2021 Compensation Survey Results: Fighting for Talent

Did Covid-19 create an even more competitive landscape for financial talent?

Most banks increased pay and expanded benefits during the pandemic, according to Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors. The results provide a detailed exploration of employee benefits, in addition to talent and culture trends, CEO performance and pay, and director compensation. 

Eighty-two percent of respondents say their bank expanded or introduced remote work options in response to Covid-19. Flexible scheduling was also broadly expanded or introduced, and more than half say their bank offers caregiver leave. In addition, most offered bonuses to front-line workers, and 62% say their bank awarded bonuses tied to Paycheck Protection Program loans, primarily to lenders and loan production staff.     

And in a year that witnessed massive unemployment, most banks kept employees on the payroll.

Just a quarter of the CEOs, human resources officers, board members and other executives who completed the survey say their bank decreased staff on net last year, primarily branch employees. More than 40% increased the number employed overall in their organization, with respondents identifying commercial and mortgage lending as key growth areas, followed by technology.

The 2021 Compensation Survey was conducted in March and April of 2021. Looking at the same months compared to 2020, the total number of employees remained relatively steady year over year for financial institutions, according to the U.S. Bureau of Labor and Statistics.

Talent forms the foundation of any organization’s success. Banks are no exception, and they proved to be stable employers during trying, unprecedented times.

But given the industry’s low unemployment rate, will financial institutions — particularly smaller banks that don’t offer robust benefit packages like their larger peers — be able to attract and retain the employees they need? The majority — 79% — believe their institution can effectively compete for talent against technology companies and other financial services companies. However, the smallest banks express less confidence, indicating a growing chasm between those that can attract the talent they need to grow, and those forced to make do with dwindling resources. 

Key Findings

Perennial Challenges
Tying compensation to performance (43%) and managing compensation and benefit costs (37%) remain the top two compensation challenges reported by respondents. Just 27% say that adjusting to a post-pandemic work environment is a top concern.

Cultural Shifts
Thirty-nine percent believe that remote work hasn’t changed their institution’s culture, and 38% believe the practice has had a positive effect. However, one-quarter believe remote work has negatively affected their bank’s culture.

M&A Plans
As the industry witnesses a resurgence of bank M&A, more than half have a change-in-control agreement in place for their CEO; 10% put one in place in the last year.

Commercial Loan Demand
More than one-quarter of respondents say their bank has adjusted incentive plan goals for commercial lenders, anticipating more demand. Ten percent expect reduced demand; 60% haven’t adjusted their goals for 2021.

CEO Performance
Following a chaotic and uncertain 2020, a quarter say their board exercised more discretion and/or relied more heavily on qualitative factors in examining CEO performance. More than three-quarters tie performance metrics to CEO pay, including income growth (56%), return on assets (53%) and asset quality (46%). Qualitative factors are less favored, and include strategic goals (56%) and community involvement (29%).

CEO Pay
Median CEO compensation exceeded $600,000 for fiscal year 2020. CEOs of banks over $10 billion in assets earned a median $3.5 million, including salary, incentives, equity compensation, and benefits and perks. 

Director Compensation
More than half of directors believe they’re fairly compensated for their contributions to the bank. Three-quarters indicate that independent directors earn a board meeting fee, at a median of $1,000 per meeting. Sixty-two percent say their board awards an annual cash retainer, at a median of $21,600. 

To view the full results of the survey, click here.

In Nonqualified Benefit Plans, One Size Does Not Fit All

Employers have long struggled with the ability to attract, retain and reward key talent at their company.

Government limits and restrictions on the amount that employees and employers may contribute toward qualified retirement plans such as a 401(k) leave many highly compensated executives without enough retirement income to sustain their current standard of living.

A supplemental executive retirement plan (SERP) is a defined benefit and a great way to solve both governmental limits and the ability to attract, retain and reward talent. SERPs are typically designed to make up for a retirement income shortfall, because executives at most companies tend to be in their late 40s and 50s.

But when consultants design SERPs solely for retirement income — because the decision-makers are concerned about retirement — they often make the mistake of designing a plan that fails its primary goal: attracting, retaining and rewarding key talent.

Consider the following: Executive A is 57, married with no children. He is maxing out his company’s 401(k) plan but still has not saved enough for retirement. His employer wants to reward him for his 15 years of service and keep him for another 10 years until his retirement. Putting a SERP in place that promises to pay him 40% of his final pay for 15 years will accomplish the employer’s goal because he is only 10 years from retirement and concerned about it.

Now let’s take a look at his successor in training. Executive B is 40 years old, married and has three kids, ages 4, 6 and 8. He is contributing very little to his 401(k). His employer wants to retain him to succeed Executive A. The employer offers him the same SERP that will pay him 40% of final pay at retirement. Three years go by, and Executive B leaves the company for a higher paying job. The plan failed the employer’s goal because to most 40-year-olds, short-term incentives are king. Promising a benefit 27 years down the road does little to retain an executive in the short term.

That is where many consultants and employers make mistakes during the design process. They don’t ask themselves: If they were in a similar stage in life as the executive, what would matter most? They also fail to ask the executives being considered what’s important to them. Many employers and executives hesitate to answer honestly. That’s where a consultant can be invaluable during the planning process. Asking the important questions to establish goals is key to making a plan work effectively.

Once the bank has a good understanding of what is important to top talent, they can design a plan to accomplish the goals. Plans can pay out benefits at certain pre-set dates or life events while still employed to accomplish goals other than retirement. Here are a few examples:

  • Lump sum in 5 years for mission work.
  • Four annual payments starting in 10 years to help pay for college.
  • Lump sum at age 50 to buy a boat.

Consider the following alternative benefit design for Executive B and its value to him. Executive B is 40 years old. He is married with three children, ages 4, 6 and 8. After being interviewed, he is most concerned about paying for his children’s college. Therefore, instead of offering him a SERP that pays out at retirement, his employer offers him a SERP that allows the executive to receive some payments while still employed.

This plan allows Executive B to direct up to half of the employer contribution into a short term or “college funding” bucket. This bucket will start paying in 10 years, when his oldest child starts college. The other half of the contribution goes into a “retirement” bucket. This is set aside for supplemental retirement income.

Will this accomplish the employer’s goal? It definitely has a better chance. This two-bucket approach is of great value to Executive B, because it addresses his immediate need to save for college and also starts to build a retirement account.

Using alternative approaches to the traditional design of focusing on retirement is more important than ever. Employer can accomplish their goals using a nonqualified plan, as long as they remember that “one size does not always fit all.”

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

Structuring Incentive Compensation Plans for 2021

Compensation committees wondering how to structure 2021 incentive compensation plans and goals should keep three principles in mind, says Laura Hay, managing director at Pearl Meyer, in a panel discussion focusing on compensation matters at Bank Director’s BankBEYOND 2020 experience.

Less complexity in a plan will bring more clarity to employees and the bank, she adds.

“Don’t overthink it,” she advises directors. “Think through what you’re trying to achieve and what would move the business forward.”

Plans should give employees “some control over the ability to control those outcomes,” she says, and should be developed with an eye toward the environment remaining uncertain for the time being. If a bank’s plan uses absolute metrics, which have performed particularly poorly in 2020, compensation committees may want to widen the performance range and reduce the absolute payout.

Hay was joined in this conversation with Bank Director CEO Al Dominick by Ken Derks, managing consultant at NFP Executive Benefits, and Todd Leone, partner and head of executive compensation at McLagan.

You can access all of the BankBEYOND 2020 sessions by registering here.

Unlocking Meaningful Compensation to Keep Essential Talent

Banks are no strangers to using nonqualified deferred compensation plans to attract, retain and motivate their employees and strengthen their succession plans.

According to the American Bankers Association’s 2019 Compensation & Benefits Survey, nearly 65% of banks report utilizing deferred compensation plans. These plans can include supplemental executive retirement plans, or SERPs, which are typically designed for the seasoned bank executive talent. Unlike a 401(k) plan, a SERP has no contribution limit or rules that mandate that all employees must be able to participate. They are purposely designed for highly compensated executives and key employees for whom the 401(k) contribution limits act as a form of “reverse discrimination” toward retirement. These limits can cause a whole host of problems if not addressed by the introduction of a SERP.

Meaningful, thoughtful compensation will be essential for banks interested in motivating and retaining key executives and talent as they continue navigating through these unprecedented times. Guaranty Bancshares’s CFO Cappy Payne called the SERP a “cornerstone” of the Addison, Texas-based bank’s compensation approach.

“[W]e have a wide variety of executive compensation and benefit plans for our senior level management,” he says. “We purposely diversify their compensation such that it increases our ability to attract, retain and motivate the talent we need to differentiate in this incredibly tough economic environment.”

SERPs are often offered alongside several other types of long-term incentive compensation vehicles. Long-term plans can include stock options, stock appreciation rights, phantom stock, restricted stock, restricted units, performance shares of units and combinations of two or three plans. All of these programs are also a form of deferred compensation, like a SERP, but don’t offer as much customization as a SERP. Additionally, most institutions use bank owned life insurance as an indirect funding approach.

A bank may design the SERP so the executive receives a benefit at a later date — like retirement or after 15 years of service. The benefit of the SERP may be issued as a lump sum, a series of payments or combination thereof. It can also have performance criteria added as a motivational incentive. And because there are no contribution limits, this ability to customize and design around one executive team generates a significant ROI. Payne says Guaranty “strongly believes” in the customization of its long-term compensation plans.

“We find customization increases the appreciation of our efforts. In addition, when used with other plans like the annual incentive plan, and other stock-based long-term incentives, we believe we are able to sustain bank leadership that creates a successful banking atmosphere,” he says.

But SERPs aren’t perfect; just like any other executive compensation and benefit plan, it’s critical that bank executives and boards understand their disadvantages. One disadvantage is the funds that accumulate for a SERP are not protected from bankruptcy and creditor claims in the event of insolvency. SERP participants become general creditors of the bank. Still, the plans offer significant advantages and can be incredibly attractive to banks as employers.

  1. They are easy to implement.
  2. The don’t require IRS approval.
  3. They can be customized to the executive team and included as a retirement benefit.
  4. Banks can use BOLI to help recover their costs and offer a split-dollar life insurance benefit while employed.

All of these advantages combined make for a powerful compensation cocktail that, when used in conjunction with other plans and communicated appropriately, is dynamite.

Banks are under more pressure than ever before to succeed. The pandemic, low interest rates and political uncertainty all contribute to questions and uncertainty in the workplace — including among top executives. SERPs can be a powerful tool in the hands of visionary banks. The flexibility afforded in a SERP is second to none. Finally, it’s just smart business to make sure banks can differentiate themselves while being sustainable by attracting, retaining and motivating the best talent possible.

Focus on Survival

Comp-WP-Report.pngThe pressures brought to bear upon the banking industry as a result of Covid-19 and the related economic downturn promise to exacerbate two long-term challenges facing bank boards and management teams: tying compensation to performance, and managing compensation and benefits costs.

In early July, the U.S. remained “knee deep in the first wave” of the Covid‑19 pandemic, according to Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases. States paused or began rolling back their efforts to reopen businesses and public areas. Tens of millions of Americans were unemployed. By September, newly reported cases remained above infection levels in March and April nationally. Many states were experimenting with school reopenings, and case counts were rising in the U.S.

“I’m really concerned about it,” said William Demchak, chairman and CEO of PNC Financial Services Group, who warned of an impending wave of loan defaults in a July interview. “I don’t know that it’s going to devastate us, but I think it’s going to put us into a period of really slow growth.”

Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, was conducted in March and April, just as Covid-19’s broad reach became clear, leading banks to embrace remote work and respond to the monumental task of issuing Paycheck Protection Program loans.

The survey highlights key concerns for bankers in this unusual environment, which will be explored in this white paper. How will bank boards evaluate CEO pay? What about director compensation and efforts to refresh the board? Finally, will banks be prepared for the impending turnover in the C-suite once baby boomers retire?

Forward-looking banks could emerge stronger from this crisis, says Flynt Gallagher, president of Compensation Advisors. “This environment is an opportunity for them, because it gives them the ability to make the changes they’ve been wanting to make,” he says. With so many Americans unemployed, more high-quality talent is available, and he believes institutions should find a way to bring them into the organization — even if a position isn’t open.

“You never go wrong when you get good people,” Gallagher says.

To read more about addressing board and CEO pay challenges, read the white paper.

To view the full results to the survey, click here.

Evaluating Executives’ 2020 Performance

Bank boards know that the world has shifted dramatically since January, when they drafted  individual executives’ performance expectations. Using those outdated evaluations now may be a fruitless exercise.

As the impact of the pandemic and the social justice movements continue to unfold across the United States, boards may not feel that they have much more clarity on performance expectations currently than they did back in March. At many banks, credit quality has replaced loan volume as the key operating priority. Unprecedented interest rate cuts have further deteriorated earnings power.

Many boards of directors are revisiting how to evaluate the executive team’s individual performance for fiscal year 2020, considering these new realities for their businesses. Individual performance evaluations are a tool for evaluating leadership behaviors and abilities; as such, it sends a clear indication of what the board values from their leaders. After a year like this, all stakeholders will be interested to know what the board prioritized for their bank’s leadership. 

Considerations for Updated Individual Performance Evaluations
This year has been defined by unprecedented developments that broadly and deeply impact all stakeholders. More than any other industry, banks have been called on to support the country using every tool in their toolkit. Reflecting this broad impact, bank boards may find it useful to establish a revised framework for evaluating leadership performance using six “Critical Cs” for 2020:

  • Continuity of Business: How quickly and effectively was the bank able to transition to a new operating model (including remote work arrangements, staffing essential workers in office or branch, etc.) and minimize business disruption?
  • Customer Satisfaction: How were customers impacted by the change in the operating model? If measured, how did the scores vary from a normal year?
  • Credit Quality: Where are the trends moving and how are executives responding? Did the institution face legacy issues that took some time to address and may be compounding current issues?
  • Capital Management: What balance sheet actions did executives take to strengthen the bank’s position for the future?
  • Coworker Wellbeing: What was the “tone at the top”? How did executives respond to the needs of employees? If measured, how did the bank’s engagement scores vary from other years?
  • Community Support: What did the bank do to lead in our communities? How effective was the bank in delivering government stimulus programs like the Small Business Administration’s Paycheck Protection Program?

For publicly-traded banks, the compensation discussion and analysis section of the proxy statement should provide a thorough description of the rationale and process used for realigning these criteria and the evaluation approach used to assess performance. Operating results are likely to be well below early-year expectations for most banks; as a result, shareholders will be keenly interested in how leadership responded to the current environment and how that informed pay decisions by the board.

This year has created an unprecedented opportunity to test the leadership abilities of the executive team. Using the six “Critical Cs” will help boards assess the performance of their leadership teams in crises, craft a descriptive rationale for compensation decisions for fiscal year 2020, as well as evaluate leadership abilities for the future.

A Deeper Dive Into Board Pay

How you pay your board may have a surprising effect on its total pay package, according to Bank Director’s 2020 Compensation Survey. This exclusive analysis has been created specifically for members of our Bank Services program.

Across asset sizes, banks paying an annual retainer generally award more total compensation to the board compared to their fee-only peers or those that award a mix of the two. This analysis focuses solely on cash compensation for the full board, in the form of meetings fees and retainers. Committee compensation is excluded due to variances in structure and meeting frequency, although 63% award committee fees.

Estimated Annual Pay, by Type and Asset Size

 >$10B$1B – $10B$500M – $1B$250M – $500M<$250MAll Banks
Annual Retainer Only$595,000$380,000$312,750$180,000$150,000$400,000
Meeting Fee Only$921,000$120,000$140,000$105,000$65,000$107,500
Both Retainer + Fees$225,000$118,000$90,000$85,400$77,500$105,000

*Estimated annual pay assumes 10 directors per board and 10 meetings per year, based on the 2020 Compensation Survey.

The low usage of meeting fees by banks above $10 billion in assets, and of annual retainers by banks below $500 million in assets, result in smaller data sets for those groups.

So, are retainer-only banks overpaying their boards? Are fee-only banks underpaying theirs?

Board responsibilities have risen greatly since the last financial crisis more than a decade ago. Regulators expect more from directors; while the buck stops with the CEO, that individual ultimately reports to the board. So, while it’s hard to say what’s right and what’s wrong when it comes to board pay, the gradual, increased use of annual retainers — from 61% five years ago to 70% today — reflects a realization by many boards that their members are spending more time outside of meetings on bank matters, whether that’s reviewing board packets or educating themselves on issues important to the oversight of the bank.

Annual retainers can better demonstrate the amount of the work directors put in. 

What’s more, technology has expanded how the board can meet. Some boards already offered phone and video conferencing options to more-remote members, like snowbirds who head south for the winter. The Covid-19 pandemic forced entire boards to adopt these measures, so they could become a more permanent feature for some. Should those attending virtually be compensated differently?

Annual Cash Compensation Per Director, by Type and Asset Size

 >$10B$1B – $10B$500M – $1B$250M – $500M<$250MAll Banks
Annual Retainer Only$59,500$38,000$31,275$18,000$15,000$40,000
Meeting Fee Only$92,100$12,000$14,000$10,500$6,500$10,750
Both Retainer + Fees$45,000$28,000$22,500$17,900$14,500$24,000

*Estimated annual pay per director assumes 10 meetings per year, based on the 2020 Compensation Survey. The low usage of meeting fees by banks above $10 billion in assets, and of annual retainers by banks below $500 million in assets, result in smaller data sets for those groups.

Getting the compensation mix right is vital to attracting the new talent a board needs to oversee the bank. Boards are often seeking someone younger. They may be looking to add gender or ethnic diversity. Or they may be looking for new skills.

While the 2017 Compensation Survey indicated that directors serve for loftier reasons than a supplemental paycheck — 62% cited personal growth as the top reason they serve — new, younger directors could be balancing an already high-pressure career with family obligations. And other organizations could be seeking their valuable time. Your bank likely isn’t the only one in its community on the hunt for board talent.

“It’s difficult to fully compensate someone for their time as a director,” says Flynt Gallagher, president of Compensation Advisors. “If you’re going to pay them for the time they put in, the skills they bring to the board — they’d be unaffordable.”

But boards still need to make it worthwhile to serve. Simultaneously, they may feel pressure to maintain current pay levels during the economic downturn.

Compensation committees could consider awarding equity compensation, which wasn’t factored into this analysis. Equity provides a way to pay directors more — and gives them additional skin in the game — without having an outsized effect on total compensation. Roughly half of survey respondents, primarily at public banks, awarded equity to outside directors in fiscal year 2019, at a median fair market value of $30,000. 

Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, surveyed 265 independent directors, CEOs, human resources officers and other senior executives of U.S. banks to understand trends around the acquisition of talent, CEO performance and pay, and director compensation. The survey was conducted in March and April 2020. Compensation data for directors and CEOs for fiscal year 2019 was also collected from the proxy statements of 98 publicly traded banks. Fifty-three percent of the total data represent financial institutions above $1 billion in assets; 59% are public.

Several units in Bank Director’s Online Training Series focus on compensation matters. You can also learn more about finding new talent for the board by reading “Cast a Wider Net for Your Next Director” and “How to Recruit Younger Directors.” If you’re considering virtual meetings, read “Best Practices for Virtual Board Meetings” to learn more about navigating that shift.

Designing a Pandemic-Proof Compensation Plan

The ability to pivot and adapt to a changing landscape is critical to the success of an organization.

The coronavirus pandemic has created a unique challenge for banks in particular. Government stimulus through the Paycheck Protection Program tasked banks with processing loans at an unheard-of rate, turning bankers working 20-hour days into economic first responders. Simultaneously, the altered landscape forced businesses to adopt a remote work environment, virtual meetings and increase flexibility — amplifying the need for safe and reliable technology platforms, enhanced data security measures and appropriate cyber insurance programs as standard operating procedure.

Prior to Covid-19, a major driver of change was the demographic shift in the workforce as baby boomers retire and Generation X and millennials take over management and leadership positions. Many businesses were focused on ways to attract and retain these workers by adapting their cultures and policies to offer them meaningful rewards. The pandemic will likely make this demographic shift more relevant, as the workforce continues adapting to the impending change. 

Gen X and millennial employees are more likely than previous generations to value flexibility in when and where they work. They may seek greater  alignment in their career and life, according to Gallup. The pandemic has forced businesses to either adapt — or risk the economic consequences of losing their top performers to competitors.

Many employees find they are more productive when working remotely compared to the traditional office setting, which could translate into increased employee engagement. In fact, the Gallup’s “State of the American Workplace” study finds that employees who spend 60% to  80% of their time working remotely reported the highest engagement. Engagement relates to the level of involvement and the relationship an employee has with their position and employer. Gallup finds that engaged employees are more productive because they have increased autonomy, job satisfaction and desire to make a difference. Simply put, increase engagement and performance will rise.

The demographic shift and a force-placed virtual office culture means that designing programs to attract and retain today’s workers require a well thought out combination of strategies. An inexpensive — though not necessarily simple — method of employee retention includes providing recognition when appropriate and deserved. Recognition is a critical aspect in employee engagement, regardless of demographic. Employees who feel recognized are more likely to be retained, satisfied and highly engaged. Without appropriate recognition, employee turnover could increase, which contributes to decreased morale and reduced productivity.

In addition to showing appreciation and recognizing employees who perform well, compensating them appropriately is fundamental to attracting and retaining the best. The flexibility of a non-qualified deferred compensation program allows employers to customize the design to respond to changing needs.

Though still relevant, the traditional Supplemental Executive Retirement Plan has been used to attract and retain leadership positions. It is an unsecured promise to pay a future benefit in retirement, with a vesting schedule structured to promote retention. Because Gen X and millennials may have 25 years or more until retirement, the value of a benefit starting at age 65 or later could miss the mark; they may find a more near-term, personally focused, approach to be more meaningful.

Taking into consideration what a younger employee in a leadership, management, or production position values is the guide to developing an effective plan. Does the employee have young children, student loan debt or other current expenses? Using personalized criteria, the employer can structure a deferred compensation program to customize payments timed to coincide with tuition or student loan debt repayment assistance. Importantly, the employer is in control of how these programs vest, can include forfeiture provision features and require the employee perform to earn the benefits.

These benefits are designed to be mutually beneficial. The rewards must be meaningful to the recipient while providing value to the sponsoring employer. The employer attracts and retains top talent while increasing productivity, and the employee is engaged and compensated appropriately. Banks can increase their potential success and avoid the financial consequences of turnover.

Ultimately, the pandemic could be the catalyst that brings the workplace of tomorrow to the present day. Nimbleness as we face the new reality of a virtual office, flexibility, and reliance on technology will holistically increase our ability to navigate uncertainty.

Covid-19, Compensation and Corporate Performance

Covid-19 has created a literal life-and-death struggle for many; the resultant economic slowdown has imperiled businesses, employees and shareholders. A few lessons have already emerged from the pandemic’s fallout.

How companies manage employment and compensation through the Covid-19 crisis is already under intense scrutiny; positive and negative case studies will undoubtedly emerge offering insight into best (and worst) practices when it comes to human capital and non-financial risk management. 

Human capital is an intangible company asset, often thought of as the economic value of an employee’s experience and skills. Already, investors focused on environmental, social and governance issues, commonly known as ESG, are tracking how companies address human capital issues in light of the pandemic and economic shutdown. 

Aon and McLagan have tracked corporate reactions to Covid-19 since the start of the crisis, recording a wide array of pandemic responses through May 2020 from 66% of companies in the Russell 3000. 

We found that firms had already taken steps to curtail executive (14.7%) and board (9.5%) compensation, work hours (2.1%), hiring (2%), and dividend payouts (3.9%), while others have gone further and closed locations (12.1%) and furloughed (6.2%) or terminated (1.9%) employees. 

By May, 387 diversified financial services firms reported making executive compensation changes; however, none were community banks, which have mostly taken a wait-and-see approach.  

Because human capital is a major driver of corporate profits in any industry, how companies manage workforce issues during a crisis and on a daily basis is important. In the banking and financial services industry, however, human capital is even more critical. 

Human capital issues rank in the top material ESG risks that commercial banks should proactively manage, along with data security, business ethics, systemic risk management and product-related considerations such as access and design. And that was before Covid-19. In a post-pandemic world, several urgent human capital issues have taken center stage at banks and financial institutions. 

Customer Access, Workplace Safety 
Financial institutions are considered essential businesses and must simultaneously balance remaining open to maintain market liquidity with workplace safety for front-line staff. While organizations should do all they can to maintain strict social distancing and cleaning regimes, some have gone further by offering hazard pay to customer-facing employees. When evaluating hazard pay options, it is also important to weigh one-time versus ongoing pay adjustments, or whether to include this compensation in hourly wage figures. While one-time or periodic bonuses may impact short-term cash flow, executives should consider the effect of needing to potentially roll back pay increases in the future. 

Staff Compensation 
While hazard pay is one component of Covid-19 compensation, it is certainly not the only one. Many banks have faced a staggering increase in loan application processing due to both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and mortgage refinancing. Planning for any overtime or performance bonus payments during the pandemic period will be a critical element of human capital and cash flow management. These decisions should be made in consideration of pay equity laws and best practices, which are additional focuses of ESG. 

Executive Compensation
In light of the Covid-19 economic slowdown, many financial institutions may decide to reevaluate and make material changes to the performance metrics used in their incentive compensation plans. 

Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis have offered guidance on such changes. ISS encourages boards “to provide contemporaneous disclosure to shareholders of their rationales for making such changes.” Glass Lewis cautioned companies that proposals “that take a proportional approach to the impacts on shareholders and employees look more likely to be widely supported.”  

No one knows for sure how long the pandemic and economic fallout will last; how companies manage their human capital through the crisis will be a key differentiator, both from an economic and a public relations standpoint.

Compensating Employees in a Crisis

It’s an old conflict with new, pandemic-created urgency: How to compensate employees during a crisis.

Compensation is one of the biggest variable expenses a bank has, and many incentive compensation plans may have components or goals that are no longer realistic at this state of the business cycle. At the same time, bank employees have served as first-responders to the economic crisis created by the coronavirus pandemic, putting in long hours to modify or originate loans. Boards are figuring out how to reward employees for these efforts while keeping a lid on expenses overall, balancing the bank’s growth and safety against the short-term operating environment.

The Paycheck Protection Program from the Small Business Administration creates an interesting compensation opportunity for banks, says Flynt Gallagher, president of Compensation Advisors. Many banks had employees who pulled all-nighters while working remotely to fulfill demand for these unsolicited loans. Some institutions may choose to exercise discretion by issuing spot awards, which reward employees for a specific behavior over a limited period of time, to bankers who worked overtime to help customers. Gallagher believes these may be larger than a typical award, citing one client that is setting aside $100,000 of PPP profits to distribute to employees who pitched in.

The pandemic created challenges for Civista Bancshares’ commercial lenders and their incentive compensation program, though it presented opportunities as well. Processing PPP applications took time that the Sandusky, Ohio-based bank’s commercial team may have spent monitoring and administrating their existing portfolios or prospecting for new customers. But after the $2.6 billion bank satiated demand from current customers, it opened its doors for new customers, says Civista Bancshares CEO Dennis Shaffer. Some new customers transferred their accounts and service needs as a result, which counts toward deposit goals that retail bank staff have.

Banks with plans featuring objectives or goals that may no longer be reasonable or prudent may be able to exercise discretion under their plans’ “extraordinary events” clause, Gallagher says. The clause applies to events that materially affect profitability, like selling a branch or implementing a new operating system. Banks electing that approach, he says, will also need to quantify the impact that Covid-19 has had on their performance.

At Civista, goals tend to be set in the first quarter, and Shaffer says that changing course on an incentive plan midstream could compromise its integrity. Gallagher adds that public companies like Civista may face scrutiny from proxy advisory firms if they make changes to a current plan or exercise too much description.

But boards have some options as they evaluate their current incentive compensation plans. Some may break their compensation plans into shorter plan periods. Gallagher predicts that banks may decide to shift or roll up individual goals into team or department objectives to reward the broad efforts of groups that may have gone beyond the four corners of their job descriptions.

“I don’t think you’re going to see any general methodology adopted. It’s going to be all over the board, based on the institution,” he says.

Walden Savings Bank is comparing its compensation plan, which uses a scorecard of 12 metrics evaluated monthly, to its expected financial performance, says Stephen Burger, who has chaired the Montgomery, New York-based bank’s compensation committee for 16 years. He says there is already “no way” to achieve at least four of those metrics, reducing the incentive accrual by 25%. The board and CEO of the $603 million bank also decided to cut their pay, but so far no employees have been laid off or furloughed.

“The scorecard is just a guideline,” he says. “We do have latitude to look at other opportunities and reward or cut in certain areas.”

The bank is already trying to keep a tight lid on expenses. They stayed local for their strategic planning weekend instead of going out of town, implemented a hiring freeze, paused a branch transformation project and are mulling alternations to certain benefits or staff reductions.

“We will find a way to reward our employees,” Burger says. “At the same time, if earnings aren’t there, we’ll also do a very effective job of making sure that they recognize that it’s a unique type of year.

Gallagher cautions against banks making short-term cuts in employment or not rewarding producers. Good employees need to be retained in anticipation of better operating periods. And some banks may actually look to hire new employees right now, given that mass unemployment has flooded the marketplace with talent.

“One banker [I spoke to] said he doesn’t think he is overstaffed, he just doesn’t think he has people in the right places,” Gallagher says. “Companies that are forward-thinking will go hard on people while they’re available, even if they don’t need them. You’ll figure out how to use them to the best of their ability later. Get the talent right now.”