The Three Critical Areas of Succession Planning

succession-9-4-17.pngLeaving is an inevitable part of life. Everybody ages and, whether by choice or by circumstance, we won’t forever be doing what we are doing today. This law is true for your bank as much as it is for yourself. It is essential to take steps now to prevent the inevitable transitions that are in the future. As individuals, we are constantly questioning whether we are prepared for the next stage of life. “Have I saved enough for retirement?” “Is my estate in order?” As directors, we need to be making similar plans for our bank’s future.

Succession planning can be broken down into three areas: management succession, board succession and ownership succession.

Management Succession
When succession planning is first addressed by a bank, typically management succession is what comes to mind. This naturally includes the chief executive officer’s position, but should also include other vital roles in the bank such as chief financial officer, chief operating officer and your bank’s senior lending officers.

Some banks are challenged when trying to start a formal succession plan: “Who should you include and how should you start?” Banks should start with the most predictable event possible, the eventual retirement of current executives. Not all current executives will necessarily know the exact date they plan to retire, but an age range of 65 to 67 is a good start. As far as whom to include in the plan, it is important to remember that it is not necessary to name a successor now. Identifying a small pool of potential successors is often sufficient. But what banks need to remember is that part of a successful succession plan is ensuring that the people in your plan are still at the bank when you need them. Many banks are incorporating executive benefit/BOLI plans that have golden handcuffs in order to retain all potential successors in the succession plan.

Knowing what you should plan for is always beneficial, but when designing a formal succession plan, banks need to address other contingencies besides the eventual retirement of the current management team. Death, disability and other unexpected events may create a critical situation for those banks that don’t have an emergency succession plan in addition to their long-term succession plan. Depending on the readiness of those involved, the person who takes over running the bank in case of an emergency may very well not be the same person who is the identified successor in the long-term plan.

Board Succession
One of the most challenging aspects of succession planning is board succession. Many banks have mandatory retirement ages typically ranging from age 70 to 75. If your bank does not currently have a mandatory retirement age, you can use nonqualified benefit plans to provide a benefit to those who you may require to retire at a specific age. This can facilitate their retirement from the board in a respectful and dignified way. You may also consider grandfathering the existing board members from a new policy you wish to implement. If that step is taken, the bank still needs to recruit young directors in preparation for the succession of the aging board. In the current regulatory environment, the role of the director is much more involved than in previous years. Often, the most successful banks have diversity on their boards, including various ages and backgrounds, to bring different perspectives regarding the strategic direction of the bank. One concept that seems to be successful for many of our clients is creating an advisory board made up of younger, successful, local business men and women to assist the bank in spreading its marketing footprint. They also typically provide great insight into the needs of the younger generation of bank customers. And many of them bring potentially profitable customers to the bank. As directors reach the mandatory retirement age, the board may recruit full-time directors from the advisory board, which makes for a much smoother transition.

Ownership Succession
Though many owners do not share their ownership succession plan with the rest of the board or key members of management, it is helpful to know how to plan for the succession of the bank. Utilizing nonqualified benefit plans for key management is beneficial in keeping the management team in place during the ownership succession of the bank.
Open communication is a key factor when considering all forms of succession planning. The more people are aware of the planning that banks are doing, the more comfortable both employees and customers will be during any portion of a transition of succession.

Why You Still Can’t Ignore Succession Planning

succession-6-13-17.pngIn the evaluations that Bank Director conducts on behalf of bank boards, it’s common for directors to voice their dissatisfaction and uncertainty regarding succession planning, particularly for the chief executive. So I wasn’t too surprised to find in Bank Director’s 2017 Compensation Survey that almost half of the responding directors and senior executives of U.S. banks report that their bank hasn’t identified a successor or potential successors to replace the CEO.

The trials and tribulations of developing a successor is a problem faced by banks of all sizes: JPMorgan Chase & Co. announced on June 8, 2017, that its chief operating officer, Matt Zames, decided to leave the bank after 13 years. Zames was viewed as a potential successor to CEO Jamie Dimon.

Fifty-three percent of survey respondents say they don’t have a successor identified because the current CEO doesn’t plan to retire soon. One-quarter say they have a young CEO. Other than not knowing who’s going to captain the ship when the top executive gets run over by the proverbial bus, the latter could be in for shock if their young CEO leaves their bank for greener pastures at a larger institution.

The end result could be messy for unprepared institutions, no matter the age of the CEO. “A bank that needs a successor is willing to do whatever it takes to get one,” says Flynt Gallagher, president of Compensation Advisors, a member of Meyer-Chatfield Group. And that could include stealing yours.

Compensation Advisors sponsored the 2017 Compensation Survey.

Money, of course, goes a long way in ensuring the CEO stays on board. Ninety-one percent of respondents believe that their bank’s compensation package is competitive enough to retain the current CEO, or attract a new one. But for CEOs responding to that question, that approval drops to 78 percent—indicating a slight but visible disconnect between CEOs and boards.

How does your CEO salary compare?

  Median CEO salary, by bank size
  All banks >$5B $1B-$5B $500M-$1B <$500M
All regions $366,250 $826,731 $442,500 $320,202 $212,000
Southeast $310,000 $848,240 $481,750 $319,185 $190,000
MidAtlantic/Northeast $475,392 $735,000 $475,783 $360,000 $298,000
Midwest $300,000 $960,305 $371,502 $280,000 $208,000
West $436,000 $770,804 $438,500 $300,000 $213,000

Source: 2017 Compensation Survey
Regional definitions:
Southeast: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia
MidAtlantic/Northeast: Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont
Midwest: Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Wisconsin, South Dakota
West: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oklahoma, Oregon, Texas, Utah, Washington, Wyoming

The median salary reported for all CEOs was $366,250 for the fiscal year 2016, a 6 percent increase over the median salary reported for FY 2015. The salary median ranges from $212,000 for banks below $250 million in assets to $826,731 for banks above $5 billion.

This year, the survey reports that 80 percent of CEOs received a cash incentive in FY 2016, compared to 64 percent in last year’s survey. The overall median cash incentive paid to CEOs in FY 2016 was $131,697, a 155 percent leap from the previous year. Bank performance has continued to improve for the industry, leading to a larger bonus for their top executives. In a quarter-to-quarter comparison of return on average equity for the last two quarters of 2015 versus the same time period in 2016, banks in general across asset categories saw a lift in return on average equity (ROAE), based on data from S&P Global Market Intelligence. Bank stocks were also rising in December 2016 due to the so-called “Trump Bump” and optimism about the president’s agenda which includes deregulation for the banking industry, a cut in the corporate tax rate and an infrastructure spending plan.

“Since incentive compensation is typically directly tied to bank performance, and the overall performance of banks continues to get better, I would conclude that is what drove the increase,” says JR Llewellyn, senior vice president at Compensation Advisors.

Fifty-two percent report the CEO received equity grants, at a median fair market value of $240,160, a five percent increase from last year’s survey. Seventy-five percent received other benefits and perks, and 62 percent received a retirement benefit and/or nonqualified deferred compensation, which allows executives to delay part of their pay to a later date. This also delays the tax burden for the executive.

Banks rely on peer studies to evaluate and set pay levels throughout the organization. Peer groups—banks of a similar size, in a similar region and even with a similar business model—can help further benchmark pay practices. Bank Director’s survey finds that 93 percent of participants are confident that their compensation plans are on par with other banks. Smaller organizations below $250 million in assets express less confidence, with 24 percent saying their compensation plans are not competitive with other banks.

And in a competitive environment for talent, banks may wind up paying more for key executive positions. “We want to have really good people work for us,” says Glenn Parry, the senior vice president and director of human resources at $1.2 billion asset First National Bank and Trust Co., a subsidiary of Centre 1 Bancorp in Beloit, Wisconsin. He says that to do this, the bank is willing to pay more than what the competition pays for talent and has higher compensation costs as a result. In the past year, Parry’s bank has replaced a chief financial officer and investment officer, both of whom retired. “We were very successful in getting really good talent into those roles, well in our ranges of what we were paying,” he says.

The 2017 Compensation Survey was conducted in March and April of 2017, and surveyed 286 independent directors and senior executives of U.S. banks. Compensation data was also collected from the proxy statements of 108 publicly traded banks. The survey provides detailed information on CEO and board compensation packages.

Talent Strategies for Family-Owned Banks

How strong and transparent is the bank’s succession plan? Are employees being developed to achieve strategic goals? Joshua Juergensen, principal at CliftonLarsonAllen, shares how community bank boards and management teams should strategically approach talent development.

  • Tackling Succession Concerns
  • Outlining a Career Path
  • Developing a Strategic Vision

Finding Talent For The Bank’s Future

CEO succession planning should be a top priority for a bank’s board of directors, but many institutions lack a plan. J. Scott Petty of Chartwell Partners outlines how to prepare for the short and long-term transition of the CEO and addresses recruiting new board talent.

  • Developing a Succession Plan
  • Finding Diverse and Talented Directors

A CEO’s Hottest Topics

Before incentive programs can be determined, staffing needs are addressed and a succession plan is developed, a CEO needs to articulate a vision and communicate key priorities to his or her team. Gerry Cuddy, CEO of Beneficial Bank, Kent Ellert, CEO of Florida Community Bank and Chris Murphy, CEO of 1st Source Bank, explore what is capturing the attention and imaginations of bank CEOs today in this panel discussion from Bank Director’s 2016 Bank Executive & Board Compensation Conference, lead by Scott Petty, managing director, financial services at Chartwell Partners.

Highlights from this video:

  • Managing Talent in the Current Environment
  • Incentive Compensation After the Wells Fargo Scandal
  • Rising Cost of Risk & Compliance Talent
  • Competing with Bigger Banks for Talent
  • External Threats to the Industry

Video length: 38 minutes


A Tale of Two CEO Succession Plans

succession-10-20-16.pngIn January 2014, the board of directors at Union Bankshares Corp. decided that it was time to begin considering a successor to President and Chief Executive Officer G. William “Billy” Beale, who at 65 was starting to think about his own retirement. This was a pivotal time for the now $8.1 billion asset bank, which is headquartered in Richmond, Virginia. The 2013 acquisition of Charlottesville, Virginia-based StellarOne Corp. had nearly doubled the company in size, and eight of the StellarOne directors joined the board of the merged company. The newly expanded board was firmly committed to a growth plan that would take it past $10 billion in assets, where several important regulatory requirements would kick in, so the new CEO would have to be capable of managing a larger bank in a more rigorous regulatory environment.

Managing an orderly and ultimately successful CEO succession process is one of the board’s biggest responsibilities, and can be a stressful situation under the best of circumstances. And, in this instance, the eight directors from StellarOne and 11 directors from the old Union would have to work together on a potentially sensitive issue, despite the fact that they were still getting to know each other. Beale says the board engaged a consultant to help it develop a consensus on the kind of individual it was looking for, and the directors ultimately agreed on a set of expectations for the new CEO’s work experience and competencies.

“It was obvious from what the board was looking for that this was going to be an outside search [rather] than being filled [internally],” says Beale. “At that point it was pretty much the typical routine for headhunters [with] lots of names and lots of resumes.”

The board started out looking at multiple candidates but eventually narrowed its search to two individuals. And in late August, Union announced it had hired 51-year-old John Asbury as president and Beale’s designated successor. A native Virginian, Asbury had previously been president and CEO of privately held First National Bank of Santa Fe, a multi-state bank with locations in New Mexico and Colorado. Asbury will become CEO in January 2017.

I think the key piece of it was getting the board, which had really never worked together before, aligned around the work experiences and competencies we wanted in John,” says Beale. Ultimately, Union’s greatly expanded board (which now stands at 18 members) oversaw an orderly process that brought in a qualified individual to succeed its incumbent CEO. Or, to put it more bluntly, the Union board did its job.

“I think that CEO succession is the single most important responsibility of a board of directors,” says Alan Kaplan, CEO of the executive search firm Kaplan Partners. “I don’t think a board has any more important decision than who leads the organization, unless at some point they’re going to sell or merge the company.”

Kaplan says that three years is a reasonable amount of time for a board at a community bank to set aside for management of the succession process, although a much larger bank might need four to five years. The experience at Union shows that it can be done in less time as well. It’s probably a good idea for the board to delegate hands-on management of the process to a subcommittee of the board, like the compensation or governance committees, although some banks set up special committees just for that purpose. For example, Union established a special search committee that had seven directors, headed up by the holding company’s independent board chair, Raymond D. Smoot, Jr.

“It gets very time consuming,” says Kaplan of the succession management process itself. “You’re meeting with consultants, meeting with internal candidates and external candidates. It’s not until that process gets whittled down to a short list that “most of our clients think it makes sense to get the full board involved,” he adds.

Sometimes the biggest challenge that boards face in managing the succession process is dealing with the incumbent CEO. For starters, many bank CEOs are at best ambivalent about the retirement issue. Some of their foot dragging is simple human nature. For many CEOs, theirs is a dream job that they are very reluctant to give up. The financial crisis, which wreaked havoc on the stock options of many younger bank CEOs, is also a factor in the retirement plans for many individuals. “People who 10 years ago at age 55 might have said they’d love to retire at 60, but at 60 they didn’t have what they had at 55,” Kaplan says. “Now they’re 65 and they might still be in it.”

The board will also have to determine what role the current CEO will play in the succession process and how much influence they will have over the final decision. “In most situations, with a planned orderly succession where no one is being forced out, the retiring CEO has an important role in participating in the interview process because they are your most experienced banker,” Kaplan says. But the process itself should be under the control of the board and not the outgoing CEO. “While I think the voice of that CEO in the process is very important, and they should be a very important participant, I do not believe the CEO should drive the process,” he says.

The board will also have to decide whether to select an internal candidate to succeed the incumbent CEO or recruit someone from the outside. Either approach can be successful, and they both entail certain risks. For the internal candidate, it’s a question of whether they have the experience and skills the bank will need going forward. For external candidates, a common concern is whether they will be able to work effectively in the bank’s culture.

One bank that has a long tradition of developing internal candidates to succeed their chief executive is Park National Corp., a $7.4 billion asset bank in Newark, Ohio. The current president and CEO, David L. Trautman, was chosen to succeed C. Daniel DeLawder in January 2014. At that point, Trautman had been with the company for 34 years, and had been president since 2005. DeLawder, who had been CEO for 15 years when Trautman succeeded him, felt the younger executive Trautman deserved the opportunity to finally run the bank. “I just thought that it was probably time,” DeLawder says.

DeLawder, who has served as chairman of the board since 2014, says the other directors were a little surprised when he first raised the succession issue in 2013 and recommended Trautman as his successor because he, DeLawder, was then only 63 and fully capable. “I’ve still got game,” he quips. “I could still be running the place.” And even though Trautman had been a director since 2002 and was well known to the other directors—and “was a large part of our historic success,” according to DeLawder—his selection as the new CEO was not a foregone conclusion as far as the board was concerned. Trautman ended up meeting separately with every Park National director in an extensive interview process as the board did its due diligence. “The board did its job,” DeLawder says. “It was very thorough.”

There were no external candidates, according to DeLawder, which is hardly surprising since Trautman is just the fifth Park National CEO since 1928, and all four of the previous CEOs came from inside.

The biggest risk of mismanaging the CEO succession process is that it could ultimately put the bank at risk of receiving a takeover bid from another institution. StellarOne announced in March 2012 that it had initiated a CEO succession plan “in contemplation of the planned retirement” of its then-CEO, O.R. Barham, Jr. In fact, Barham had informed the StellarOne board a few years prior that he was considering retirement, and the board had already been working on a succession plan. According to the bank’s former chief talent officer, Lisa Cannell, now chief human resources officer at the University of Virginia’s Darden School of Business and also founder of the consulting firm Talent Strategies and Solutions LLC, the board looked at several internal candidates to replace Barham but ultimately decided to recruit someone from the outside. Working with an executive recruiter, the bank did settle on an outside candidate to succeed Barham. “But by the time we finally got the person identified, Union came in with an offer,” Cannell says. [For more on this, and CEO succession, see Bank Director digital magazine’s Talent Issue.] Beale, who had long eyed the possibility of merging with StellarOne, eventually made an offer to acquire the bank, which the StellarOne board accepted in April 2013. In effect, Beale made himself Barham’s successor.

According to Beale, the two characteristics that Union’s board were looking for was someone who had run businesses in a banking environment that were much larger than Union’s current size, and were also multi-state in nature. Asbury fit the bill since he had held senior level positions at two of the largest banks in the country—Regions Financial Corp. and Bank of America Corp.—and had also managed a multi-state franchise at First National Bank of Santa Fe. “They wanted someone who had been down that path before,” Beale says.

Clearly, the Union board is expecting Asbury to grow the bank and expand its franchise beyond Virginia. Interviewed just eight days after taking over as CEO, Asbury has a lot on his management plate at the moment. But one of his priorities going forward will be to make sure the company has a good management succession process in place.

Bank Succession Planning Made Simple

Succession-10-17-16.pngAccording to a recent Bank Director survey, 60 percent of those surveyed expect their bank’s CEO and/or other senior executives to retire within the next five years. The survey also revealed that most banks are unprepared for those coming changes. Only 45 percent have both a long-term and emergency succession plan in place for the CEO and all other senior executives. Does your bank have a plan? Will the plan actually work should the trigger be pulled?

There are a lot of moving parts in a bank’s management succession plan. That’s why we have highlighted the following three key steps to consider that have repeatedly surfaced in our experience working with bank boards and CEOs around the topic of management succession planning.

Who “Owns” Succession Planning?
The chairman or a board committee is the overall “owner” of management succession planning, specifically for the chief executive role and board of directors. In turn, senior management succession is owned by the CEO, with regulators now requiring most sized banks to have detailed succession plans in place for senior management. The big question quickly becomes; will those succession plans actually work, given the velocity of change in bank business models, regulatory demands, flat margins and the lack of viable growth options? Banks with well developed succession plans will clearly be in the driver seat. If your bank has a weak plan or no plan, here are three practical steps bank board, CEO and management teams should take.

Step One: Emergency Plan
In the event of an immediate leadership void, we recommend an emergency 90-day plan for each key position with no clear internal successor. Putting someone from the board or management team into the slot for 90 days buys time to consider the best short-term and long-term options. Appointing an interim person gives the board or CEO a chance to “test drive” the new leader while at the same time, considering external options. For public banks, it’s the fiduciary responsibility of the board to consider external options so as to compare and contrast to the internal candidate. However, based on our experience and observations, more often than not, the internal candidate gets the nod with minimal disruption and a high level of success.

Step Two: Internal Plan
Based on a recent Bank Director management survey, more than 50 percent of banks still do not have a formal succession plan for senior management. Shareholders are more active in bank succession and demand a written plan. Either way, regulators will soon be requiring formal succession plans across all asset sizes of banks. Clearly, succession requirements are moving down to the community bank level with all speed. Clients we serve with strong succession plans have taken the time to codify each senior management position, including the timeline to retirement and then review who in the bank could take on that role if necessary. Unfortunately, many banks simply don’t have a backup internal option. Either the bank can’t afford the extra overhead cost of a successor or the age and timeline of the backup option does not align for succession purposes. If your bank is in that predicament, move to step three immediately.

Step Three: External Plan
Being ever mindful of the internal succession plan is key when it comes to considering and evaluating potential external options. We have seen clients go to the extreme and develop a list of external succession options for all senior management positions. Since banks can’t predict when they will have a departure, which very well could happen before the internal successor is ready, it is wise to think and identify those whom it would make sense to recruit. Clearly knowing your competition and developing relationships in advance makes recruiting an executive easier, plus the culture fit can also be assessed early, thereby increasing a successful integration.

A practical three step plan can provide the board more detailed insights into the depth and reality of the company’s succession plan. A formal review by the bank board should be conducted annually to test succession plans and make adjustments where necessary.

Visit to download our simple succession planning guide.

Do Executives Want Equity?

Compensation_WhitePaperCover_tb.pngAre equity awards still effective tools that tie the interests of executive management to those of a bank’s shareholders?

Equity is an important piece of the compensation pie for many banks, particularly those that are publicly traded, according to the 262 directors, CEOs, human resources officers and other senior executives responding to Bank Director’s 2016 Compensation Survey, sponsored by Compensation Advisors, a member of Meyer-Chatfield Group. Forty percent say that their institution allocates equity grants to executives annually. Boards and shareholders like equity because, in theory, it ties the interests of the executive to the long-term success of the company. For executives, it’s a reward that, hopefully, grows along with the value of the bank.

The survey also finds many banks preparing for the next generation of bank CEOs, but there remains a lot of work to do in this area. Almost one-third anticipate the retirement of the bank’s CEO within the next five years, and responding CEOs indicate differing desires, based on age, when it comes to their compensation packages. Can banks weather the transition from a baby boomer CEO to someone who is younger—maybe even a millennial? Twelve percent of bank CEOs are now between the ages of 32 and 46, so the dawn of the millennial CEO isn’t that far off. But more than one-third of respondents indicate that attracting talented millennial employees is a challenge for their bank, and they cite two factors: Millennials aren’t interested in working for a bank, and their bank’s culture is too traditional.

With just a few exceptions, the 2016 Compensation Survey finds that few banks have millennials serving on their board. But bank boards are also aging, and 90 percent of respondents indicate their board will see at least one director retire within the next five years. Almost half expect to lose more than three directors to retirement. As they seek new directors to fill these slots, 63 percent indicate that their board seeks to foster more diversity among its members.

For more on these considerations, read the white paper.

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

Succession Planning for the Board: What to Consider

succession-7-6-16.pngBenjamin Franklin is quoted as saying “If you fail to plan, you are planning to fail.” And that old quote couldn’t be more applicable to bank board succession planning, especially nowadays when the industry is undergoing so many significant changes.

Boards today need to be planning for even more technology reliance, new fee-based income generators, tougher regulations, and fewer professionals interested in banking as a career. The days when a bank could rely solely on investors and well-connected business people to guide its direction are almost gone. Instead, tomorrow’s banks will need leadership with expertise in the crucial areas that aren’t directly adding to the bottom line, such as technology, risk, compliance and audits.

There are a lot of moving parts in a bank board succession plan. That’s why we’ve highlighted seven areas to consider that have surfaced from our experiences working with banks and their board succession plans.

Optimize Your Composition: Boards need to find the right people to reflect the strategic priorities of the shareholders. Banks today have moved to finding niche lending areas in addition to traditional banking services to meet growth objectives. It is imperative to build a board that aligns with and is complementary to the bank’s strategic plan. For example, if a bank is transitioning from a branch-focused model to a branchless model, it’s important to incorporate expertise on the board who can guide that transition. Perhaps reducing the number of directors will increase the productivity of the board.

Anticipate What’s Coming: It’s important to understand the changing bank market, including technology and regulatory shifts that are expected in the next three to five years. Understanding this gives banks an opportunity to move out of reactionary situations and become proactive. Having board members with the right experience and forward-thinking approach can help define new potential business lines while adhering to shifting compliance and regulatory demands.

Identify Necessary Skills: Once you have identified coming shifts in the business, it’s important to determine the skills needed to meet those challenges. Beyond driving business, boards should include members who bring a skill set that advances the bank toward its strategic priorities, whether technology, cyber-security, audit, risk and/or compliance. As a bank grows, it should consider bringing on directors who understand more complex banking models. If a bank wants to move into a niche, bringing a board member in with specific experience can help guide the bank in that area.

Consider Investor Expectations: It’s important to keep in mind the fiduciary role the board plays. Investors want to see a committed board qualified to serve, while remaining devoted to the short and long-term success of the bank. Investors today are actively monitoring the governance of banks.

Get a Technology Expert on the Board: It’s time to consider adjusting the board’s composition to complement the capabilities of the next generation of leadership. One big switch between today’s leaders and tomorrow’s will likely be reliance on technology. Technology has been a missing piece on a lot of boards, and as the next generation of leadership takes the helm to steer banks toward more technology-driven services, it will be essential to have a technology expert on the board. This person should not only understand technology, but also understand how to leverage it to connect with customers.

Self-Assess: Directors are increasingly using self-assessments to look for gaps in expertise and skills, some of which could be addressed with training or further development. Assessments can help drive consistent refreshment of the business over time by adding needed skills as the complexity of banking continues.

When it comes to who will lead succession planning for the board, it is typically the governance committee’s responsibility but in privately held banks, the chairman often runs the show on succession planning. As regulators are increasingly asking about director succession, the ownership of the plan will increasingly shift to the independent directors of the governance committee. Knowing when and how often to develop and refresh a succession plan depends on where a bank is in its development. A newer bank will likely review the succession plan for the board more frequently than a more established bank.

Investing in Formal Leadership Development and Succession Planning

succession-6-14-16.pngAs the baby-boomer exodus from the workplace grows in the coming years, many banks will find themselves with a groundswell of leadership positions to fill. Yet a 2015 Crowe Horwath LLP survey of banks found that only about 23 percent of respondents have established a formal leadership program. Without a well designed internal development and succession plan, banks will be forced to scramble.

Building Versus Buying Talent
With banks facing consolidation, regulatory expectations, and similar challenges, leadership planning hasn’t been a priority for many institutions. Twenty-one percent of respondents to Bank Director’s 2016 Compensation Survey say they have no long-term succession plan in place for the CEO, and another 16 percent say they have no plan for the other senior executives.

Some banks have been content to simply buy talent as needed, hiring experienced executives from outside of the organization, rather than take the time to build talent from within. It might seem like a luxury to put an individual in a management position as a development opportunity—better to keep experienced, productive people in their positions as long as possible and then look outside for equal experience when the time comes.

While understandable, this perspective is short-sighted. Promoting from within is far less costly and eliminates business continuity risk. Internal development also helps a bank maintain and reinforce its unique culture and makes it easier to retain high performers and those employees with high potential.

Of course, the board of directors also can present an obstacle to pursuing formal development and succession processes. Boards at banks frequently are populated by members of the traditionalist generation that precedes the baby boomers. They tend to believe that “the cream rises to the top” or in so-called “survival of the fittest”— in other words, those that deserve leadership positions will find their way to them without formal programs nurturing them. But regulators have begun impressing on bank boards the importance of approaching things like succession planning in a more formal way than has been done in the past.

The Role of Generational Differences
Attracting talent and planning for succession is more challenging than ever. Banks that long have depended on the wisdom and work ethic of their senior teams now must attract, develop, and retain millennials (generally, those born after 1980), while engaging their Generation X employees (born 1965-1980), and adapting to the accelerating loss of boomers.

Banks might realize that the exit of boomers will produce a rash of leadership openings, but some don’t seem to grasp that a one-size-fits-all approach to recruiting, retention and leadership development is doomed to fail due to generational differences. For example, millennials have different expectations for their employers and careers than their boomer and Generation X colleagues. They often express a desire for jobs that allow them to help society and maintain a healthy work-life balance. To attract such workers, banks might need to emphasize their community involvement efforts, which could be of less interest to older employees.

Leadership development and succession planning processes also must recognize and reflect generational differences. Millennials, for instance, can be very open to receiving mentoring from their boomer colleagues because they’ve largely had close, positive relationships with their parents. Generation Xers, on the other hand, might have had rockier parental relationships. Gen X workers also came into the job market at a time of downsizing and outsourcing. As a result of these experiences, they can be more resistant to authority figures.

While research has found some distinct generational differences, similarities certainly exist, too. Strong management and leadership appeal to all generations. The good news is that these skills can be effectively taught, mentored and modeled with the assistance of formal processes.

Act Now
A wave of leadership openings is on the horizon, and banks can’t afford to take a reactive stance—they need to plan for the transition to the next generation of leaders. Forming a succession plan and building a pipeline of talent requires time, so institutions should take the first steps now.

This article first appeared in the Bank Director digital magazine.