Salary Survey art

Banks need a game plan to keep your best people

Bank Compensation and Benefits Study identifies concerns and solutions

Ken Derks and Trey Deupree, consultants with NFP Executive Benefits

Issues impacting the HR departmentIn today’s rapidly changing and competitive banking environment, attracting and retaining top performers is essential for success. In fact, it may be the key to your performance or even differentiating your bank from your competition.

Some top challenges facing Texas bankers were recently identified in the 2022 TBA Bank Compensation and Benefits Survey. The top three issues identified by survey participants include: finding and hiring the right people at 96%, followed by retaining and motivating the right people at 89% and motivating employees for better performance at 89%. Interestingly, these are the same top challenges as reported in TBA’s survey the previous three years, however, the top issue has increased in importance from 2021.

Retaining younger talent also continues to be a challenge, 63.3% of TBA survey respondents indicated it was “very or somewhat challenging” to retain younger talent up from 46.5% in 2021. Certainly, this challenge is heavily weighted to retail staff, but retention issues are growing in other key positions such as commercial lenders, technology staff and other positions.

U.S. average base pay changeIn Texas, bankers have made significant adjustments to salary for various employees. The survey did reflect that the base pay on average increased 8% up from 3% in 2021 for employees who met expectations while for top performers base pay increased at a rate of 10%, up from 6%. The average salary increase for officers was 6.8% in 2022 up from 3.7% in 2021 and is projected to be 4.1% for 2023. Your bank may have made similar changes to retain certain key employees. But, as we know, base pay alone will not retain key talent.

Banks with higher retention rates typically offer at least two to four of the following types of compensation plans, in addition to salary and bonus:

  • Employee Stock Ownership Plans (ESOPs)
  • Equity Plans, such as stock options, restricted stock, phantom stock, and stock appreciation rights (SAR) 
  • Supplemental Executive Retirement Plans (SERP)
  • Deferred Compensation Plans (DCP)

The designed flexibility of these plan types can allow for payments to participants either at retirement or while employed. In some cases, banks will offer a combination of both in-service and post-retirement distributions. 

The ability to customize such benefit plans has emerged as an important strategic tool to incentivize strong performance while fitting the demographics and needs of the key personnel regardless of age or life stage. There is no one-size-fits-all plan. 

Employee performance and pay change

The game plan

To help you develop a game plan for recruiting and retaining your best people, we have identified three key approaches.

1. Incentive programs

Sharing value with those who help create value is a common characteristic among high-performing banks. Top individual performers are looking for the right balance between guaranteed and variable compensation, as well as between both short- and long-term incentives. While objectives differ from employee to employee and bank to bank, every board should be able to identify the particular outcomes it wants to pursue and how their fulfillment will impact the financial future of the bank.

An effective incentive plan should have measurable goals and specific rewards tied to achieving those goals. They should include a blend of bank goals that the individual can help shape as well as individual goals. The key employee must be able to make a difference and see how his or her actions affect the outcome. Sales incentives are traditional and obvious, but the incentive pay-out strategies can vary. Including automatic deferrals can build sizeable nest eggs that can help protect your talent from being poached.

2. Strategic deferred compensation

Used when a bank wants to create both a recruiting and retention incentive for top talent, a strategic and customizable deferred compensation plan is fully funded by the bank, often based on performance criteria designed to support bank strategic goals. These programs are not usually “all or nothing” in nature. In other words, there is a range of contribution levels tied to achieved performance levels — including no contributions in down years. Strategic DCPs can allow for contributions to be credited to balances based on ROA, ROE or a phantom stock price, thereby tying the long-term value of contributions to the performance of the bank.

Deferred compensation plans typically incorporate a vesting schedule for bank contributions to incent a participant to remain employed to reap the full benefits of the plan. This is a tool to tie your top performers to the bank.

For younger generations, boards should consider a feature that allows for in-service distributions. Again, building a deferred compensation pool allows for these additional benefits. “In-service” DCP payment schedules are customizable and can be made at any point, e.g., three, five or 10 years, or even to coincide with certain life events such as a home purchase, student loan repayments or a child entering college.

3. Equity participation

Equity plans can be an important part of an officer’s compensation package. However, many privately owned banks are reluctant to share actual equity with their employees. An alternative strategy to sharing real shares is a deferred cash bonus plan that is tied to appreciation of the bank’s value over time. 

Phantom stock/stock appreciation rights (SAR)

Phantom stock and SARs are ways to provide an equity-like benefit to employees without having them own actual stock.

These plans can be designed to pay key officers bonus compensation tied to an increase in the bank’s stock or book value. In a SAR plan, the bank determines a hypothetical stock price through an internal or external valuation of the bank. Officers are awarded some number of hypothetical or “phantom” shares that include specific terms and conditions. At a pre-determined time, the officer receives a cash payment equal to the difference between the original price and the appreciated price.

For example, let’s assume the officer receives 1,000 phantom shares with a beginning price of $50. At the end of three years the bank calculates the phantom stock price to be $75 and then pays the officer any positive difference. In this example, the bank would pay the participant $25,000.

Now is the time to prepare

The current banking environment poses many challenges, with increasing competitive pressure, continued labor shortage of key talent, regulatory requirements and future economic uncertainty. Bank leadership should now be proactively taking steps to attract and retain the best people. Often times, the greatest risk to an institution is the risk of doing nothing. This axiom holds true particularly during times of uncertainty. 

These flexible benefits and incentive plans will help your bank reduce pressure on annual base pay increases.

Compensation needs to be viewed as an investment in your people and franchise — not simply an expense. If your bank has not undertaken a formal review of the competitiveness of its compensation program for officers in recent years, now is the time. 

Tom Grottke, Managing Director, Crowe leads the national compensation survey and performance practice. Ken Derks and Trey Deupree are consultants with NFP Executive Benefits, which both the ABA and TBA endorse for executive and board benefits consulting, administration of BOLI and nonqualified benefit plans, BOLI portfolio solutions and BOLI risk assessment. Derks and Deupree are registered representatives with Kestra Investment Services, Member FINRA/SIPC. NFP and Kestra Investment Services are not affiliated. The survey of Texas Bankers Association banks was conducted by Crowe LLP with data collected as of March 2022.

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