By Matt Brei, President and Kristen Kostner, Senior Consultant, Blanchard Consulting Group – IBA Associate Member
Our firm has been providing compensation consulting services exclusively to community and regional banks for the last seven years, and we can confidently say that one of the first things we talk about with most new clients is the strategic use of compensation. Human capital is likely the most expensive resource a bank has, and we all know our people are important in a customer facing business, so why not be strategic with it? Almost every business has a written strategic plan that states profitability goals, growth goals, three-year plans, etc. Frequently, the board and executive management spend multiple days working on such a plan. However, when it comes to compensation, less than half of banks (47% of the 201 banks surveyed in our 2016 Compensation Trends Survey) have a written compensation philosophy.
Banks are for profit businesses, so it certainly seems to make sense that their compensation programs should be in-line with the strategic goals of the organization. All employees are not the same and do not provide the same value to the bank. As such, they should not all be paid at the median of the market, always receive the same annual 3% salary increase, and receive the same bonus or incentive as their peers. Unless, of course, the strategic plan says you want to be average and you want all your people to be average as well! We are confident that we never seen a strategic plan with those goals in it.
The Compensation Philosophy
Most organizations start the strategic compensation discussion with the development of a compensation philosophy. This document, often only a page or two, primarily identifies a few key items. 1) What are we trying to accomplish with our compensation programs, 2) What compensation programs do we have available to our employees, 3) Who qualifies for these programs and why, and 4) Where do we want to position ourselves versus market? The compensation philosophy statement should be a living document that is reviewed annually and is adjusted as necessary to support business strategy changes.
Strategic Salary Planning
Banks that are strategic with compensation will frequently have a clearly defined salary grade structure, accurate and up-to-date job descriptions, utilize external market data for position benchmarking, and a salary increase matrix for annual salary adjustments. The salary structure will have enough grades to encompass all levels of positions, and will often be used as a motivational tool to show top performers how they can progress within their current range, and where promotions could place them in the future for career growth and development. The salary structure should be tested against both internal and external bench marking to ensure it’s competitive. The entire structure should also be reviewed annually and adjusted for cost of labor and market trend increases. Ultimately, salary structures do not have to be overly complex to be effective.
Additionally, the annual salary increase process should be strategic, based on the performance of the individual, internal equity with others in the same position, his or her current positioning in their salary grade, and fit within the overall budget of the organization. Many banks utilize a salary increase matrix to assist managers in determining annual raises. The matrix generally focuses on providing the largest increases to employees who are exceeding job expectations and are positioned low in their salary grade. Employees who are simply meeting expectations and are high in their salary grade will often have very minimal increases, and employees who are not performing will generally receive no increase. Those above the maximum of their salary grade typically receive their increase in the form of a one-time lump sum payment. These matrices help managers be strategic with their salary increase budgets and put the dollars in the right place. The days of giving everyone the same percent of salary raise are gone.
Once you have the salary component figured out, the next step is incentive-based pay. This can take the form of annual cash incentives and/or equity-based incentives. What type/s of incentive a bank utilizes will often vary depending on the company structure (public, private, etc.). Incentives may also vary depending on level of position. As an example, executives may be eligible for a cash and equity incentive plan, but staff may only be eligible for cash incentives. The key to using strategic compensation is to make sure your incentive plans are based on performance and are sufficiently motivating and rewarding key positions. The strategic goals of the organization should be incorporated into the incentive-based compensation plans. The concept is to clearly state what you want your employees to do and encourage and reward these behaviors through your incentive compensation programs. Getting everyone aligned and on the same page as to what the goals are is important for success. This takes time, communication, regular check-ins on performance, and “buy in” from the entire organization.
In today’s banking world, there is a lot of talk about incentive plans being “risky” and maybe even “evil” (example: Wells Fargo retail incentives). We strongly disagree with this sentiment. Banks are still in the business of being profitable and incentive plans have their place to help drive behaviors and reward performance. The key is to have a balanced approach between profitability goals, quality goals, and strategic goals. Some of the incentive plan “horror stories” actually prove that incentive plans work. They do drive behaviors and you simply need to be smart about what performance behaviors you are encouraging.
From our experience, the most successful banks (not unlike other industries) are those who are able to appropriately balance their profitability needs with good culture, good communication, and strategic compensation programs. Banks need to be financially successful to truly help the communities they serve. Ensuring that your compensation programs are strategically supporting the overall goals of your organization and are linked to the performance you need is essential. Make sure you are getting your “bang for the buck” with your compensation dollars being spent.