Some of the top challenges facing Texas bankers were identified in a recent 2021 TBA Bank Compensation and Benefits Survey. The top three issues identified by the participants include: finding and hiring the right people, followed by retaining and motivating the right people and motivating employees for better performance. Interestingly, these are the top challenges as reported in TBA survey the previous two years.
Retaining young talent
Retaining younger talent continues to be a challenge. 46.5% of survey respondents indicated it was very or somewhat challenging to retain younger talent and 53.5% indicated that it was no more challenging than retaining others. An alarming 77.4% of the respondents indicated they have no strategy in place for recruiting and retaining younger talent — but this percentage has become more favorable over the past two years.
Retaining key talent
How would your bank fare if your top-performing lenders left tomorrow? During these unique times, retention of key talent — including mid-level officers — continues to be a challenge. They value the types of compensation differently than their older counterparts and are not always interested in retirement or equity plans.
For this younger generation, boards could consider a deferred compensation plan that allows for in-service distributions that can be timed to coincide with certain events, such as the need for mid-term cash or child entering college. Plan payments made to the participant while still employed are customizable and can be made at some future point such as three, five or ten years. These plans can be highly valued by an officer who is not focused on a retirement benefit.
The direct cost of replacing a high-performing employee is up to 213% of the annual salary associated with the position, according to research by the Society for Human Resource Management & Center for American Progress. Total costs can rise to as much as 400% when considering indirect expenses. Direct costs include screening, interviewing, acquisition cost, onboarding and training, while indirect costs include lost productivity, short-staffing, coverage cost and reduced morale.
Many bankers attempt to quantify the cost of losing a lender to help with retention planning. One example includes a lender in their early 40s who maintains a $40 million loan portfolio with a 4% margin joins a competitor bank. The estimated earnings on the lender’s portfolio were $1.6 million. If 30% of the portfolio moves to the competing bank, that would create an annual impact of $480,000. The bank stands to lose $1.4 million in three years. Assuming this lender generates $10 million in new loans annually, that adds another $400,000 in additional lost income. Losing this one lender results in lost annual revenue of almost $900,000. Now imagine the bank has seven lenders with similar portfolios and margins. If the entire team left, the lost revenue potential could be over $6 million annually.
Supplemental benefits
In growing numbers, community banks are recognizing the need to enhance traditional management compensation packages with supplemental benefits. Whether it be stock look-alike plans, stock awards or some other form of mid- to long-term cash awards or supplemental retirement benefits, careful consideration should be given to the strategy or combination of performance-based strategies that are most appropriate.
It is critical that banks implement competitive compensation plans that provide relevant, meaningful benefits. Some compensation committees believe a salary and an annual performance bonus are adequate to retain key employees. But based on our experience, banks with higher retention rates offer two to four types of compensation plans, in addition to salary and bonus.
Examples include employee stock ownership plans, stock options, restrictive stock, phantom stock, profit sharing, salary continuation plans and deferred compensation plans. The survey identified several of these types of plans used by Texas banks. These plans provide for payments either at retirement, while employed or a combination of pre- and post-retirement payments. Banks can strategically design and customize these plans in ways that incentivize strong performance but fit the demographics and needs of the key personnel. There is no one-size-fits-all plan.
Performance-driven incentive plans
Historically, many institutions made up retirement shortfalls in executive benefits through non-qualified salary continuation plans (often referred to as SERPs). These plans generally provide a fixed, monthly retirement benefit based on an executive’s long-term service to the bank. More recently, however, banks — recognizing the value of management incentives — have begun tying current and long-term compensation to bank performance. When properly designed, performance-driven incentive plans can:
- Align management goals and incentives with annual strategic goals of the bank.
- Focus executives and employees in the areas that are key to the success of the bank in the short-term and long-term.
- Allow executives to share in the bank’s success.
- Provide competitive compensation.
- Enable the bank to attract, motivate and retain top talent.
While performance-driven benefit strategies can take various forms, they must comply with regulatory guidance on incentive compensation plans by providing incentives that appropriately balance risks and rewards in a manner that does not encourage imprudent risk-taking. Incentive plans should have both earnings-based goals and strategic goals such as asset quality, capital raising and core deposit growth. Plans that focus solely on earnings-based goals could encourage a focus on short-term profit without adequate consideration of risks.
Cost of benefits
Striking the proper balance between plan attractiveness to executives without excessive expense to the company are also significant factors when designing the benefit plan. Financing employee benefits is a costly endeavor for banks of all sizes. With the cost of benefits continuing to rise and volatile investment returns, finding a reliable benefit-financing option can be a complex task. Implementing a bank-owned life insurance (BOLI) program can help your bank offset the current and future costs of existing benefits such as medical and group life, as well as new programs such as incentive deferred compensation and supplemental retirement benefits.
Avoid the retention problem
The significant potential financial impact when your bank loses key employees — or is unable to attract additional resources — quantifies and underlines the value and importance of retention, so it is critical that executives meaningfully and competitively compensate these employees. Banks without a strong corporate culture and a competitive compensation plan in place are at a higher risk of losing key employees and may have an emerging retention problem.
Effectively managing retention in your bank can be a challenge. It takes time and effort to understand the various strategies and practices available. But given the increasing difficulty of keeping valued employees on board in the face of major shifts in the talent landscape, it is well worth the effort. If your bank hasn’t undertaken a formal review of the competitiveness of its compensation program for officers in recent years, now may be the time.
Ken Derks and Trey Deupree are consultants with TBA endorsed partner NFP Executive Benefits. Derks and Deupree are registered representatives with Kestra Investment Services (www.kestrafinancial.com/disclosures), Member FINRA/SIPC. NFP and Kestra Investment Services are not affiliated. To learn more, contact Ken Derks at [email protected] or Trey Deupree at [email protected].