Compensation

4 Tips for Your Compensation Planning from the Banking Industry

Banking is a highly regulated industry. Oversight by an alphabet soup of government agencies means that your bank accounts enjoy security against fraud, corruption, and just plain mistakes.  It’s no secret that the recession of 2007/08 resulted in an array of new regulations, especially in the financial services arena. Banking, especially, became subject to new regulation intended to avoid the circumstances that originally led to the recession.

The regulation doesn’t end with your mortgage loan or bank money market account. We spoke with Kathy Smith, President of Bank Compensation Consulting to find out how the industry’s highly regulated environment has led to creative compensation solutions—many of which can apply to any industry.

Tip #1: Stay Flexible

Since the recession, the regulatory evolution in financial services has impacted business processes and procedures. But, says Smith, it hasn’t stopped there; regulations about how banks can compensate employees also changed. Financial services organizations have to seek flexibility in how they reward employees, she says.

“We’ve had to be very flexible in designing benefit plans and compensation packages, because the agencies can change the rules at any given time—and they have. We have learned over the years to be very flexible, so if something changes we can easily respond.” Companies in the corporate arena should also consider how quickly they could respond when rules change.

Tip #2: Plan for the Future

One focus of government regulators specific to the banking industry is succession planning. Smith says, “They want banks to do more formal succession planning for management, Boards, and ownership. Fewer banks are closely held today, so ownership succession is less of an issue than it was in the past. But community banks often have an executive team and Board members who are aging.

“If a bank has an older executive team, as many do, there can be gaps in succession for the critical positions of Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Lending Officer. We help our client banks recognize employees they can groom for those positions.

“Sometimes, banks have to search outside the organization. When that happens, we help them design compensation packages that help them meet their goals.

“For example, let’s say they’re going to bring in a CEO from outside because they haven’t identified someone to groom for that position within the organization. When they bring someone in from the outside, they need to make sure they’re taking care of their other valuable people to avoid losing them.”

Do you regularly assess who is “up and coming” among your employees?

Tip #3: Define and Assess Retirement Preparedness

Lots of start-ups have a youthful CEO. In banking, though, the executive team is older. Benefits for a 35-year-old executive finds compelling are often quite different from those that appeal to someone who is 55 and thinking about retirement.

“It’s surprising to some people,” Smith says, “that in the community bank market, bankers aren’t that highly compensated. It’s necessary to complement their base salary with benefits, like Non-Qualified Deferred Compensation plans, or perquisites like a country club membership (where they can also network). Their base salary might not be as high as people think.

“This can make a reverse discrimination situation for these executives, where they may actually have to retire on less income, in comparison to others in the organization. They are compensated higher than a staff level person, but there are caps on how much they can contribute to, for example, a 401(k) plan. And Social Security has limitations, too.

“The result is that the more someone makes in income, the lower percentage of their income they can retire on. A staff person can conceivably retire on 100% of income between their bank retirement and Social Security, but that’s unlikely for the executives. Because of the shortfall for the higher-level person, we’ll design plans to pick up the slack.”

Tip #4: Different Generations, Different Incentives

Across industries, people who are 50 or 55 years old are much more likely to be thinking about retirement than are their younger colleagues. Smith says. That’s why banks, like other industries, need to respond to generational needs and wants in order to attract and retain the talent they’re after.

“If you have someone 50 or 55, they are focused more on supplemental retirement income, so for them, we would design a SERP—a non-qualified Supplement Employee Retirement Plan,” she says. “But if you have a 30-something in the loan officer position, a very valuable but younger person, a SERP will mean little to them. They’re thinking, “I’m not staying with you until I’m 65!’ so you have to do something more short-term for them.

“Cash talks to the younger generation. Gen X-ers want something more immediate along with something long-term. Older employees want something long-term. So a tiered program can work best. For example, we had a client with a 55-year-old CEO. There was an officer who was 45 at the bank who was the perfect candidate for CEO in 10 years. So they did a 10-year program for the person they were grooming.

“From age 45 to 55, to keep him hanging in there until the CEO retired and he would take over as CEO, they created a shorter term incentive program. Once he took over as CEO, they did a traditional SERP for him from age 55 and 65; then he could retire thereafter. They took care of him in this tiered way, and it worked beautifully.”

Among the incentive programs BCC has created for bank clients is a deferred cash incentive. Rather than paying all compensation in cash and seeking to retain employees by paying above market level, Smith says that delaying some compensation can be effective.

“If you pay all in cash right away, you aren’t leaving anything on the table,” she cautions. “The balance is a combination—a salary that’s attractive enough, more in the median of the marketplace, a bonus, and additional, short-term deferred compensation.

“It works like this: if you meet the set criteria, the bank grants you a bonus, which is deferred for 4 more years before it pays out. Each subsequent year, the same thing happens. After you’re in the program for 5 years, you start getting an annual bonus in additional to your regular bonus, and it continues as a rolling bonus program. If you walk away, you forfeit all that’s left in your account; it becomes like a silver handcuff, if you will. You might think twice about leaving.”

Smith believes in taking a holistic approach to compensation management, whether it’s for banks or another industry. “Benefits and compensation programs may be designed slightly differently for banks, but many of the challenges are the same for all of us,” she says. Why not absorb some of the lessons she’s learned in her career, and apply them in your organization?