The pressures brought to bear upon the banking industry as a result of Covid-19 and the related economic downturn promise to exacerbate two long-term challenges facing bank boards and management teams: tying compensation to performance, and managing compensation and benefits costs.
In early July, the U.S. remained “knee deep in the first wave” of the Covid‑19 pandemic, according to Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases. States paused or began rolling back their efforts to reopen businesses and public areas. Tens of millions of Americans were unemployed. By September, newly reported cases remained above infection levels in March and April nationally. Many states were experimenting with school reopenings, and case counts were rising in the U.S.
“I’m really concerned about it,” said William Demchak, chairman and CEO of PNC Financial Services Group, who warned of an impending wave of loan defaults in a July interview. “I don’t know that it’s going to devastate us, but I think it’s going to put us into a period of really slow growth.”
Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, was conducted in March and April, just as Covid-19’s broad reach became clear, leading banks to embrace remote work and respond to the monumental task of issuing Paycheck Protection Program loans.
The survey highlights key concerns for bankers in this unusual environment, which will be explored in this white paper. How will bank boards evaluate CEO pay? What about director compensation and efforts to refresh the board? Finally, will banks be prepared for the impending turnover in the C-suite once baby boomers retire?
Forward-looking banks could emerge stronger from this crisis, says Flynt Gallagher, president of Compensation Advisors. “This environment is an opportunity for them, because it gives them the ability to make the changes they’ve been wanting to make,” he says. With so many Americans unemployed, more high-quality talent is available, and he believes institutions should find a way to bring them into the organization — even if a position isn’t open.
“You never go wrong when you get good people,” Gallagher says.
To read more about addressing board and CEO pay challenges, read the white paper.
To view the full results to the survey, click here.
A direct correlation exists between data quality and productivity improvements within the risk management function. Poor quality data can result in increased time to develop models, lower confidence in the model results and less time to analyze results. Less precise modelling caused by poor data quality can mean that banks have to set aside higher capital buffers and loss allowance provisions.
There are numerous processes available for banks to define data quality, and guiding principles that can be implemented to improve data quality. When defining the firm’s framework for data quality in risk analytics, the following guidelines can be applied:
Specifically document how data are defined and constructed.
Ensure that data accurately quantifies the concept that modellers intend to measure.
Independently verify numerical correctness by using backlinks to primary sources, quality declarations, unique identifiers and accessible quality logs.
Moody’s Analytics recently published an article entitled “When Good Data Happen to Good People: Boosting Productivity with High-Quality Data.” This article quantifies the impact of data quality on improvements to analytical productivity, and provides a functional definition of data quality along with detailed examples of the impact of improving data quality on efficiency in analytical tasks. To read the full whitepaper, click here.
For most bank boards, technology is a black hole of knowledge. Although they might be perfectly capable of programing their digital televisions or surfing the Internet with their tablets, bank directors generally don’t understand technology in the broader context of how it impacts their institution’s performance and profitability. And they’re not alone, which only compounds the problem. “It’s hard for the bank’s executives to keep up with technology let alone the board,” says Terence Roche, a principal at Cornerstone Advisors in Scottsdale, Arizona.
Unfortunately, the banking industry is changing so rapidly—and technology in many cases is actually driving that change—that directors need to engage in strategic discussion around technology and make that a priority at their regular board meetings. “You can’t have a discussion about banking without having a discussion about technology,” says Bruce A. Livesay, executive vice president and chief information officer for First Horizon National Corp. in Memphis, Tennessee.
Increased Spending Certainly directors need to have an appreciation of where their banks are making significant technology investments. Celent, a New York-based research and advisory firm, released a forecast in January 2014 that total information technology spending for North American banks, including both U.S. and Canadian institutions, would increase approximately 4.5 percent in 2014 and 4.6 percent in 2015. And what will that money be spent on? Much of it will go towards the maintenance of existing systems and operations, although Celent was encouraged that new investment spending will rise an estimated 11 percent in 2014, which means that a proportionally larger share of every dollar of technology spending will go towards new systems, applications and operational capabilities.
Retail banking initiatives like application enhancements for smart phones and tablets, and the next generation of online applications, are expected to capture some of that increased investment spending, as are commercial banking initiatives like upgrades to existing cash management and treasury solutions as many larger institutions look to deepen their relationship with core business customers. A more demanding regulatory environment, particularly in critical areas like anti-money laundering, will also lead many banks to invest in various compliance-based solutions.
Making Decisions about Technology Not only do boards need to understand where the technology expenditures are going, they also need to have an in-depth understanding of how technology either facilitates—or impedes—the bank’s overall strategy. Livesay offers this example: The increased cost of regulatory compliance is causing some boards and management teams to consider whether they need to grow larger so they can spread those costs over a wider base. But the decision to grow larger can’t be made in a vacuum. There are other issues that must be taken into consideration, including whether the bank’s current technology platform can support a larger bank. “Can it scale to where we want to go?” says Livesay. If not, the bank could be facing a costly investment to build out its technology infrastructure to support a larger operation.
Another example of where corporate strategy and technology are beginning to intersect is the exploding popularity of smart phones and tablets and the impact this is having on retail delivery systems. In order to remain competitive, most institutions are going to have to make significant investments over the next three to five years to build out their mobile and online retail banking applications, and this also might require more scale to make those investments cost effective. If the board anticipates that it might sell the bank in that time frame, it probably won’t make those investments. But if the board is committed to growing the bank and maintaining its independence for the next three to five years, those new spending initiatives on retail delivery need to be made now so it doesn’t fall behind. “The board needs to look forward and decide where it’s going and what the bank’s technology needs are,” says Cornerstone Senior Director Sam Kilmer.
How a Bank’s Board Handles Technology At $28-billion asset First Horizon, which has significant activities in retail and commercial banking, mortgage lending, capital markets and wealth management, the board is particularly focused on information security—or as Livesay puts it, “keeping the bank off of the front page of the newspapers.” Protecting the security of customer data is so important that it has become a board level concern at the company. “Cyber-attacks are becoming more frequent and more destructive and that’s not going to slow down, but will intensify,” he says.
The First Horizon board also pays close attention to customer preferences in the digital space and how the growing demand for “anywhere, anytime, any device” capability is forcing the company to alter its retail delivery strategy. While banking is still a relationship-focused business, the retail model is beginning to change as an increasing number of customers make greater use of remote channels like mobile. This migration from branches to mobile has placed new demands on the bank’s technology, requiring that it invest capital resources to keep pace with demand. What does the board worry about? “Where do we place our bets on innovation?” says Livesay.
If the board at First Horizon is comfortable having high level discussions that involve technology, it might be in part because in 2007 it recruited a director—Robert B. Carter, chief information officer at FedEx Corporate Services—who knows something about it. Livesay, who is a member of First Horizon’s executive management committee and reports to the company’s chief executive officer, also makes a presentation at every regularly scheduled board meeting on some aspect of technology. “Every board meeting I am on the agenda,” he says.
Most boards do not become overly involved with technology decisions that are purely tactical, but increasingly they have become very engaged in decisions that are strategic in nature, or could pose a significant risk to the bank if not executed properly. For example, when First Horizon made a decision four years ago to in-source its data center after having used a third-party processor for a number of years, the board was very engaged because of the operational and strategic risks that undertaking entailed. The fact that building a new data center was the second largest capital expenditure in the company’s history also captured the board’s attention, Livesay says. “It was a big data project,” he laughs.
With the exception of Carter, none of the directors on First Horizon’s board is an expert on technology, but they still make it an important aspect of critical board discussions about strategy. And perhaps because they do understand the importance of technology in the overall scheme of things, they also make sure that Livesay has the necessary resources to do his job.
“When I go in with a technology issue, they’ll ask, ‘Do you have what you need?’” he says. “I don’t think that is the case in every company.”