Modernizing Total Rewards Programs to Attract, Retain Talent

Written by

The labor market has shifted dramatically and, in many ways, is more competitive than ever.

Low unemployment and decreasing labor force participation has caused high vacancy rates and increased the time to fill open positions. It’s also pressured employers to increase compensation and enhance their total rewards packages to keep up with changing employee expectations.

These market dynamics mean banks need to review their total rewards package. You may find your bank’s people strategy, and current and future workforce, have evolved beyond the total rewards offerings. You might be investing in benefits and programs that aren’t valuable to employees. Here are three top total rewards trends to consider for your bank.

Compensation
For most companies right now, compensation increases budgets that are already falling short due to rapidly rising inflation. Employers are frustrated that they are stretching budgets and profitability by spending more on wages, without necessarily seeing an increase in their ability to attract and retain. Employees are frustrated that their wage increases aren’t keeping pace with inflation; their personal budgets are stretching, particularly at entry-level positions.

In addition, certain specialized and high demand jobs that can be performed remotely — especially in areas such as technology and cybersecurity — means banks are facing competition from local, national and international companies.

Here are ways to succeed in compensation:

  • Short-term incentive programs: Are there ways to enhance your short-term or annual incentive programs? Currently, nearly 91% of employees receive some sort of variable pay, according to Willis Towers Watson’s 2020 US Annual Incentive Plan Design Survey. Increasing the eligibility to additional groups can make the total compensation package more attractive and competitive, as long as it is clearly communicated and understood. Consider accelerating the payouts to semi-annually or quarterly, so employees receive the value more frequently than once a year.
  • Long-term incentive programs: Traditional long-term incentive plans are simply a compensation arrangement with a delayed timing element. While simple to administer, they can lack flexibility that connects employees to the benefits, which creates true retention.

A nonqualified retention program, or sometimes called a SERP (supplemental employee retirement plan) offers the additional benefits of investment discretion, where employees may self-direct their unvested balances across a 401(k)-type menu of funds. SERPs also offer distribution and taxation discretion that allows employees to control the timing of the distribution of benefits. Employers can give employees the opportunity to re-defer their benefits, keeping them invested in a tax-deferred vehicle after they’ve vested. Additionally, a nonqualified program allows plan sponsors a great deal of flexibility when it comes to vesting schedules. Participants can customize schedules and contribution occurrences to fit the organization’s objectives.

  • Compensation philosophy and communication: Employees will develop their own opinions if you don’t communicate with them directly about pay. In a world where it’s easy for employees to gather salary information online, being clear and transparent about the compensation program, including how you review and determine pay rates and market competitiveness, can give your employees confidence that they will be treated fairly and equitably.

Learning, Growth and Development
The “Great Reshuffle” is leading employees to examine their purpose, work lives and future like never before. Learning and development are a key focus for some employees’ future growth and fulfillment. At the same time, companies are faced with the reality that a significant portions of their workforce may leave or retire in the next five to 10 years. Not surprisingly, according to LinkedIn’s Workplace Learning Report, the primary focus areas of learning and development programs in 2022 are:

  • Leadership and management training.
  • Upskilling and reskilling employees.
  • Digital upskilling and digital transformation.
  • Diversity, equity and inclusion.

With these core skills in mind, learning is becoming central to everyday work, and key to developing future talent. Employees who feel that their skills are not being put to good use in their current job are 10 times more likely to look for a new job than those who feel their skills are being put to good use, according to LinkedIn’s September 2021 survey.

Culture and Connection
Even the best total rewards package can’t make up for a toxic culture. It’s critical to focus on your people and provide opportunities to connect, collaborate and build relationships (whether in person or virtually). This will support your employee’s mental health while building connection with your organization, improving employee retention.

These three total rewards trends all share one thing: It’s important to have leadership and manager support to truly see success. Executives must also communicate early and often with employees in all of these areas, so they understand the true value of your bank’s offerings and have a positive and engaging employee experience. The right components of a total rewards package empowers banks to attract and retain high performing talent to drive performance to the next level.

Unlocking Meaningful Compensation to Keep Essential Talent

Written by

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.

The High Cost of Good Talent and the Value of Retention

Written by

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.

Use Compensation Plans to Tackle a Talent Shortage

Written by


Can you believe it’s been 10 years since the global financial crisis? As you’ll no doubt recall, what was originally a localized mortgage crisis spiraled into a full-blown liquidity crisis and economic recession. As a result, Congress passed unprecedented regulatory reform, largely in the form of the Dodd-Frank Act, the impact of which is still being felt today.

Significant executive compensation and corporate governance regulatory requirements now require the full attention of senior management and directors. At the same time, shareholders continue to apply pressure on management to deliver strong financial performance. These challenges often seem overwhelming, while the industry also faces a shortage of the talent needed to deliver higher performance. As members of the Baby Boomer generation retire over the coming years, banks are challenged to fill key positions.

Today, many banks are just trading people, particularly among lenders with sizable portfolios. Many would argue the war for talent is more intense than ever. According to Bank Director’s 2017 Compensation Survey, retaining key talent is a top concern.

surey-chart.png

To address this challenge, many banks have expanded their compensation program to include nonqualified benefit plans as well as link a significant portion of total compensation to the achievement of the bank’s strategic goals. Boards are focusing more on strategy, and providing incentives to satisfy both the bank’s year-to-year budget and its long-term strategic plan.

For example, if the strategic plan indicates an expectation that the bank will significantly increase its market share over a three-year period, compared to competition, then executive compensation should be based in part upon achieving that goal.

Achieving Strategic Goals
There are other compensation programs available to help a bank retain talented employees.

According to Federal Deposit Insurance Corp. call report data and internal company research, nonqualified plans, such as supplemental executive retirement plans (SERPs) and deferred compensation plans, are widely used and are particularly important in community banks, where equity or equity-related plans such as stock options, restricted stock, phantom stock and stock appreciation plans are typically not used. These plans can enhance retirement benefits, and can be powerful tools to attract and retain key employees. “Forfeiture” provisions (also called “golden handcuffs”) encourage employees to stay with their present bank instead of leaving to work for a competitor.

SERPs
SERPs can restore benefits lost under qualified plans because of Internal Revenue Code limits. Regulatory rules restrict the amount that can be contributed to tax-deferred plans, like a 401(k). A common rule of thumb is that retirees will need 70 to 80 percent of their final pre-retirement income to maintain their standard of living during retirement. Highly compensated employees may only be able to replace 30 to 50 percent of their salary with qualified plans, creating a retirement income gap.

retirement-income-gap.png

To offset this gap, banks often pay annual benefits for 10 to 20 years after the individual retires, with 15 years being the most common. SERPs can have lengthy vesting schedules, particularly where the bank wishes to reinforce retention of executive talent.

Deferred Compensation Plans
We have also seen an increasing number of banks implement performance-based deferred compensation plans in lieu of stock plans. Defined as either a specific dollar amount or percentage of salary, bank contributions may be based on the achievement of measurable results such as loan growth, increased profitability and reduced problem assets. Typically, the annual contributions vest over 3 to 5 years, but could be longer.

While deferred compensation plans have historically been linked to retirement benefits, we see younger officers are often finding more value in cash distributions that occur before retirement age.

To attract and retain millennials in particular, more employers are expanding their benefit programs by offering a resource to help employees pay off their student loans. According to a survey commissioned by the communications firm Padilla, more than 63 percent of millennials have $10,000 or more in student debt. Deferred compensation plans can also be extended to millennials to help pay for a child’s college tuition or purchase a home. Because these shorter-term deferred compensation plans do not pay out if the officer leaves the bank, it provides a strong incentive for the officer to stay longer term.

Banks must compete with all types of organizations for talent, and future success depends on their ability to attract and retain key executives. The use of nonqualified plans, when properly chosen and correctly designed, can make a major impact on enhancing long-term shareholder value.

Insurance services provided by Equias Alliance, LLC, a subsidiary of NFP Corp. (NFP). Services offered through Kestra Investment Services, LLC (Kestra IS), member of FINRA/SIPC. Kestra IS is not affiliated with Equias Alliance, LLC or NFP.

Addressing Problems with SERPs in Benefit Plan Designs

Written by


SERPs-8-5-16.pngSupplemental Executive Retirement Plans (SERPs) are a valuable compensation tool that banks can use to attract and retain executive talent. SERPs are nonqualified deferred compensation arrangements that are non-elective, meaning the company is responsible for contributions to the plan. Unfortunately, improper design of these plans can result in significant expenses for banks without providing the intended retention value. As a result, SERPs have gained a lot of negative press (particularly during the economic downturn), but if used properly, they can be a powerful tool in compensation. Here’s what you need to know about executive retirement benefits and how banks can avoid the common issues that arise with SERPs.

SERPs have some lingering reputational issues, although this isn’t entirely fair. Many banks do their due diligence and pay close attention to the expenses they will incur as a result of their benefit plans, but this hasn’t always been the case. When SERPs rose in popularity, many banks entered into inappropriately designed plans without understanding their implications. A poorly designed SERP can accelerate vesting schedules in the event of early retirement or cause banks to pay benefits in excess of 100 percent of final salary. Problems also arise due to IRC Section 280G (which deals with golden parachutes) in the event of a change of control. Additionally, many of these SERPs were designed solely with the placement of Bank Owned Life Insurance (BOLI) in mind, ignoring the strategic purpose and future impact. Fast forwarding to 2016, we see a number of problems related to SERP plans. The primary concerns are the following:

  • Banks absorbing mortality risks for lifetime benefit plans.
  • Defined benefit structures whereby a SERP benefit is contingent upon a final pay calculation.
  • Not considering 280G excise tax concerns in the case of M&A activity.
  • Unreasonable benefit structures that are either too lucrative or conservative.
  • Equity-based SERP designs.

Many boards have been soured by a bad experience and vowed to never implement another SERP plan at their bank. From a strategic perspective, this is a mistake that will hinder the bank’s ability to retain and recruit the talent necessary to stay competitive.

The real problem isn’t SERPS—its poor design. A SERP isn’t the answer to all the retention or recruitment issues, but it is a tool that should be used to complement the other components of compensation. SERPS themselves are not the problem; poorly designed SERPs are. Let’s address a few key design considerations:

  • Know what your expense is going to be. The benefit should be fixed day one, plain and simple.
  • Understand the potential 280G impact, regardless of the probability of a change in control.
  • Know that financing tools exist to reduce plan expense and provide a lifetime benefit with a fixed cost through proven methodologies. Explore all financing options—BOLI is not the only tool available for bankers.
  • Understand the strategic purpose behind the benefit plan structure, and conduct peer compensation studies to ensure that the benefit and compensation are reasonable and competitive.
  • Make sure the bank is protected in the event of premature death, but don’t allow life insurance to drive the design of your plan.

If your plan does not incorporate some of these features, it’s time to take a hard look at your plan design. Although IRC 409A (which regulates the tax treatment for nonqualified deferred compensation plans) imposes limitations on plan design changes, there are a number of strategies to help reduce the general plan expense, mortality risk concerns, 280G exposure and other issues without violating IRC 409A. There are hedging vehicles in the market to generate efficiencies at the benefit expense level. Consult with a compensation professional to help you navigate these waters.

Many banks continue to use SERPs effectively. A bad experience should not deter you from exploring the plan’s positive benefits. That said, a SERP can be complex and should be designed objectively by compensation professionals. If you explore all financing tools to make sure the bank is getting the most efficient design, your bank will be in an excellent position to accomplish your goals.

The Elements of a Compensation Plan: What a Board Needs to Know

Written by


5-25-15-BCC.pngReviewing compensation within an organization is an integral part of the board’s duties, but it can be challenging to get right. There are a number of reasons for this.

Philosophy
Compensation committees need to determine the bank’s philosophy regarding compensation. Will it be a zero-sum equation where paying more compensation creates fewer dollars for management and/or the shareholders, or an abundance mentality where paying for performance generates shareholder value? Having tension between the two is healthy for setting compensation practices correctly while maintaining balance.

Regulatory
One facet that overlays any compensation structure is regulatory constraints. Over the last decade, there have been three major regulatory pronouncements affecting how banks can structure compensation.

The first is the adoption of the Internal Revenue Code Section 409A, which prohibits the acceleration of payment of deferred compensation.

The second major regulation originates from the Dodd-Frank Act. Essentially, mortgage compensation incentives can only be paid based upon: (i) the dollar volume of the mortgage loans made; or, (ii) the transaction volume generated by the mortgage lender. However, the incentives can vary as to how much is paid to each lender on either method.

The third regulation adopted is the Interagency Guidance on Sound Incentive Compensation Policies effective June 25, 2010. In the guidance, policy steps are set forth that require incentive compensation to be structured to balance the risk to the institution of such incentives, and the guidance dictates that boards are responsible for reviewing this.

Delivery
In what form will your bank deliver compensation? The following are some major ways that banks pay their executives.

Non-statutory stock options
Non-statutory options (NSOs) can be granted to just about anyone. It is not unusual for a participant to fail to realize that not only must they have sufficient funds to purchase the stock, but that there will be ordinary taxation on the gain in stock value from the exercise price for the shares compared to the fair market value of the shares at exercise. In addition, the participant will also owe Social Security and Medicare taxes on the gain.

Incentive stock options
Incentive Stock Options (ISOs) have the benefit of being taxed as capital gains upon the sale of the purchased shares for the gain over the exercise price. However, there can be one surprise in the way of alternative minimum tax (AMT).

Restricted stock
Restricted stock has become more popular as a delivered component of compensation since restrictions come with the grant of the shares. Unlike options, which do not have restrictions once the options become exercisable, restricted shares often carry a restriction as to when they can be sold. This avoids the potential of a quick sale that can occur with options, leading to volatility in the stock price and negative news when investors and others learn of executive sales of stock.

Deferred compensation
Many banks will use nonqualified deferred compensation to recruit, reward and retain key executives in various formats because plan design can be very flexible, structured as defined contribution or defined benefit plans. With closely-held organizations, the shareholders are not subjected to dilution of ownership with deferred compensation as it is accrues through the financial statements. Also, unlike the equity components previously mentioned, shareholder approval is not required. Programs of deferred compensation require board approval. There are various types of deferred compensation programs including, but not limited to, Supplemental Executive Retirement Plans (SERPs), deferred incentives, deferred grants, phantom stock, stock appreciation rights and elective deferrals.

BOLI
While it might appear that deferred compensation is expensive because the entire value of any program generates expense to the bank, often bank-owned life insurance (BOLI) is utilized as an asset to offset or recover the cost incurred by the deferred compensation. This happens in two ways. First, the interest earned while the BOLI contracts are owned informally counterbalance the expense of a deferred compensation program. Second, if the participant meets an untimely death, the death benefit the bank receives in addition to the return on its investment is available to offset the additional expense to complete the accrual of the deferred compensation benefit, so that such benefit can be paid in full to the employee’s beneficiaries.

While the components of compensation are numerous, banks can use the various components for certain tiers of executives within the organization. Further, no single component discussed is superior to the other. Each has its advantages and disadvantages, and can be tailored to the bank’s needs.