to this exclusive report, contact bankservices@bankdirector.com.

2022 Compensation Survey: Complete Results

Bank Director’s 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 307 independent directors, chairs, CEOs, human resources officers and other senior executives of U.S. banks below $100 billion in assets, with the majority of respondents representing regional and community banks. Members of the Bank Services program have exclusive access to the full results of the survey, including breakouts by asset category, ownership structure and region.

The annual survey benchmarks CEO pay and compensation for independent directors and non-executive chairs, and supplements respondent input with data collected from 96 public banks. This year, it also examines a competitive talent landscape, and CEO succession and performance. The survey was conducted in March and April 2022.

Click here to view the complete results.

Key Findings

Talent Challenges
Managing compensation and benefits costs (46%), paying competitively (40%) and recruiting commercial lenders (34%) have emerged as respondents’ top compensation-related challenges this year. While half say their bank added staff over the past year, 78% say that it was harder in 2021 to attract and keep the talent their bank needs.

Banks Pay Up
Banks almost universally report increased pay for employees and executives. Of these, almost half believe that increased compensation expense has had an overall positive effect on their company’s profitability and performance. Forty-three percent say the impact has been neutral.

Lenders In Demand
Seventy-one percent expect to add commercial bankers in 2022, which is almost certainly driven by a desire to grow commercial portfolios and offset expense growth. Over half of respondents say their bank did not adjust its incentive plan for commercial lenders in 2022, but 34% have adjusted it in anticipation of more demand.

Additional Talent Needs
Banks also plan to add technology talent (39%), risk and compliance personnel (29%) and branch staff (25%) in 2022. Respondents also indicate that commercial lenders, branch and entry-level staff, and technology professionals were the most difficult positions to fill in 2020-21.

Image Enhancement
Forty percent of respondents say their organization monitors its reputation on job-posting platforms such as Indeed or Glassdoor. Further, 59% say they promote their company and brand across social media in an effort to build a reputation as an employer of choice, while just 20% use Glassdoor, Indeed or similar platforms in this manner.

CEO Turnover
Sixty-one percent of respondents indicate that they’re not worried about their CEO leaving for a competing financial institution, while a third report low to moderate levels of concern. More than half say their CEO is under the age of 60. Respondents report a median total compensation spend for the CEO at just over $600,000.

Remote Work Persists
Three quarters of respondents say they continue to offer remote work options for at least some of their staff, and the same percentage also believe that remote work options help to retain employees. Thirty-eight percent of respondents believe that remote work hasn’t changed their company’s culture, while 31% each say it has had either a positive or negative impact.

Using the Succession Plan to Evaluate Talent

Boards have many duties, from overseeing the long-term strategy of the institution, to approving executive pay packages, to vetting and approving the budget. But one job that they often leave for another day: succession planning. Yet, for forward-thinking banks, having a process for succession not only can strengthen the organization in the future, but also build talent today.

Brian Moynihan, chairman and CEO of Bank of America Corp., recently spoke about this very fact. Despite not having plans to leave the institution he’s led since 2010, the 62-year-old Moynihan explained that the bank reworks its succession plan twice a year.

We have a deep succession planning process that we go through every six months [on] the board that alternates between the senior most people and then … I do it multiple levels down so we’re always looking,” said Moynihan in an interview last December with CNBC’s Closing Bell. “The board will pick somebody. My job is to have many people prepared.”

Such a clear process makes Bank of America unique, in some regards. While surveys over the years have tried to pinpoint how many companies have formal succession plans, organizations often avoid outlining it to investors, leaving it an open question. The Securities and Exchange Commission revised disclosure rules in November 2020 to encourage companies to outline human capital resources, like diversity rates, employment practices, and compensation and benefits. Of the first 100 forms filed by companies with $1 billion in market capitalization, only 5% of the companies added any additional detail to the succession planning process, according to researchers working with Stanford University and corporate data provider Equilar. Bank Director’s 2019 Compensation Survey found 37% of bank executives and board members reporting that their bank had not designated a successor or potential successors for the CEO.

So much of a bank’s long-term success has to do with having a clear plan if the head of the business must leave. This becomes especially true if the CEO must step aside suddenly, like for a health concern or other emergency. It’s on the board to lead this search. But when done right, it can also become a powerful tool to prepare internal and external talent, a process embraced by the current CEO. 

David Larcker has studied CEO succession planning as a professor at Stanford Graduate School of Business, where he leads the school’s Corporate Governance Research Initiative. “One of the two key things that boards do is hiring and firing the CEO,” says Larcker. Many boards, though, “do not put in enough time and effort in succession,” he adds.

By not taking an active approach to this part of the job, it can lead to the wrong hire, resulting in years of poor management. Larcker says one of the reasons for a lack of proper succession plans is often because it’s one of the least exciting roles a board undertakes, so it gets put to the backburner. Plus, since you rarely replace the CEO, it’s not always a priority.

Larcker and his research team sought to identify what occurs when a board lacks a succession plan. They looked at scenarios where the CEO left abruptly, either because the person resigned, retired or made other transitions. These are often the reasons disclosed to the public; in reality, the company may have fired a CEO without stating that fact. Out of the various scenarios, the researchers identified situations where the board and CEO likely parted ways due to performance. 

Out of all the media citations, 67% of the time the company named a permanent successor in the announcement; in 10% of the cases, it appointed a permanent successor but after a delay; and 22% of the time it named an interim successor. Those moments of upheaval provide investors with the clearest insight into whether the board took a proactive approach to succession, since the plans aren’t often public.

When a company named an interim successor, that was one of the clearest signs that the organization fired the CEO without a plan in place, and the stock performance of the company performed the worst after the announcement. Also, it’s worth noting that 8% of the time, the company named a current board member to the CEO role. When that occurred, the company’s stock price often performed worse than when internal or external candidates were chosen. 

What separates the organizations that can name a successful permanent successor from those that can’t? Often, it’s the organizations that have a clear line to the talent that’s growing inside and outside of the bank.

John Asbury knows all too well the need for this line of succession — it’s how he got the head role at Atlantic Union Bankshares, Corp., a $20 billion public bank based in Richmond, Virginia.  When Asbury was tapped as CEO in 2017, he followed G. William Beale, who had helmed the bank — then known as Union Bankshares Corp. — for almost 25 years. The bank had done a full executive search starting two years before Beale stepped away. Now, despite not having any plans to retire, Asbury, 57, takes the job of building succession within the entire organization seriously. 

“There are too few people in the industry who understand how the bank actually works or runs front to back,” Asbury says. “Oftentimes they have their area of specialty and not much else.”

Asbury, who sits on the board of directors as well, works with his human resources and talent evaluators to identify those within the organization who can fill executive roles. In addition to empowering them as executives, he gets them face time with the board. This provides the board with the ability to interact and know the talent that the bank has in the stable. 

“We want these folks to understand how the organization works, and we want them at the table to talk about not just strategy for their business unit, but the bank strategy as well,” Asbury says.

Asbury recently showed this leadership style in a public way by announcing that President Maria Tedesco would add the role of chief operating officer, and he would hand over managing many of the day-to-day operations to Tedesco. This isn’t a succession plan put in place. Instead it’s giving Tedesco the ability to have 85% of the organization reporting to her, while she and other executives at the bank continue to report to Asbury. 

Asbury thinks the move was needed to allow him the freedom to focus on growing Atlantic in other ways. But it also provides Tedesco with hands-on training in managing the organization. Despite the move, Asbury says that it doesn’t prevent him from working with the board on succession plans. 

The compensation committee, which Asbury does not sit on, also runs succession planning at Atlantic Union Bank. Sometimes boards may be hesitant to discuss succession if the current CEO views the discussion as antagonistic. But Atlantic Union undergoes an emergency succession plan evaluation once a year — currently, Tedesco would step in as interim CEO if something unexpected occurred to Asbury. She even sits in on every board meeting except when the executive team is being discussed. 

It’s a conversation that boards cannot be afraid to have. “If the CEO is on the board, that committee or board, has to own the process,” Larcker says.

What doesn’t work when it comes to succession planning? Having the new CEO step into the company while the outgoing CEO continues to helm the business for a few months to a year, added Larker. This design creates confusion from both the leadership and the staff on who they should listen and report to. “Ultimately, it’s a bad sign,” Larcker says.

Asbury knows that all too well. When he took the Atlantic Union role, Beale held the CEO position for three months while Asbury got acquainted with the organization. Within a few weeks, though, Beale let Asbury know that he would clear out the office and Asbury could call him if any questions arose. “Shorter is better in terms of transition,” Asbury adds. 

That can only happen with a plan in place.

MOE Compensation Considerations, Challenges


Mergers of equals present unusual — and often, more challenging — compensation considerations for executive teams. The deal structure means both institutions will need to consider a variety of factors ahead of and after deal announcement, navigating them carefully to retain talent and incentivize integration. In this video, Todd Leone, partner at McLagan, a division of Aon’s Total Rewards, lays out how bank leaders involved in MOEs can use compensation to support bank culture and communicate with stakeholders.

  • How MOE Compensation Differs
  • Preparing Prior to Announcement
  • Telling Your Story

How Fintechs Are Impacting Conventional Pay Practices

Traditional banks are facing unprecedented talent market pressures to retain key people, while also needing to attract talent from the financial technology industry to execute their own business transformations at an accelerating rate.

As the pressure on traditional banks increases, the question of “how much?” is no longer the only relevant question to be answered. Equally important is understanding how compensation opportunities should be structured and potentially delivered to ensure offers remain competitive.

PitchBook, a Morningstar company, has tracked over 820 companies in their fintech industry database as of October 2021. A third of these companies are less than five years old and well-funded by venture capital investors looking to capitalize on the industry’s explosive growth. Growth requires highly skilled, experienced talent to drive it. The fintech revolution has many traditional banks evolving their business models to remain relevant in this highly competitive market.

Seven Notable Pay Practice Trends from the Fintech Industry
The following seven pay practice trends are common across the fintech industry and essential for banks to understand. Financial institutions are likely to encounter several of these practices when competing for talent, and should consider which may work well within their programs to bolster competitiveness.

  1. Highly Competitive Salaries. Many fintech companies were established in high-cost cities, and the pay levels established in Silicon Valley often ripple through their national pay structures. Market-leading base salaries establish a firm offer upfront for prospective candidates.
  2. More Equity Compensation. High company valuations support granting equity more broadly in the organization; candidates coming from that environment will expect an equity grant.
  3. Equity Grants at Hire. It is common in high-tech markets to make an upfront equity grant at the time of hire between two and four times annual target levels to establish a foundational level of ownership.
  4. Shorter Equity Vesting Periods. The age-old belief that longer vesting periods promotes retention is being challenged by some high-profile tech firms. These companies are opting for monthly vesting over a multi-year time frame. Some even opt for full vesting within a year.
  5. Specialized Incentive Plans. The bank’s “corporate plan” may not fit the needs of a developing Banking-as-a-Service venture or fintech business unit. As such, a customized incentive geared towards growth or achieving strategic objectives may better support these businesses in the critical early stages.
  6. Retention Awards for In-Demand, Specialized Skills. Candidates with anti-money laundering, cryptocurrency and treasury function experience are highly sought after by firms and are experiencing large jumps in pay when they change employers. “Lock-in” retention equity awards are one way that companies are attempting to retain their employees.
  7. Flexible Work Arrangements. All industries are encountering this, but this is old hat for fintech companies that have historically emphasized this style work. Flexible work arrangements have become an expectation for most employees with in-demand skills.

For traditional banks, the realities of the broader competitive labor market are further complicated by the increased talent crunch in the fintech industry. Amid these unprecedented labor market pressures, traditional banks would do well to ensure relevant stakeholders are well informed about the realities of the broader competitive labor market and the need for a nimble talent strategy. Understanding both the “how” and “how much” of pay will prepare organizations to respond proactively to these market realities and provide an advantage when competing in the marketplace for talent.

Five Common Misperceptions About BOLI

Bank-owned life insurance has been a popular way for banks to earn a tax-deferred or even tax-free return on their capital for many years. In fact, banks can invest up to 25% of their Tier 1 capital in BOLI.

Banks have struggled with low yields on bank-approved investments such as U.S. Treasuries since the Federal Reserve dropped rates to zero. BOLI has been welcome relief to that pressure: As of mid-October, the average highest credit quality general account BOLI yielded 2.37% and the highest yield on average was 2.69%, according to the Newcleus BOLI Index. The taxable equivalent yield, based on a 21% tax rate, is 3% to 3.41%.

Despite its popularity, there are still many misperceptions in the market about BOLI that we want to dispel. Let’s focus on general account BOLI, the most common form of BOLI.

1. “BOLI is janitor insurance. Is it even legal?”
The term “janitor insurance” refers to a time when it was common for companies to buy life insurance for their employees without their knowledge or consent. That’s not legal anymore. With the passage of the Pension Protection Act of 2006, firms need to obtain consent from the employees covered by policies where the company pays the premium. In addition, only the top 35% highest paid employees can be considered for coverage.

For example, a regional bank may send out a notice asking for consent and a signature from 200 of the highest-paid employees in the bank, and 150 of them with sign it. Those 150 employees will be covered by BOLI.

2. “I don’t want my bank to profit off the death of employees.”
Many banks, especially community banks, choose to share a portion of the life insurance benefit with the deceased employee’s estate. In essence, the bank pays the premium, not the employee, and earns tax-deferred interest on the BOLI asset along with a death benefit that it can share with the employee. This can be structured in different ways. The bank may decide to offer a life insurance benefit only to the CEO, the members of the executive team, or the 20 top highest paid employees, for example.

3. “We don’t need to add a life insurance benefit.”
The point of BOLI is not life insurance coverage (yes, we know it’s called bank-owned life insurance). It’s not a regular term-life policy, where you write a premium check every month and receive a benefit when someone dies.

BOLI is an asset class. BOLI stays on the balance sheet and is accretive from Day 1. The day after a bank wires the premium, it is paid interest on the principal. The earned interest is tax-deferred until the death of the employee. If the employee dies, the earnings are tax free. But there are regulatory restrictions on the use of BOLI. For example, the Office of the Comptroller of the Currency requires banks to use the earnings to offset the cost of bank compensation and benefit programs.

4. “BOLI is an illiquid asset.”
This is a common misperception of BOLI. Typically, on a term-life policy, there’s no asset you can sell. That’s not true for BOLI. Like other investment products, banks can sell, or surrender the policy, at any time. In a time of widespread declines in asset values, a bank might find that the value of its asset, similar to a bond portfolio, has fallen. But the insurance company will return 100% of the cash surrender value. There are no fees to sell the asset. If a bank surrenders the policy before the death of the covered employee, the bank may owe unpaid taxes on any earnings received.

5. “Now is a bad time to buy BOLI.”
Given that many predict interest rates to go up in the next few years, banks may assume it’s a bad time to buy BOLI. Why lock in capital at a low interest rate when rates are going to go up? Although BOLI is a fixed-rate asset, it reprices at market rates. Typically, a BOLI portfolio has a duration of 5 to 7 years. Each year, 20% of the portfolio will turn over. By the fifth year, 100% of it has repriced.

We hope to have dispelled some of the common misperceptions about BOLI. If you haven’t maxed out the amount of BOLI you can put on your balance sheet, it might be time to take another look.

Wait Wait, Don’t Quit

The Covid-19 infection rate across much of the country is in decline, but banks and other employers trying to bring workers back to the office are dealing with another problem: an acute labor shortage.

Last month acquired the nickname #striketober, as the U.S. reached a record high percentage of people quitting their jobs. The latest data from the U.S. Bureau of Labor Statistics found that 4.7 million people, or 2.9% of all employees, quit their jobs in August. Nonfarm employment as of October was 4.2 million shy of what it was pre-pandemic. Wages are climbing, and banks feel the pressure from companies like Bank of America Corp., which announced that it will pay workers at least $25 an hour by 2025.

The ability to work-from-home in such an environment has suddenly become a retention tool — no longer simply a response to the pandemic. As I head to Bank Director’s Bank Compensation & Talent Conference at the Four Seasons Resort and Club in Dallas Nov. 8 to 10, where close to 200 people will discuss those and other issues, it’s clear that flexibility is becoming the new 401(k).

At $1.6 billion State Bank of Cross Plains, in a suburb of Madison, Wisconsin, allowing non-branch staff to work from home a few days per week has become an important benefit, said Chief Financial Officer Sue Loken at a recent Bank Director conference in Chicago.

In Buffalo, New York, at $152 billion M&T Bank Corp., employees will come back to the office three days a week starting in January 2022. Some already were coming into the office voluntarily or if their work required it.

Hybrid work looks like a better alternative to most banks than remote work. An unscientific audience poll at Bank Director’s recent Bank Audit and Risk Committees Conference in Chicago found that fewer than 5% of 57 respondents thought that more than half their employees would work remotely in the future. The most popular answer was that fewer than a quarter will work remotely, in line with Bank Director’s 2021 Risk Survey conducted at the beginning of the year.

That fits with what Paul Ward, chief risk officer at $15 billion Community Bank System in DeWitt, New York, had to say at the conference. Most employees are back at the office full-time, though a few still are working remotely.

Community Bank’s senior executives believe those in-person conversations are critical to building culture at the bank. Executives at M&T Bank also felt that culture is best cultivated in person, not via video conferencing. Michele Trolli, M&T’s head of corporate operations and enterprise initiatives, told The Buffalo News last October that M&T was “living off an annuity” acquired pre-pandemic by being together and knowing each other. “And that annuity, at some point, that runs out,” she said.

Compensation Considerations in a Merger of Equals

2021 has been a very active M&A year for regional banks, with some organizations combining through a merger of equals.

As the term suggests, a merger of equals is when two banks of comparable size merge to form a larger new company. There is a lot to consider in these situations to ensure the combination effectively unlocks value for stakeholders. Developing the human capital strategy and compensation program at the pro forma bank is a key factor for the management teams and boards of directors to consider. It is critical they get this right in order to retain and engage critical talent through the key milestones in the merger and beyond. In this guide, we identify some of the key compensation-related items that must be addressed in a merger of equals.

Leadership Structure and Executive Team
In a typical acquisition, the executive team of the acquirer often stays in place and the executive team of the target may take on newly created executive roles or leadership roles in a subsidiary business. In a merger of equals, the combined executive team is typically comprised of executives from both legacy organizations. Companies should identify the best talent to lead the bank well before the close of the merger so they can seamlessly execute on the integration and develop a retention plan.

Companies must also determine if they will combine the roles of CEO and chairman of the board, or if the roles will be split between the two legacy CEOs. It is common in a merger of equals to split the roles for a defined time period. This approach gives the pro forma bank the benefit of the leadership of both legacy CEOs as it navigates how to effectively operate as a new organization and create a harmonized organizational culture.

Compensation Philosophy and Competitive Market
It is important for the newly formed entity to have a cohesive compensation philosophy promoting a “one company” mindset among employees who are from different legacy organizations. The compensation philosophy should guide how the bank now pays its employees, including mix between fixed and variable compensation, mix between cash and equity compensation and where compensation is positioned relative to the market. If the two legacy banks have different compensation philosophies, the pro forma bank should develop a strategy to harmonize these philosophies in the near-term. For example, it set a goal to pay all corporate employees using the same mix by the anniversary of the close of the merger.

The combined entity will also need to define its new competitive market. Clearly, it will need to compare itself to larger institutions than the legacy banks, but it should also consider if there are other differences that should define the competitive market, like if the two legacy banks operated in different geographies or had different operating characteristics. It is paramount that the board compensation committee and management teams identify relevant criteria to define a competitive market that best reflects the combined bank’s business.

Retention and Success Awards
Once the banks establish the compensation philosophy and define the new leadership team, it is important to consider how ongoing compensation programs can incent and retain the new team. A common approach to tie the new team together is by providing a long-term incentive award, often referred to as “success awards.” A portion of the award typically vests based on performance linked to achieving deal-based objectives such as synergies or systems conversions. A portion of the award may also vest over a period of time to provide an additional retentive hook. Success awards with performance conditions are better received by external investors and proxy advisory firms. The combined entity should also consider retention risks among the executive team, including the ability to trigger change in control severance and current equity holdings. This may influence which executives receive additional awards or larger success awards.

A merger of equals can be an exciting but also uncertain time for an organization. Early planning on the new bank’s compensation philosophy, leadership team compensation program and success and retention award approaches can help alleviate some of the uncertainty and allow the executive management team to focus on successfully completing the integration. A well thought-out program can combine the best of both legacy organizations into a harmonized compensation program that supports a “one bank” strategy and culture.

An M&A Checklist for BOLI, Compensation Programs

As bank M&A activity continues to pick up, it is crucial that buyers and sellers understand the implications of any transaction on bank-owned life insurance portfolios, as well as any associated nonqualified deferred compensation (NQDC) programs, to mitigate potential negative tax consequences.

Identify and Review Target Bank’s BOLI Holdings
The first step is for buyers to identify the total cash surrender value of sellers’ BOLI portfolio and its percentage of regulatory capital. The buyer should identify the types of products held and the amount held in each of the three common BOLI product types:

  • General account
  • Hybrid separate account
  • Separate account (registered or private placement)

In addition to evaluating historical and current policy performance, the buyer should also obtain and evaluate carrier financial and credit rating information for all products, as well as underlying investment fund information for any separate account products.

Accounting and Tax Considerations
From an accounting standpoint, the buyer should ensure that the BOLI has been both properly accounted for in accordance with GAAP (ASC 325-30) and reported in the call reports, with related disclosures of product types and risk weighting. Further, if the policies are associated with a post-retirement split-dollar or survivor income plan, the buyer should ensure that the liabilities have been properly accrued for.

The structure of the transaction as a stock sale or asset sale is critical when assessing the tax implications. In general, with a stock sale, there is no taxable transaction with regard to BOLI — assets and liabilities “carry over” to the buyer. With an asset sale (or a stock sale with election to treat as asset sale), the seller will recognize the accumulated gain in the policies and the buyer will assume the policies with a stepped-up basis.

Regardless of the type of transaction, the buyer needs to evaluate and address the Transfer for Value (TFV) and Reportable Policy Sale (RPS) issues. Policies deemed “transferred for value” or a “reportable policy sale” will result in taxable death benefits. Prior to the Tax Cuts and Jobs Act, the transfer for value analysis was fairly simple: In a stock transaction, the “carryover basis” exception applies to all policies, whether or not the insured individual remained actively employed. In an asset sale, policies on insureds who will be officers or shareholders of the acquiring bank will meet an exception.

The Jobs Act enacted the notion of “reportable policy sales,” which complicated the tax analysis, especially for stock-based transactions now requiring much more detailed analysis of the type of transaction and entity types (C Corp vs S Corp). It is important to note that the RPS rules are in addition to the TFV rule.

Review Risk Management of BOLI
The Interagency Statement on the Purchase and Risk Management of BOLI (OCC 2004-56) establishes requirements for banks to properly document both their pre-purchase due diligence, as well as an annual review of their BOLI programs. The buyer will want to ensure this documentation is in good order. Significant risk considerations include carrier credit quality, policy performance, employment status of insureds, 1035 exchange restrictions or fees and the tax impact of any policy surrenders. Banks should pay particular attention to ensuring that policies are performing efficiently as well as the availability of opportunities to improve policy performance.

Identify and Review NQDC plans
Nonqualified deferred compensation plans can take several forms, including:

  • Voluntary deferred compensation programs
  • Defined benefit plans
  • Defined contributions plans
  • Director deferral or retirement plans
  • Split dollar
  • Other

All plans should be formally documented via plan documents and agreements. Buyers should ascertain that the plans comply with the requirements of Internal Revenue Code Section 409A and that the appropriate “top hat” filings have been made with the U.S. Department of Labor.

General Accounting and Tax Considerations
Liabilities associated with NQDC programs should be accounted for properly on the balance sheet. In evaluating the liabilities, banks should give consideration to the accounting method and the discount rates.

Reviewing historical payroll tax reporting related to the NQDC plans is critical to ensuring there are no hidden liabilities in the plan. Remediating improperly reported payroll taxes for NQDC plans can be both time consuming and expensive. Seek to resolve any reporting issues prior to the deal closure.

Change in Control Accounting and Tax Considerations
More often than not, NQDC plans provide for benefit acceleration in the event of a change in control (CIC), including benefit vesting and/or payments CIC. The trigger may be the CIC itself or a secondary “trigger,” such as termination of employment within a certain time period following a CIC. It is imperative that the buyer understand the financial statement impact of the CIC provisions within the programs.

In addition to the financial statement impact, C corps must also contend with what can be complicated taxation issues under Internal Revenue Code Section 280G, as well as any plan provisions addressing the tax issues of Section 280G. S corps are not subject to the provisions of Section 280G. For additional insight into the impacts of mergers on NQDC programs, see How Mergers Can Impact Deferred Compensation Plans Part I and How Mergers Can Impact Deferred Compensation Plans Part II. 

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

Attracting Talent in a Brave New World

Getting the talent your bank needs — even just getting candidates to apply and turn up for an interview — has increasingly challenged financial institutions as the country emerges from the Covid-19 pandemic. And the cost to pay them a competitive wage — and benefits — keeps climbing.

Every year in Bank Director’s annual Compensation Survey — which is sponsored by our firm, Newcleus Compensation Advisors — bank executives and directors identify managing compensation and benefit costs as a key challenge for their institution. In this year’s survey, it rates as the second-highest challenge for bank leaders, behind tying compensation to performance.

These tensions are particularly felt by community banks. Those located in urban or suburban markets face stiff competition from large employers like Bank of America Corp., which recently announced plans to increase its minimum wage over the next few years to $25 an hour. Rural banks face similar challenges along with a smaller pool of talent, particularly in high-demand areas including technology, lending, and risk and compliance.

How can your bank attract and retain the talent it needs to survive in today’s environment? We suggest that you consider the following questions as you weigh how to become an employer of choice in your community.

How flexible is your bank willing to be?
Most banks introduced or expanded remote work options and flexible scheduling in 2020. Now that operations are returning “back to normal,” more or less, bank leaders are left to question what worked and what didn’t from a nationwide experiment that occurred during abnormal conditions.

Expectations have shifted over the past year, particularly for younger, digitally-native employees — resulting in a generational divide between staff and management teams. Consider the following from MetLife’s 2021 U.S. Employee Benefit Trends Study:

  • More than two-thirds of employees who can work remotely believe that they should be allowed to choose where they work — not their employer.
  • Half of young employees in their 20s — young millennials and Gen Z — say their work/life balance has improved during the pandemic, and they’re happier as a result. Just a quarter of baby boomers agree.
  • And, crucially: More than three-quarters of employees say they want more flexible scheduling, perhaps splitting their time between remote work and the office. Conversely, the majority of companies surveyed by MetLife expect staff to return to their pre-Covid status quo.

Some employees are interested in returning to the office, but others aren’t. They’ve had months to enjoy a break from long commutes and create an environment that’s comfortable for them.

Will remote work be a passing fad, or a permanent part of the talent landscape? Even if you believe that remote work isn’t a cultural fit for your bank, be aware that you’re competing against it.

Can talented employees from outside the industry strengthen your organization?
Opening your bank up to remote work can broaden the talent pool; so can having an open mind to hiring talent from outside the financial sector. Employees can be educated on the fundamentals of banking; there are training programs all across the country. But a skilled salesperson or someone with deep technology or cybersecurity expertise can fill critical roles at your institution — no matter their background.

 Do you have a good reputation?
Bank leaders often tout the value of their culture — but it can be difficult for leadership teams to truly understand how staff down the ranks view the organization. Conducting employee engagement surveys can help bridge this gap, but also consider how your current and former employees rate your company on external review sites such as Glassdoor, Indeed and Monster.com.

While these websites often attract more negative comments than positive ones, they still can provide a clearer picture of how you’re viewed as an employer — and the perception that prospective employees may have of your organization.

Does your compensation package really stack up?
Your bank isn’t competing solely with other financial institutions for talent — it’s competing against all kinds of companies in your market. We received several comments touching on this in the 2021 Compensation Survey:

Competing employers (not just banks) in our markets can sometimes offer better benefits. We now participate in an internship program at a major state university to develop a pipeline of young talent.” —  Chief executive of a public bank between $1 billion and $10 billion in assets 

“We operate in a highly competitive market, so retaining and attracting technology talent is always an issue. We are competing with Amazon[.com] — hiring 50[,000] workers in our market, as an example.” —  Director of a public bank between $1 billion and $10 billion in assets

Compensation surveys help banks compare their pay packages to peer institutions, but your leadership and human resources teams need to know how your bank compares to local competitors outside the industry, too. This is where boards can provide valuable insights based on their networks and experience, since they’re likely facing the same challenges in their own industries. Leverage that advice.

And consider asking your employees what they value. We’ve found this information to be invaluable to banks, allowing them to review compensation benefits and culture from the employee’s perspective.