The High Cost of Good Talent and the Value of Retention

How would your bank fare if your top-performing lenders left tomorrow?

A bank succeeds because of its employees who grow the bank and keep it safe. The departure of these employees can impose massive costs to a bank in lost relationships and the effort to find new personnel. Has management at your bank adequately assessed the financial cost and risk of losing its key employees? What would be the financial impact to the bottom line and shareholder value if a key employee is not retained?

The direct cost of replacing a high-performing employee is up to 213% of the annual salary associated with the position, according to research by the Society for Human Resource Management. Total costs can rise to as much as 400% when considering indirect expenses. Direct costs include screening, interviewing, acquisition cost, onboarding and training, while indirect costs include lost productivity, short-staffing, coverage cost and reduced morale.

The following are hypothetical examples that help illustrate both the costs and risks associated with replacing a key employee at a bank:

Example 1: A lender in their early 40s who maintains a $40 million loan portfolio with a 4% margin joins a competitor bank. The estimated earnings on the lender’s portfolio were $1.6 million. If 30% of the portfolio moves to the competing bank, that would create an annual impact of $480,000. The bank stands to lose $1.4 million in three years. Assuming this lender generates $10 million in new loans annually, that adds another $400,000 in additional lost income. Losing this one lender results in lost annual revenue of almost $900,000.

Now imagine the bank has seven lenders with similar portfolios and margins. If the entire team left, the lost revenue potential could be over $6 million annually.

Example 2: A bank loses its compliance officer. In addition to the direct financial costs of replacing the officer, this could cause both short- and long-term regulatory and financial risks and challenges. If the officer had a salary of $90,000, the cost to replace them is between $191,700 and $360,000, using the 213% and 400% of base salary replacement cost assumptions. There could also be additional costs associated with potential outsourcing the compliance services until the bank can hire a new compliance officer.

Fortunately, in both of these examples, management preemptively responded by strategically designing compensation programs to retain the officers. Quantifying the lost revenue and costs to replace the employees demonstrated the substantial risks to the bank, and convinced executives of the  inadequacies of the compensation plan in place.

It is critical that banks design and implement competitive compensation plans that provide meaningful benefits. Some compensation committees believe a salary and an annual performance bonus are adequate to retain key employees. But based on our experience, banks with higher retention rates offer two to four types of compensation plans, in addition to salary and bonus. Examples include employee stock ownership plans, stock options, restrictive stock, phantom stock, profit sharing, salary continuation plans and deferred compensation plans. These plans provide for payments either at retirement or while employed, or a combination of pre- and post-retirement payments. Banks can strategically design and customize these plans in ways that incentivize strong performance but fit the demographics and needs of the key personnel. There is no one-size-fits-all plan.

Additionally, nonqualified executive benefit programs such as supplemental executive retirement plans (SERPs) and deferred compensation plans (DCPs) can help your key employees accumulate supplemental funds for retirement. Their flexibility allows them to be used alongside other forms of compensation to enhance your bank’s overall executive benefit program by offering additional incentives and incorporating special features intended to retain top performers who may not be focused on retirement. For example, a deferred compensation plan with payments timed to when the officer’s children are college age can be highly valued by an officer fitting that demographic.

The significant potential financial impact when your bank loses key employees quantifies and underlines the value and importance of retention, so it is paramount that executives meaningfully and competitively compensate these employees. Banks without a strong corporate culture and a competitive compensation plan in place are at a higher risk of losing key employees and may have an emerging potential retention problem.

Using Succession Planning to Unlock Compensation Challenges

compensation-9-16-19.pngSuccession planning could be the key solution boards can use to address their biggest compensation challenges.

Succession planning is one of the most critical tasks for a bank’s board of directors, right up there with attracting talented executives and compensating them. But many boards miss the opportunity of allowing succession planning to drive talent retention and compensation. Banks can address two major challenges with one well-crafted plan.

Ideally, succession planning is an ongoing discussion between executive management and board members. Proper planning encourages banks to assess their current talent base for various positions and identify opportunities or shortfalls.

It’s not a static one-and-done project either. Directors should be aware of the problems that succession planning attempts to solve: preparing future leaders, filling any talent voids, attracting and retaining key talent, strategically disbursing training funds and ultimately, improving shareholder value.

About a third of respondents in the Bank Director’s 2019 Compensation Survey reported that “succession planning for the CEO and/or executives” was one of the biggest challenges facing their banks. More popular challenges included “tying compensation to performance,” “managing compensation and benefit costs,” and “recruiting commercial lenders.”

But in our experience, these priorities are out of order. Developing a strategic succession planning process can actually drive solutions to the other three compensation challenges.

There are several approaches boards can use to formulate a successful succession plan. But they should start by assessing the critical roles in the bank, the projected departure dates of those individuals, and information and guidance about the skills needed for each position.

Boards should be mindful that the current leaders’ skill sets may be less relevant or evolve in the future. Susan Rogers, organizational change expert and president of People Pinnacle, said succession planning should consider what skills the role may require in the future, based on a company’s strategic direction and trends in the industry and market.

The skills and experiences that got you where you are today likely won’t get you where you need to go in the future. We need to prepare future leaders for what’s ahead rather than what’s behind,” she said.

Once a board has identified potential successors, it can now design compensation plans that align their roles and training plans with incentives to remain with the organization. Nonqualified benefit plans, such as deferred compensation programs, can be effective tools for attracting and retaining key bank performers.

According to the American Bankers Association 2018 Compensation and Benefits Survey, 64% of respondents offered a nonqualified deferred compensation plan for top management. Their design flexibility means they can focus on both longer-term deferrals to provide retirement income or shorter-term deferrals for interim financial needs.

Plans with provisions that link benefits to the long-term success of the bank can help increase performance and shareholder value. Bank contributions can be at the board’s discretion or follow defined performance goals, and can either be a specific dollar amount or a percentage of an executive’s salary. Succession and training goals can also be incorporated into the plan’s award parameters.

Such plans can be very attractive to key employees, particularly the young and high performing. For example, assume that the bank contributes 8% of a $125,000 salary for a 37-year-old employee annually until age 65. At age 65, the participant could have an account balance equal to $1,470,000 (assuming a crediting rate equal to the bank’s return on assets (8%), with an annual payment of $130,000 per year for 15 years).

This same participant could also use a portion of the benefit to pay for college expenses for two children, paid for with in-service distributions from the nonqualified plan. Assume there are two children, ages three and seven, and the employee wants $25,000 a year to be distributed for each child for four years. These annual $25,000 distributions would be paid out when the employee was between ages 49 and 56. The remaining portion would be available for retirement and provide an annual benefit of $83,000 for 15 years, beginning at age 65.

Boards could use a plan like this in lieu of stock plans that have similar time horizons. This type of arrangement can be more enticing to younger leaders looking at shorter, more mid-term financial needs than a long-term incentive plan.

And many banks already have defined benefit-type supplemental retirement plans to recruit, retain, and reward key executives. These plans are very popular with executives who are 45 and older, because they provide specific monthly distributions at retirement age.

It is important that boards craft meaningful compensation plans that reward older and younger executives, especially when they are vital to the bank’s overall succession planning efforts and future success.

The Evolution of Strategic Business Objectives in Annual Incentive Plans


incentive-8-19-19.pngBoards are increasingly looking for ways to appropriately align pay and performance for bankers in the face of the disruptive changes in the industry.

Post-financial crisis, many bank boards shifted to a scorecard approach as a way to improve their compensation governance and accountability. However, industry disruption has sparked an evolution of the scorecard itself.

Before the financial crisis, determining annual bonus payouts at banks was a singular, annual event. The compensation committee and the CEO compared the bank’s current financial results to the prior year, assessed the operating environment, considered last year’s bonus pool and adjusted bonus accruals accordingly. Higher performers got a little more than prior year; poor performers looked for new jobs.

Following the financial crisis, a search for improved compensation governance and accountability ushered in a movement to construct incentive plans with payouts specifically tied to financial outcomes. This resulted in the popular financial scorecard approach used by many banks today.

Most scorecards include “hardwired” financial goals (usually earnings per share, net income and return on equity), banking-specific metrics (deposits, credit quality metrics and expense management) and a component that reflects “individual” or “discretionary” evaluations of performance.

Scorecards have served the industry well and addressed concerns that the lack of transparency into banking incentive plans resulted in shareholders being unclear of exactly what performance they were rewarding. The industry is now in the midst of a new phase of disruption that has banks reexamining their business models and entering a period of significant transformation.

In response, boards are increasingly enhancing the qualitative component of their scorecards to add balance and encompass the progress executives have made against clearly articulated strategic business objectives (SBOs). These strategic components balance the “backward-looking” nature of financial metrics with a “forward-looking” assessment that focuses on improving future financial performance.

Trends in Strategic Business Objectives
An SBO is a goal or metric that generally supports a key business priority and can be measured and objectively evaluated. For many boards, delivering against SBOs is critical to ensuring sustainability of their franchise. While growing earnings per share is a proven measure of current business success, achieving other critical outcomes is essential to creating long-term value for shareholders.

Detailed SBOs are specific to each bank and reflect where the bank is in its life cycle or period of transformation. Recently, we have observed banks incorporating the following eight categories into their SBOs for bank bonus plans:

  1. Executing the Digital Strategy: Depending on the bank’s current digital state, this category evaluates the success of critical milestones, such as percentage of paperless customers, “app” rollout and usage rates and expansion of service offerings through the digital interface.
  2. Technology Enhancements: This can include initiatives such as cybersecurity upgrades, automated fraud detection and general infrastructure enhancements like enterprise resource planning rollout.
  3. Corporate Development: This objective centers on the bank’s execution of its M&A strategy. It reflects the board’s evaluation of acquisitions, divestitures and integrations throughout the year. Banks often set goals based on quality, rather than quantity, to avoid incentivizing “bad deals.”
  4. Branch Strategy: This rewards the expansion, contraction or footprint-specific goals tied to the bank’s strategy for brick-and-mortar branch presence.
  5. Fee-Income Initiatives: Boards want to compensate for successful growing non-interest income from existing products, new products and complimentary service offerings.
  6. Customer Metrics: This can be measured through various means, such as net promoter score, internal customer satisfaction ratings, call center resolution rates and client retention statistics.
  7. Compliance: This generally focuses on the performance against anti-money laundering (AML) objectives and other regulator-specific compliance priorities.
  8. Risk Management: Boards define this SBO by evaluating process-related rollouts, infrastructure enhancements and talent upgrades across the risk function.

Banks are looking to drive their key initiatives during this time of significant transition in the industry. To do so, they are increasingly using SBOs to underpin the strategic drivers of future value creation in their business. Linking these initiatives to annual incentive compensation can communicate the importance of the strategies to the organization, and align compensation to the successful execution of these strategies.

A Compensation To-Do List For Your Board

Is your board effectively addressing the risk embedded in the bank’s compensation plans? McLagan Partner Gayle Appelbaum outlines a to-do list for boards in this video, and shares why new rules around hedging policies should be on your board’s radar. She also explains what banks need to know about these rules, along with considerations for your board’s annual compensation review.

  • Compensation Issues to Watch
  • New Rules on Hedging Practices
  • Other Practices to Address

What CEOs Want (and Directors Aren’t Giving)


compensation-7-12-19.pngChief executive officers at community banks want more equity, not more cash.

This is particularly true of community bank CEOs, who say that including equity in pay packages incentivizes them to create long-term shareholder value, aids management retention and prepares them to join the board.

While this shouldn’t come as a huge surprise, the message may be lost on some directors of these banks.

In Bank Director’s 2019 Compensation Survey—sponsored by Compensation Advisors—54 percent of CEOs said their bank should offer equity or increase the amount of equity they already provide. Directors didn’t feel as strongly about this: Only 19 percent said offering or increasing equity was a priority. They saw equity as one of a number of potential improvements, along with other options like non-equity long-term compensation, cash incentive and higher salary.

The board of directors at Talladega, Alabama-based FirstBanc of Alabama added stock grants to the compensation plan for President and CEO J. Chad Jones in 2017, after discussing how to incentivize and retain executive management. The board granted Jones 3,000 shares—1,000 of which were unrestricted and granted immediately, with the remainder consisting of restricted stock transferred over time.

“It has raised my eyebrows,” he says. “It certainly helped me focus on how to drive the stock and dividends.”

Adding the equity incentive “very minimally” diluted existing shareholders but allows Jones to benefit from the upside he creates. The board also approved a block of shares for other C-level officers, with which Jones can implement a similar equity grant program for them.

Jones added that increasing his salary beyond a certain point offered diminishing returns for him and higher expenses for First Bank of Alabama, which has $548.6 million in assets.

“You can give me 5 percent to 10 percent pay increases each year for the next 25 to 30 years. At that point in time, what good has it done?” he says. “I love the compensation side, don’t get me wrong, everyone does. But … if [the board] continues to increase my pay 5 percent and I’m the highest paid individual in this company, it doesn’t make sense for [them] to continue increasing my pay.”

Interest in and demand for equity-based compensation is expected to rise as competition for qualified executives remains stiff and a new generation of talent assumes the top spot, says J. Scott Petty, a partner at executive search firm Chartwell Partners. He says community bank boards should use it as a retention tool.

“In general, more and more CEOs want equity as a part of their compensation package,” he says. “It’s the ultimate alignment of the goals of the board and how the CEO is going to achieve those goals.”

Succession planning at First National Bank of Kentucky changed President and CEO Gregory Goff’s perspective on equity incentive compensation. He plans to retire soon from the Carrollton, Kentucky-based bank, which has $124.5 million in assets, and says he wishes he had opportunities to accumulate equity throughout his career.

“It’s one area of the bank where I didn’t push much—I did my job and went home,” he says. “I ran it like I owned all of it. But now I have no reason to stay here.”

He says the board of directors looked at different incentive compensation structures several times, but could never get comfortable with the dilution from awarding equity or alternatives like bank-owned life insurance. He says the board discussed adding him as a director after he retires, but his lack of equity makes him less interested in a seat.

When Jeffrey Rose interviewed with the board at Davenport, Iowa-based American Bank & Trust in 2016, he told them he wanted to make a bet on himself. Rose says he had been paid a salary and a bonus for turning around banks before, and it “wasn’t enough.” As president and CEO of American Bank & Trust, he hoped to capture some of the upside he created as he helped turn the bank around.

At the $366.2 million asset bank, Rose has the option to purchase a set number of shares each year at a predetermined price. The program is “very simple, very clean,” and the shares fully vest after he purchases them.

American Bank & Trust is taking the equity compensation philosophy one step further, having recently decided to compensate the board with stock instead of cash, too. Rose says the decision generated extensive discussion, but will help long-time directors become more invested in the bank and serve as a positive signal to local shareholders.

It’s tempting for a board to shy away from granting equity to executives—especially if the bank is closely held—but the benefits from doing so can outweigh the costs.

2019 Survey Results: CEO and Board Pay Trends

Today, more banks are tying their chief executive officers’ pay to performance indicators, as indicated by 80 percent of the directors and executives responding to Bank Director’s 2019 Compensation Survey, sponsored by Compensation Advisors. That’s up from 75 percent when Bank Director last posed the question, in 2015.

Most, at 59 percent, tie CEO compensation to their strategic plan or corporate goals.

But the metrics banks prefer vary according to their structure. Public banks are more apt to tie pay to performance—just 8 percent indicate they don’t do so—and tend to favor goals established in the strategic plan (72 percent), as well as metrics such as return on assets (58 percent), return on equity (53 percent) and efficiency (40 percent).

Among private banks, net income is the preferred metric, at 55 percent. Twenty-seven percent of respondents in this group say CEO compensation is not tied to performance.

The survey was conducted in April 2019, and includes the perspectives of more than 300 bank directors and executives—including chief executives and human resources officers—as well as data obtained from the proxy statements of more than 100 publicly traded banks.

It includes details about current CEO and director compensation packages—in the aggregate, and by asset size and ownership structure. The survey also focuses on succession planning and board refreshment.

Respondents indicate that their CEOs all received a salary in fiscal year 2018, at a median of $325,000; the median total compensation was $515,728. Paying a cash incentive (78 percent), and offering benefits and perks (75 percent) are also common forms of compensation throughout the industry. Less common are nonqualified deferred compensation or retirement benefits (49 percent) and equity grants (47 percent). However, payment of equity differs broadly based on the ownership of the bank: Almost three-quarters of respondents from public banks say their CEO received an equity grant last year.

Additional Findings

  • When asked how compensation for the CEO could be improved, 36 percent point to offering non-equity, long-term incentive compensation. Twenty-three percent believe the bank should offer equity at greater levels, and 21 percent say they should offer some form of ownership in the bank. Twenty-two percent believe the bank should pay a higher salary to the CEO.
  • The median age of a bank CEO is 58. Seventy percent are baby boomers, between the ages of 55 and 73.
  • Seventy-two percent believe the current CEO will remain at their bank for at least the next two years.
  • Twenty-one percent believe it’s time for their CEO to announce his or her retirement.
  • Thirty-one percent say their bank has designated a successor for the CEO. One-quarter have identified potential successors.
  • Nearly one-third indicate their board conducts an annual evaluation.
  • Forty-one percent have a mandatory retirement policy in place for directors. The median retirement age is 75—an increase from 72, as reported three years ago.
  • Forty-seven percent indicate their board is working to recruit younger directors. The median age of the youngest director serving on responding boards is 48.
  • Seventy-two percent say their directors receive a board meeting fee, at a median of $900 per meeting. Sixty-nine percent pay an annual cash retainer, at a median of $20,000.
  • Forty-three percent say that tying compensation to performance is a top compensation challenge facing their institution, followed by managing compensation and benefit costs (37 percent) and recruiting commercial lenders (36 percent).

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

What Your Compensation Committee Calendar Should Look Like


compensation-3-12-19.pngA goal-oriented calendar can be the difference between a productive year and a nonproductive one for compensation committees.

Planning for the year goes beyond scheduling meetings. Compensation committee chairs should have a thoughtful plan that encompasses the goals of the committee for the year. A detailed and in-depth calendar can help both new chairs and experienced chairs craft a plan for the year that considers the short- and long-term needs of the bank.

This article provides planning tips and a cheat sheet for the core topics that should be on the committee’s annual schedule. Though the cheat sheet is specific to public banks, private banks can use the list as well.

What’s on The Agenda
The old saying goes “what gets written down, gets done.” Having a written document sets a roadmap for the year and provides your committee a timeline to stay on track. You don’t need to reinvent the wheel.

Start with the committee charter, which provides a job description for the committee’s responsibilities. Review the past year’s calendar, agendas and meeting minutes for a head start in creating your annual agenda and stick to it throughout the year.

Identifying key topics at the beginning of the year allows for communication across all stakeholders: members of the committee, your management team, and outside legal and compensation advisors.

Topics should cover both short-term and long-term items. For example, if you are looking to request more shares for your equity plan, this process should start well in advance, and may include updating your equity plan document, modeling ISS and Glass Lewis share guidelines, and redesigning your grant methodology.

Getting your outside advisors involved early can help you avoid last-minute surprises.

Frequency of Meetings
Typically, public banks hold four to six meetings in a year. This allows the committee sufficient time to cover key topics and to review the goals of the committee. In any given year, the agenda may require additional meetings for special events including merger and acquisition activity, creation of new incentive plans and other events.

committee-numbers.png

What (And When) Should Be on The Calendar
Below are key topics that should be on the regular calendar for public banks as well as additional items for consideration any time during the year. The sample covers a typical schedule, however, there is flexibility depending on the subject.

In any given year, items should be evaluated both in terms of the current short-term and the longer term needs of the bank 24 months or more from now.

compensation-calendar.png

Enticing Compensation Strategies In An Active M&A Market


compensation-1-8-18.pngA recent Deloitte study indicates community bank merger and acquisition activity has been on the rise in 2018, though not necessarily at levels predicted by most experts.

A key benefit of a merger or acquisition is the resulting increase in talent for the surviving bank. Conversely, one of the greatest risks to consolidation is the loss of key employees; particularly talented loan officers. To mitigate this risk, many community banks ensure that director and employee benefit offerings are at or above the market.

The plans offered by the acquiring bank should not be perceived as non-competitive by the acquired talent they wish to retain.

Executive and director benefit plans are also part of the cost of consolidation. The latest report by community bank advisory group Vining Sparks highlighted several “hidden” costs of a merger or acquisition, including executive salary continuation plans (SCPs), director retirement agreements, stock options and employment contracts.

Acquiring banks need to understand the change-in-control stipulations outlined in such benefit plan agreements. These may include stay bonuses designed to retain critical staff through the closing of the consolidation, severance pay arrangements and accelerated accrual and payout requirements for certain nonqualified plans.

While retaining local talent after an acquisition is crucial to the acquiring bank, it should also be a consideration for banks who do not want to be acquired. The 2016 Bank Director M&A Survey found that 85 percent of banks sold because of shareholder liquidity, CEO/management succession, or board succession issues. One year later, Bank Director asked banks why they think they might sell in the future, 67 percent noted the same succession issues. Although many banks recognize succession issues as a driver, nearly 20 percent more of the banks who actually sold noted this as the main motivator.

Though it may be a challenge to find young local talent to establish an effective succession plan, banks can attract and retain the future leaders of their institution. Traditional bank deferred compensation plans, such as SERPs or SCPs usually interest the older generation. More creative plans, such as short-term deferrals and synthetic equity, can attract the younger generations.

When properly designed, short-term deferral plans can interest a young potential executive while simultaneously providing the bank with a hook to retain their services. Typically, a bank would identify a handful of potential candidates for the succession group and offer them a bonus that is deferred for a few years, and then pay out in cash. The bank continues to do so in subsequent years, building an account balance of 3-4 years of bonuses. If the employee leaves, they forfeit the bonuses. This strategy provides the employee with more immediate cash incentive, rather than waiting until retirement like traditional plans. It also gives the bank a few years to vet candidates of the successor pool. 

Synthetic Equity, such as Phantom Stock and Stock Appreciation Rights plans, is another approach banks utilize to align the interests of the executive with the success of the bank. Often, younger executives are not shareholders, but these plans are designed to make them feel and act like it. Simply stated, fake shares are awarded to each executive in the plan. These fake shares perform exactly like actual bank stock, giving the executive a stake in the success of the bank, while not diluting any actual ownership or voting rights of current shareholders.

Looking beyond 2018, short-term deferral and synthetic equity plans will certainly be among the more prevalent compensation plan designs in community banks, as the market continues to trend toward performance-based programs that more readily accommodate regulatory guidance. Plans are likely to include claw-back provisions and more deferrals of incentive pay that allow banks to take back all or a portion of incentive earned by an executive if the bank suffered losses, or was subjected to undue risk, as a result of the executive’s actions.

Bank owned life insurance (BOLI) continues to serve as the primary strategy used by community banks for recovering the costs of executive and director compensation plans. Rising employee benefits costs and competitive market pressures continue to challenge banks to explore unique and innovative ways to maintain profitability and growth while not abandoning their fundamentals.

BOLI helps a bank achieve this in two ways: tax-deferred growth of cash value (recorded as annual non-interest income) and non-taxable insurance proceeds paid to the bank at the time of death of the insured officer or director. These features of BOLI create an earning asset for the bank in addition to providing an effective means of informally funding executive or director compensation plans.

How Bananas and Tech Firms Can Help Tackle the Talent Challenge


management-11-8-18.pngAll bank executives and directors say that recruiting, retaining and properly incentivizing top talent is a priority, but it’s the banks that truly excel at this that are able to separate themselves on the competitive playing field.

How to tackle the talent challenge was the theme of Bank Director’s 2018 Bank Compensation and Talent Conference, hosted this week at the Four Seasons Resort and Club at Las Colinas in Dallas, Texas.

The first day of the conference laid the groundwork by introducing the conventional techniques used today by human resources professionals throughout the bank industry.

On Monday morning, before the formal beginning of the conference, attendees participated in a half-day workshop, presided over by a panel of experts from Compensation Advisory Partners and Kilpatrick Townsend & Stockton LLP. The topics covered a broad range of issues, from common executive compensation challenges, to strategies for promoting diversity and inclusion, to tools that can be used to properly align pay and performance.

The second day of the conference built on this, in part through a pair of audience surveys.

In one survey, nearly a third (31 percent) of attendees said managing rising compensation and benefit costs is their top compensation challenge for 2019, more than half (56 percent) said they’ve raised wages to better compete for talent and in response to last year’s tax cut, and nearly three-quarters (70 percent) said they’ve expanded their internal training programs to develop young leaders.

These statistics were borne out with anecdotes. Beth Bauman, the head of human resources at Bank of Butterfield, an $11 billion bank based in Bermuda, talked about implementing a talent management program to help guide and groom the bank’s younger employees. And human resources officers from Cadence Bancorporation and Union Bankshares discussed the challenges of merging compensation cultures after an acquisition.

The final day of the conference delved into less conventional approaches to talent management.

The day started with an anecdote from Bank Director’s CEO, Al Dominick, about an Asian grocery store chain that figured out a new way to sell bananas. Instead of selling them in traditional, equally ripe bunches, the chain sold bananas in packages of five, with each banana at a different stage of ripeness. As a result, the bananas ripen in stages over a period of a week, not all at the same time.

The anecdote illustrates how approaching an issue in a creative way can result in an unconventional yet effective solution.

The first presenter on stage on Wednesday, Jason Mars, came not from a bank, but rather from a fintech company. Mars is the founder and CEO of Clinc, a company focused on bridging the gap between research on conversational artificial intelligence and its application for enterprises.

My No. 1 criterion for hiring is intellectual curiosity, because that’s what drives people to do really hard stuff,” said Mars. This is more important to Mars than other, more orthodox measures, like a prospective employee’s college grade point average or even their performance in the interview process.

“Passion is another priority, and flexibility,” said Mars. “It’s about figuring out whether they will be motivated to do hard stuff because they’re passionate, curious and interested.”

And finishing out the conference was a panel of three bank CEOs from across the country, all of whom shared their respective talent and compensation strategies.

One of the more innovative philosophies came from John Holt, CEO NexBank, a rapidly growing bank based in Dallas.
A group of investors acquired control of the bank in 2004, when it had only $55 million in assets. Seven years later, a new management team was brought in to hasten its growth. One way it did so was to promise its employees a bonus equal to 100 percent of their base pay when the bank passed the $8-billion threshold, which it recently eclipsed. The strategy should serve as a retention policy as well, explained Holt, because the bonus pays out over 24 months.

NexBank also buys lunch for its employees every day, offering them a menu of multiple restaurants to order from. It pays 100 percent of their health insurance premiums. And it has added a millennial to its board of directors—the bank’s 37-year-old chief operating officer, now the CEO heir apparent.

The net result, said Holt, was the bank has fewer, better people than many of its competitors, and it faces little employee turnover, sidestepping a perennial problem in any industry.

The point is while there is no magic bullet that will solve all of a bank’s talent and compensation challenges, understanding the tried-and-true approaches to doing so, as well as the less conventional strategies used in the market today, will help banks better compete for the next generation of employees.

Solving the Puzzle of Compensation Plans and Diversity


compensation-11-6-18.pngThere are some tasks that seem innocuous and administrative, but are nevertheless incredibly important. Assembling the puzzle pieces of effective executive and employee compensation plans is one such task.

This is why hundreds of bank executives and directors have assembled at Bank Director’s 2018 Bank Compensation and Talent Conference in Dallas, Texas, this week.

A number of themes began to emerge on the first day of the annual event, hosted at the Four Seasons Resort and Club at Las Colinas, the first of which is that many banks and their boards are still fully figuring out exactly how to structure executive and employee pay.

The starting point, according to a panel of experts from Compensation Advisory Partners and Kilpatrick Townsend & Stockton LLP during a morning workshop, is the interagency guidance issued in 2009 by the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

There are three overarching principles:

  • Provide employees incentives that appropriately balance risk and reward.
  • Be compatible with effective controls and risk-management.
  • Be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

These may seem simple in theory, but the challenges for banks are real and complicated, which explains why compensation plans at so many banks are still a work in process.

On one hand, banks face one of the most competitive labor markets in decades, with the lowest unemployment rate in half a century. To attract talented workers, banks have to pay accordingly, which is why so many bankers raised their hands during a Monday morning workshop when asked if their banks boosted their minimum wages after tax reform passed Congress late last year.

On the other hand, as Steve Hovde, chairman and CEO of Hovde Group LLC, pointed out in his analysis of the industry, banks are facing well-seasoned business and credit cycles. This creates a quandary about how aggressive a bank should be in incenting rapid growth, as loans made at the top of an up cycle tend to be the first to go sour at the bottom of the next down cycle.

Moreover, while this may seem counterintuitive, there was wide agreement among attendees at the workshop that regulators aren’t currently focused on the design of compensation plans. The sole exception, according to at least one attendee, concerns how mortgage originators are being compensated, likely a reaction to the issues that surfaced two years ago at Wells Fargo & Co.

Another theme to emerge during the workshop involved diversity and inclusion initiatives, which all banks seem focused on addressing.

It’s important to distinguish between those two initiatives, observed one of the workshop’s panelists.

“Diversity is about inviting people to the party,” she noted. “Inclusion is about giving everyone an opportunity to dance.”

The challenge in banking, as in other industries, is tackling unconscious bias—social stereotypes people form outside their own conscious awareness.

No rational banker today would admit being biased against hiring or promoting women or minorities. Yet the demographic statistics in the industry speak clearly to a lack of diversity, especially at the upper levels of management.

One way to address this is simply through awareness. This was a point that Kate Quinn, the chief administrative officer of U.S. Bancorp, echoed two months ago at Bank Director’s Bank Board Training Forum in Chicago.

“Everyone has prejudices,” said Quinn at the time. “To address them, you first have to be aware they are there.”
And this isn’t just about hiring a diverse workforce; all employees must also be given an equal opportunity to excel. This is the distinction between diversity and inclusion in the corporate world.

An interesting point brought up during the workshop was that entry-level jobs throughout the financial industry tend to be fairly representative of the broader population. But as you look up the organizational chart, that diversity dissipates.

The lack of diversity at the top sends a strong signal, noted one attendee. Her point was, if, as a woman or minority, there isn’t someone like you on the board or who serves as an executive, then you are left with the impression you don’t have the same opportunity to advance.

Ultimately, though, if you listen to bankers, it’s clear that diversity and inclusion have become priorities at many institutions.
After all, to compete for talent, it’s not only how much you pay, it’s also the culture of your institution that will serve as a magnet for the next generation of employees.