Over the past year and a half, there’s been a lot of good news for the banking industry. New regulators have been appointed who are more industry-friendly. Congress managed to not only pass tax reform, but also long-awaited regulatory relief for the nation’s banks. And the economy appears to remain on track, exceeding 4 percent gross domestic product (GDP) growth in the second quarter of 2018, according to the Bureau of Economic Analysis.
Bank Director’s 2018 Compensation Survey, sponsored by Compensation Advisors, a member of Meyer-Chatfield Group, finds that the challenges faced by the nation’s banks may have diminished, but they haven’t disappeared, either.
Small business owners are more optimistic than they’ve been in a decade, according to the second quarter 2018 Wells Fargo/Gallup Small Business Index survey. This should fuel loan demand as business owners seek to invest in and grow their enterprises. In turn, this creates even more competition for commercial lenders—already a hot commodity given their unique skill set, knowledge base and connections in the community. Technological innovation means that bank staff—and boards—need new skills to face the digital era. These innovations bring risk, in the form of cybercrime, that keep bankers—and bank regulators—up at night.
For key positions in areas like commercial lending and technology, “banks have to spend more,” says Flynt Gallagher, president of Compensation Advisors. “You have to pay top dollar.”
But a solid economy with a low unemployment rate—dropping to 3.8 percent in May, the lowest rate the U.S. has seen in more than 18 years—means that banks are facing a more competitive environment for the talent they need to sustain future strategic growth.
And regulatory relief doesn’t mean regulatory-free: With the legacy of the financial crisis, along with the challenges of facing economic, strategic and competitive threats, all of which are keeping boards busy, there’s more resting on the collective shoulders of bank directors than ever before, and boards will need new skill sets and perspectives to shepherd their organizations forward.
For more on these considerations, read the white paper.
To view the full results to the survey, click here.
The world of corporate governance today has a brighter spotlight on boards of directors than ever before. While bank regulatory relief has provided a long-awaited respite, bank examiners seem to be zeroing in on governance, director performance and board succession. Here are 7 things directors should have on their radar screens in the year ahead:
Defining Innovation. Digitization and innovation are the buzzwords, but truly embracing the transformations taking place all around us can be daunting. Pondering how technology has altered our client relationships and acquisitions means thinking out of the box, which may be a challenge for some directors and bank executives. A refresh of the bank’s website is not an innovation—it is table stakes. True innovative thinking requires more proactivity and planning, and likely some outside perspectives as well. Boards should encourage management to craft a plan to address to these challenges, which are key to remaining relevant.
Talent Management. Historically, boards viewed talent management as the purview of executive leadership and the CEO, except when it came to CEO succession. In today’s talent-deficient environment, though, boards need to hold the CEO and senior team much more accountable for developing the next generation of leaders and revenue generators. If your bank wants to perform above the mean, then the senior team must be composed of very strong players well suited to execute your strategic plan. A true linkage between the business strategy and human capital strategy has never been more critical for success and survival.
Revisiting Compensation Strategies. Balancing the tradeoffs between enhanced compensation packages and performance/accountability has become a significant challenge for compensation committees and CEOs. In this competitive talent climate, banks need to make sure that their compensation practices properly reflect the bank’s market and goals, motivate the right behaviors, and incentivize key players to both perform, and remain, with the institution. Fresh board thinking in this area may be appropriate, particularly for banks that have been less performance driven with their incentive programs, or do not have the currency of a publicly listed stock as a compensation tool.
Enhanced Accountability and Self-Assessment. Just as boards need to truly hold their CEO accountable for institutional performance, boards need to hold themselves accountable as well. Governance advocates are pushing for boards to assess their own performance, both as a group and individually. Directors should have the fortitude to evaluate their peers—confidentially, of course—to identify areas for improvement. Directors should be open to this feedback, and work to improve the value they bring to the institution.
Onboarding New Directors and Ongoing Training. Plenty of data reinforces that new executives as well as board members contribute more rapidly when there is a formal approach to ramping up their knowledge of the company. Expectations of new directors should be clear up front, just as any new employee. A combination of information and inculcation into the institution provides context for decision-making; clarifies the cultural norms; and often reveals the hidden power structures, including the boardroom. A strong onboarding program forms the foundation for ongoing board education. There should be an annual plan for each director’s education to maintain currency, refresh specific skills, and to stay abreast of leading governance practices.
Board Refreshment. Are we truly building a board of diverse thinkers with the range of skills needed to govern appropriately today? Age and tenure have become flashpoints around continued board service, in reality they avoid dealing with declining contributions and underperforming directors. Every board seat is a rare and precious thing, and needs to be filled with someone who broadens the collective skills and perspectives around the board table. Board nominating and governance committees need to manage accountabilities for existing—and particularly for prospective—directors, and be willing to make the tough calls when needed. Underperforming directors should be encouraged to raise their game or be asked to step aside.
Leading by Example. In today’s information-driven society with endless social media channels and instant visibility, C-Level leaders and board members are under the microscope. Lapses in judgment, breaches of policy or inappropriate behavior, once validated, must be dealt with quickly and decisively. The company’s brand reputation and credibility are always at risk. The board itself—along with the CEO, of course—must set the standard for ethics and compliance and lead from the front. Every day.
Bank Boards will continue to be under scrutiny no matter the environment. More importantly, a bank’s board must be a strategic asset for the institution and provide strong oversight and advice. The expectations of good governance have never been higher, and successful boards will raise their own performance to ensure success and survival.
A tight labor market could be big risk if your bank lacks the talent to fuel its future. How can bank boards and management teams manage this risk? In this video, Julia Johnson of Wipfli shares why your bank should conduct a human resources review and provides tips to help banks tackle the talent challenge.
Four HR Areas Bank Leaders Should Be Watching
How Boards Can Better Understand HR Portfolio Risk
Roughly a decade after the financial crisis, community banks are introducing, developing and enhancing internal training programs to turn today’s young, millennial employees into the leaders the bank will need in the future. Forty-four percent of bank executives and board members responding to Bank Director’s 2018 Compensation Survey indicate that their bank has been dedicating more resources to employee training over the past three years to attract and retain younger talent. The majority, 74 percent, say their bank offers an in-house training program for some employees, and 80 percent say external training or career development is available as an employee perk.
While there’s no one-size-fits-all approach to employee training for the industry, the program developed by Midland States Bancorp, a $5.7 billion asset financial holding company based in Effingham, Illinois, illustrates how one bank is developing talent at several levels throughout the organization.
The bank had been discussing the development of future leaders, with an eye toward succession planning, for several years, says Sharon Schaubert, senior vice president of banking services at Midland States. Oversight of the bank’s human resources function is one of her primary responsibilities. “Then, as we were going through acquisitions and were growing, that need was becoming more and more apparent,” she says. Midland States Bancorp acquired Centrue Financial Corp. in June 2017, and Alpine Bancorp. last March.
The ability to lure away talent from local bank competitors had become increasingly difficult and expensive, and the bank had talented potential leaders in its own ranks that just needed the right training. “Any time that you bring somebody in from outside of your own company, you’re bringing in the culture that they come from [and] how they’ve been developed as leaders, so we felt that we could have more success with developing our own,” says Schaubert.
To develop the curriculum, the bank hired an experienced learning and development director from a California utility company, who expanded Schaubert’s initial vision into a three-tiered employee development program that trains staff at different stages of their careers. The program is in its second year, and each level takes one year to complete.
The first tier is designed for individual employees who don’t currently supervise anyone within the bank but have potential to grow within the organization. Each class is comprised of roughly 15 employees. Along with additional reading and one-on-one time with their own mentor within the bank, participants work on banking and project management simulations.
Applicants must be employed by Midland States for at least one year to be considered for the program. They are interviewed by a panel of managers and must have the endorsement of their immediate supervisor.
Midland States initially had managers identify and recommend employees, but found that employees were better able to participate and displayed a greater level of commitment if they applied themselves. “We learned some really good lessons, because people also have to have an active interest in their own self development and the ability to make the time commitment,” says Schaubert. The bank put an application process in place, effective with the second first-tier class.
The second tier of the program launched recently and is designed for managers and supervisors, with a focus on how to lead and manage a team. The project management and banking simulations are more intensive, and trainees are coached on presentation skills.
Almost all of the employees who participated in the initial first-tier program have received some sort of promotion or additional responsibilities within the bank, but Schaubert says these employees can’t go straight to the second-tier program—at least a year must pass between the two levels. Since the program is new, no employee has participated in multiple tiers, yet.
Participants are each matched with a mentor, with whom they meet quarterly to discuss their progress, in line with their personal development goals. While face-to-face meetings are encouraged, the geographic footprint of the bank sometimes requires that those meetings occur by phone. The mentor provides guidance and ensures the participant is on track to meet their goals. Participants have some say in the selection of a mentor—the bank provides a list of potential mentors with a brief biography about each, and trainees can pick their top three choices. Members of the senior management team tend to be reserved as mentors for the higher levels of the program.
Mentorship programs are rarely used by the banking industry, according to the 2018 Compensation Survey. Just 15 percent of respondents say their bank has one in place.
The third tier of the training program hasn’t been formally launched but is intended for members of senior management or just below. The program will be one-on-one and won’t be classroom-based like the other tiers. External, rather than internal, mentors will work with participants at this level.
The training program isn’t just the responsibility of the human resources team, according to Schaubert. Subject matter experts and senior leaders, including the CEO, are brought in to present to trainees. And an all-day graduation—which includes presentations from training participants—is attended by each trainee’s mentor and immediate supervisor, as well as members of the executive team.
Some of the resources developed so far have been made available to other managers to encourage self-development. A one-day class is also available for new managers biannually.
Schaubert reports to the board twice a year about the bank’s training initiatives, and shares details about the participants and the curriculum. “The board is actively engaged,” says Schaubert. She adds that the full impact of the program won’t be felt for several years. “The big success of this will come a few years down the road, when we’re able to build a strong pool of candidates for significant roles in the future,” she says. “That takes time.”
One of the more immediate challenges banks face in training employees in today’s competitive talent environment is ensuring that those same employees don’t jump ship for a better opportunity. “You can either manage out of fear, or you can manage for growth and opportunities for the future,” says Schaubert. “We would much rather risk losing a good employee than not developing the employees.”
While some attrition is unavoidable, Midland States is actively working to engage and promote its most promising employees. Most trainees have been promoted or received additional responsibilities, though the bank did lose one trainee that it wasn’t able to promote as quickly as that employee may have expected.
But the bank puts considerable focus toward ensuring that its trained employees are engaged within the organization. For example, the CEO hosted a senior management meeting at his home in August of last year and asked senior managers to invite someone on their team. All graduates and current participants of the training program were invited, as well. “We’re challenging ourselves to find opportunities” to engage and grow talented staff, says Schaubert.
As banks are increasingly challenged to attract and retain experienced employees, more banks like Midland States could be apt to enhance their training programs to build the talent they need.
If the members of Wells Fargo’s board of directors had spent time a few years ago reading through comments on job review websites, where current and former employees post reviews of their employers, the bank might have been able to avoid its current predicament.
The phrase “sales goals” shows up in 1,253 reviews on Glassdoor.com, a popular website used by job seekers. And hundreds of those reviews were posted before Wells Fargo’s management identified sales practices as a “noteworthy risk” to the board in February 2014.
Here’s a teller in 2008:
At least on the retail side of the company, the pressure of getting sales is too high…leading to unethical selling practices which are not corrected.
Here’s a branch manager in 2009:
I saw other stores exceeding [sales goals] by 150 percent or more and initially wanted to learn from those stores . . . What I found was that they had thrown all ethics out the door. I was shocked and appalled . . . So, naturally, I alerted my manager. I reported blatant cheating to the ethics line. I alerted human resources. Nothing happened to the officers except promotions!
Here’s a personal banker in 2013:
Unethical behavior, very high sales goals, things are not done with customers’ best interests [in mind]. It isn’t easy for a bank’s directors to gauge its culture, but the fallout from Wells Fargo’s sales scandal shows how important it is to do so.
“Good news tends to travel up much more quickly” than bad news, said Elizabeth “Betsy” Duke, the chairwoman of Wells Fargo, at a recent conference on governance and culture reform hosted by the Federal Reserve Bank of New York.
One way directors can assess culture is to visit business units and attend corporate functions. “Such dip-sticking appraisal does not require detailed understanding of technology or process, but an outside board member’s opinion on the behavioral atmosphere and tone at the front line or in the engine room could be critical input,” said Sir David Walker, former chairman of Barclays plc, in his concluding remarks at the conference.
Another way is to use websites like Glassdoor. Had the directors of Wells Fargo done so, they would have known long before February 2014 that the bank’s sales practices were a noteworthy risk.
A board should also monitor job review websites because the reviews on them reflect the bank’s reputation and impact its ability to attract talent. Job seekers use these websites in the same way that diners use Yelp.com to choose a restaurant and apartment seekers use websites like ApartmentRatings.com to find a place to live.
This is especially important right now. With an unemployment rate below 4 percent, good workers are hard to come by, and the ones that are willing to switch jobs are demanding higher salaries.
We captured the challenge of a competitive labor market in our 2018 Compensation Survey, done in collaboration with Compensation Advisors, a member of Meyer-Chatfield Group, which will be published in the third-quarter issue of Bank Director magazine.
“It’s a tight labor market, and the expense to hire and retain talent is going up,” said Flynt Gallagher, president of Compensation Advisors.
A good score on job review websites helps combat this. A study published by Glassdoor in 2017 found that people who read positive reviews about a company were more eager to apply to it and recommend it to friends than they would have been if they read negative reviews.
The study also found that people are willing to accept smaller salary increases to switch jobs if they are recruited by a company with a high employee approval score relative to a company with a low score. “This is consistent with economic theory, which predicts that people will accept lower salaries in exchange for a good workplace environment or other positive features of a job,” noted the study’s authors.
It’s worth pointing out, too, that participants in the study found online reviews to be more credible than human resource awards—“The Best Place to Work in Chicago in 2018,” for example—which are often publicized by companies to attract talent.
These findings underscore the value of monitoring websites that include reviews of the company’s internal work environment. A bank’s human resources department does it, and so should its board. If Wells Fargo’s directors had done so prior to 2014, its reputation might not have since suffered so much.
An effective board starts with having the right members, making board composition a key issue for today’s banking industry. Forty-five percent of the directors and executives responding to Bank Director’s 2018 Compensation Survey, sponsored by Compensation Advisors, a member of Meyer-Chatfield Group, say that developing a board succession plan is a top challenge related to board composition, followed by the recruitment of tech-savvy directors, at 44 percent.
More than 200 chief executive officers, human resources officers, senior executives and board members participated in the survey, conducted in March and April 2018, which examines the talent challenges faced by the banking industry. The survey also includes data collected from proxy statements to reveal how—and how much—CEOs, directors and chairmen were compensated in fiscal year 2017.
Thirty-five percent of respondents cite the recruitment of female directors as a top board challenge, an area where the industry appears to have made some improvement. Seventy-seven percent of respondents indicate that their board has at least one female member, up from two-thirds last year. However, boards still have progress to make, with just 14 percent indicating that their board has three or more female members. And boards still struggle to represent diverse ethnic backgrounds—77 percent report that their board doesn’t have a single ethnically diverse director. They also need to gain more age-diverse views, with just 16 percent reporting they have a director who is aged 40 years old or younger.
Conducting an effective board evaluation—which rates the effectiveness of individual directors, as well as the board—is cited by 42 percent as a top governance challenge. Board evaluations are often touted as effective tools to fuel board diversity efforts, because they identify ineffective directors and help push them out of the boardroom, leaving empty seats to be filled with the skill sets, expertise and backgrounds needed by today’s board.
Other key findings:
Commercial lenders remain in high demand, cited by 68 percent of respondents as an area where they expect to actively recruit employees in 2018, followed by technology, at 38 percent.
Forty-seven percent indicate their bank has increased salaries over the past three years to attract younger talent. Twenty-seven percent offer more equity compensation or profit-sharing incentives.
Forty-four percent indicate their bank has dedicated more resources to train young employees. Overall, 80 percent offer external training as a benefit to employees, and 74 percent say their bank has an in-house training program.
The median age of a bank CEO is 58 years old. The median CEO salary in FY 2017 was $370,232, with total compensation at $621,000.
Paying board members appears to be a low-level concern: Just 14 percent indicate that offering a competitive director compensation package is a top challenge faced by the board.
Seventy percent of non-executive chairmen and outside directors receive a meeting fee, at a median of $1,000 per board meeting in FY 2017. More than three-quarters of non-executive chairmen, and 71 percent of outside directors, receive an annual retainer, at a median of $35,000 and $24,000, respectively.
Fifty-one percent most recently increased director compensation in 2017 or 2018, and one-quarter raised director pay in 2016.
To view the full results to the survey, click here.
Successfully recruiting a qualified credit analyst is proving to be quite a challenge in today’s banking environment. There are a number of contributing factors, including compensation compared to other industries, the evaporation of commercial credit training, and a lack of college graduates in certain areas.
With this shortage, credit analysts are highly sought after, and analysts are demanding higher wages than what the banking industry is accustomed to paying.
In the past, it has been common practice for banks to outsource loan review, compliance testing, and internal audit functions — so why not the credit analyst role?
Thin talent pools flow two ways Historically, banks have hired recent college graduates as credit analysts with the expectation of developing them into commercial lenders and potentially future management. In theory, this practice makes sense. But in today’s market, the success rate of banks converting a credit analyst into a long-term employee seems to be the exception rather than the norm, causing many banks to abandon their commercial training programs.
Over the past decade, many banks have begun hiring seasoned credit analysts who aren’t looking to move to a customer-facing role, making it more difficult to find affordable, permanent analysts.
In recent years, outsourced providers have started meeting the demand for credit analysts. With the increase in compensation for this role, outsourcing may now be the cost-effective option. This is especially true when you factor in the time and effort spent recruiting and training, while accounting for increased efficiency or production from an experienced analyst/outsourced provider.
Banks Still Have Underwriting Control It is clear many bankers do not want an outside vendor impacting their underwriting decisions. Banks want to make loans to familiar borrowers, and they don’t want the potential for an overly critical or negative analysis from a third party to hinder their ability to do so.
It’s important to understand that your bank will always own and control the underwriting process. The primary focus for outsourced credit analyst services is to provide all the relevant credit information in a consistent format, which will allow the bank to make a well-informed decision. Outsourcing credit analysis should not impact the bank’s underwriting practices.
Banks take pride in their ability to provide quick responses to their borrowers. Outsourcing analyst work doesn’t mean longer turnaround times. If you are considering an outsourced solution, make sure that you establish clear deadlines with your vendor.
You could also consider segmenting the credit analyst work flow between new credit requests and ongoing portfolio monitoring. It may make sense for a bank to analyze new money requests in-house, and then to outsource the less time-sensitive renewal requests and annual reviews.
Training, Retaining Analysts Can Cost You Even if you are successful in hiring a qualified analyst candidate, the time and resources needed to properly train a new hire with little or no previous credit experience can be quite extensive. Typically, when a bank is large enough to have a pool of credit analysts, there is usually a full-time employee who helps train and develop their skill set. But if you work at a smaller community bank, you might only have one or two analysts on staff.
It is common for a senior analyst, credit officer, or a manager from the credit administration area to oversee a new analyst. But these employees usually maintain a full workload in addition, which may result in inadequate training, or an overstressed manager.
The challenge doesn’t end once you hire and train a new credit analyst. One of the biggest challenges still remains — keeping the analyst in the role. Most banks are lucky if they can keep an analyst in the role for two or three years before the individual leaves for higher pay or a more satisfying analyst role somewhere else. And then it’s time to start the recruiting and training process all over again.
At the end of the day, banks want a viable option to end the what seems like a revolving door of credit analysts. By outsourcing this role, banks have new opportunities to provide cost savings and improve quality for their customers.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.