Many bank boards of directors and CEOs are proud of their bank’s executive team. And rightly so! Yet frequently those feelings of pride dissolve into uncertainty when the bank is faced with the decision to promote a banker into a top executive position or even the CEO role.
How does this happen? Why do well laid out succession plans sometimes evaporate in the face of reality when the time to elevate someone finally arrives? One reason, based on our experience working with hundreds of community bank boards and executive teams, is that directors are often missing context when faced with a promotion decision. The lack of relative perspective on comparative candidates for similar roles may at times impede the comfort level necessary for a board to validate a major promotion decision.
Succession plans are frequently aspirational in nature for community banks: long on good intentions towards the executive and bank, yet short on taking advantage of the time available to fully develop and groom worthy successors for key roles. In order for a bank board to feel comfortable supporting a CEO’s recommendation for a C-Level executive promotion, or for the board to align around a promotional decision into the CEO role, a robust assessment, development and monitoring program needs to have taken place along the way.
True clarity around the bank’s strategic plan and growth objectives is also critical. Alignment among the key decision makers—usually the board of directors or trustees, along with the CEO—provides a consistent viewpoint on what the bank needs in its next leader. Strategy informs profile on many levels, including both tangible skills and leadership competencies, and collectively these must also mesh with the company and boardroom culture to enable a successful leadership transition.
Once a bank’s strategic direction is updated and affirmed, an appropriate next step is often to conduct a management assessment of the existing leadership team. At a minimum, this exercise should provide a developmental action plan to help elevate performance of the senior team—even when that performance is already solid.
Evaluating the leadership team provides multiple benefits, including:
An objective evaluation of the strengths, scalability, areas of development and desire for more responsibility—particularly when conducted by an independent party.
Creation of a “road map of development,” which can be taken to boost executive performance and enhance succession viability.
Increased likelihood of retention of high potential bankers due to the feeling of being “valued” and “invested-in” by the organization.
Higher morale, as employees see the investment in future leaders as a sign of a commitment to growth and continued independence.
A lower risk of a sale or merger driven by a talent deficit, as good succession planning enhances the continuity of leadership and strategy.
A robust management assessment program should have several critical components:
Input from the CEO and board that aligns strategy and the desired/needed profiles of future leaders for key roles. These profiles are often different than an incumbent’s profile.
Extensive in-person interview time with a qualified industry talent expert. This should involve both behavioral and chronological interviewing techniques.
Use of a third-party assessment tool to help understand an executive’s full range of behaviors and leadership attributes, and the ability to benchmark against desired profiles.
A peer evaluation survey to garner candid input from close colleagues. Such a 360° process can provide valuable insights to help guide developments plans.
There is no more important responsibility of an incumbent CEO and community bank board than to develop the strongest possible leadership team and potential CEO successors. An informed board with a strong range of perspectives on the bank’s executive talent is best positioned to make promotional decisions on future bank leaders and the next CEO. A robust management assessment program provides the right foundation for good governance and successful succession planning.
As year-end numbers are released and the board wraps up items concerning the prior year, the task of conducting the CEO’s performance review moves higher on directors’ to-do lists. The review often is placed on an already jam-packed agenda, resulting in a process that leaves both directors and the CEO feeling the review was more a formality than an opportunity to provide meaningful feedback.
We have found that directors have greater success in capturing the feedback they really want to convey to the CEO if they define performance from a broader perspective and develop a more open-ended review process that involves dialogue around performance, rather than rating scales.
What Does CEO Performance Encompass? Defining performance with the question, “Did we make our numbers?” does not ensure ongoing sustainability. CEOs play a very diverse role within a financial institution, ranging from setting the strategic vision of the business to meeting financial targets to navigating new channels to improve the customer experience.
To capture the multiple competencies required of a chief executive, we recommend that performance be assessed on the basis of seven distinct dimensions:
Strategy and Vision – How well does the CEO convey the bank’s vision and develop a clear guide for current and future courses of action?
Leadership – How well does the CEO motivate and energize employees to implement the business strategy and achieve the bank’s vision?
Innovation/Technology – Does the CEO have a vision for the development of new/better products and services? Is there an IT strategy in place to improve the customer experience and assist in operational and risk management?
Operating Metrics – Is the bank meeting its current financial objectives? Has progress been made in achieving mid- and long-term financial performance objectives?
Risk Management – Is the bank adequately managing its risk and receiving satisfactory regulatory reviews?
People Management – To what extent does the CEO take steps to improve and expand the capabilities of senior managers? Does the CEO’s management style convey a high level of ethics and respect for employees?
External Relationships – How well does the CEO interact with shareholders, the board, customers, regulators, media and other stakeholders?
Establishing the Process The key factors in a successful evaluation process are first, to ensure that the entire board has the opportunity to provide input and second, to have a designated committee that drives the process. Boards can tailor the steps in the process described below to their own bank’s culture and needs:
The CEO conducts a self-assessment at the end of the fiscal year based on the seven performance dimensions described above, highlighting his/her achievement of the goals and directives established by the board for that year.
The board committee designated to conduct the review discusses the CEO’s self-evaluation and its members’ own observations regarding performance around the seven dimensions. The focus should be on identifying both good performance and key areas for improvement, rather than on trying to cover every aspect of performance in detail. Directives for the upcoming year may also be established at this time.
The committee’s discussion is documented, a process that is often handled by a trusted outside party who collects and organizes the group’s thoughts. Doing so in memo form, rather than using a rating scale, has the advantage of providing more detail on certain aspects of CEO performance, as well as allowing for examples of where performance over the past year was exceptional or fell short.
The rest of the board reviews the committee’s preliminary evaluation and substantive comments are incorporated. The final evaluation is then submitted to the full board and reflected in the minutes.
Designated directors meet with the CEO. It’s good practice to have two directors, such as the chairmen of the board and compensation committee, conduct the review.
The CEO reports back to the board on key messages and preliminary ideas regarding directives. This ensures that the key points were heard and that actions are in place to address the objectives established by the board for the year at hand.
By broadening the definition of performance and having an established and more open-ended process, directors can get to the heart of the feedback they want to communicate to their CEO. The process above assists directors in identifying areas in which the CEO may need to focus, either because they are strengths that need further development or because they inhibit his/her ability to be effective in certain aspects of the role.
How should bank boards properly compensate executives, under the watchful eye of regulators and the media, while still retaining key talent? That’s the question with which directors and chief executive officers continue to struggle. Despite this, there is perhaps a touch of newfound optimism in the banking industry regarding the management and fairness of compensation programs.
Last March, more than 300 directors and senior executives of financial institutions across the U.S. responded to the 2013 Compensation Survey, conducted via email by Bank Director and sponsored by Compensation Advisors by Meyer-Chatfield. Almost half of the respondents were independent directors. Response was almost evenly split from respondents representing privately-held and publicly-traded institutions.
Bank boards continue to struggle with how to effectively tie compensation to performance. Sixty-nine percent of respondents cited this as their top compensation challenge for 2013. Boards continue to struggle with regulatory compliance—41 percent indicated that this is a key concern. Rounding out the top three, retaining key people was selected by 40 percent of respondents as a top challenge.
Talent retention could increasingly prove to be a concern for the industry. Forty-four percent of respondents reported the departure of a key executive within the last three years. Very few reported that these departures are due to promotional moves, for a better pay or position, or even lateral moves to other banks. Of those reporting an executive departure, 23 percent indicated that the officer left the banking industry. With increased scrutiny on the industry coupled with the departures of retiring baby boomer executives, could the banking industry find itself in the midst of a talent drain?
Thirty-five percent of directors expect to see a pay increase in 2014. Just two percent expect pay to decrease. Moreover, the majority, at 62 percent, believe that they are fairly compensated. Respondents also reported that the amount of time spent on bank board activities remains the same, at a median of 15 hours per month.
The mood is a little lighter. Respondents indicating a positive or neutral feeling in the management of executive compensation rose 17 points from last year’s survey, to 92 percent. When it comes to management of director compensation, those indicating a positive or neutral feeling rose 10 points, to 90 percent.
Banks are increasingly tying executive compensation to performance metrics or strategic goals. Still, nearly one-third, or 32 percent of respondents, said they don’t tie executive pay to a strategic plan.
Show me the money. Cash rules as the most valued form of compensation for executives, in the form of salary, and directors, in the form of annual retainer and meeting fees. Benefits for boards, such as retirement or health insurance plans, continue to decline, with 58 percent indicating that they receive no benefits at all as compensation for board service. This represents a drop of 19 percentage points since 2011.