Compensation strategies to retain your bank’s top talent

Retaining high performers through a mix of benefits and “soft” perks may keep them climbing your bank’s corporate ladder. Photo by MaaHoo Studio/Stocksy

Gone are the days of defining compensation as salary and bonus. Today’s star employees—whether existing or prospective—are demanding ever-more innovative employment packages.

By Colleen Morrison

When it comes to staffing and compensation, community banks display their competitive instincts. Almost 20% of banks offer base salaries more than 10% above market levels—a figure that has more than doubled in the past decade, according to the 2019 Crowe Bank Compensation and Benefits Survey. While some of these increases can be chalked up to an increasingly competitive job market over the years, they also speak to community banks’ desire to reward hard work.

“You can’t pay your best people too much,” says Mark Heinemann, president and chief financial officer of $169 million-asset Farmers State Bank of Hartland in Albert Lea, Minn. “The best people perform even better when you pay them a higher salary. They are internally motivated and feel like they need to justify their worth to the organization and to themselves.”

“The best people perform even better when you pay them a higher salary. They are internally motivated and feel like they need to justify their worth to the organization and to themselves.”
—Mark Heinemann, Farmers State Bank of Hartland

That sentiment applies to all levels within an institution, and many community banks are stepping up to ensure they offer pay that attracts strong talent. In fact, the Crowe survey reported increases in compensation for key branch roles. The results indicate an overall investment in branch staffing, with frontline staff benefiting from “higher-than-expected” increases between 2017 and 2019.

“Our [frontline staff] compensation is still far higher than almost every other bank I ever talk to,” Heinemann says. “I think that’s a huge mistake that a lot of organizations are making. [These staff] are the face of the bank, and they’re the most important interaction that we have with our customers on a regular basis. When you pay better wages, you get better employees.”

Yet, standard compensation alone no longer seals the deal. Beyond salary and bonus, prospective employees look for other financial incentives, such as 401(k) contributions and student loan subsidies. Millennials in particular, who according to Experian have an average of nearly $35,000 in student loan debt, see these other forms of benefits as supplementing their full compensation.

In addition, prospective employees may be looking for investment opportunities in the bank itself, including profit shares and employee stock ownership plans (ESOPs). The National Center for Employee Ownership estimates that there are more than 6,600 ESOPs covering more than 14 million participants in the U.S., with employees controlling about 8% of corporate equity.

However, ESOPs aren’t right for every institution. For community banks that are family owned or where minority shareholders aren’t desired, synthetic equity or phantom stock plans create another compensation offering. In these plans, the synthetic equity stockholder receives the equivalent of an equity shareholder without actually holding the shares. This allows them to earn compensation—usually on a deferred or vested basis—without earning voting rights and diluting ownership.

Retaining top performers

Once a community bank has developed a compensation package that enhances its position as a hiring employer, it’s time to develop programs that ensure the bank is retaining its best and the brightest. HR consultancy G&A Partners estimates that it can cost between 30% and 150% of an existing employee’s salary to replace them. Retaining top performers therefore remains critical from a financial perspective, as well as from an operating one. Yet, COVID-19 aside (see sidebar below), retaining employees is becoming increasingly challenging: Since 2014, the turnover rate for those in nonofficer positions has more than doubled, reaching an average of 24% in 2019, according to the Crowe survey.

“Certainly, for the retention component, the compensation does play a role,” says Dan Maddox, chief executive officer of $675 million-asset Citizens State Bank in New Castle, Ind. “Up until [COVID-19 hit], it was a very competitive job market, so you had to be competitive.”

Today, retaining employees goes beyond meeting the market salary-wise. Bank leaders know that culture, shared mission, work/life balance, and other “soft” benefits must factor into their models, but employees are also looking for concrete offerings to bolster standard salary and bonus. That’s why some banks are identifying creative solutions to provide “hard” incentives in ways that further tie the employee to the organization. Case in point: Deferred compensation plans—those structured for payouts following a certain period of time—have become a carrot to reward employee effort and keep them connected to the bank.

For example, a community bank may set up a deferred cash incentive plan for its star performers or leadership staff. This plan’s evaluation metrics may align with those of the standard annual plan for payout, but along with it, there’s a five-year vesting period for the funds earned. During that time, the funds are tax deferred, and they earn a rate of return equal to the bank’s return on equity. This approach creates a cascading effect, so year one funds are fully available in year six, while year two funds will be fully vested in year seven.

According to experts, the beauty of a deferred compensation plan is two-fold. First, it ensures bank teams continue to focus on long-term goals instead of just short-term gains. Second, it keeps high performers and leaders tethered to the organization.

“Deferred compensation gives you the golden handcuff,” says Kathy Smith, principal at Bank Compensation Consulting, an advisory firm based in Plano, Texas. “If they pay all of their compensation out in cash, then there’s nothing tying that person to the bank. … If they add to it some form of deferred compensation that [employees] leave on the table if they walk away, that starts giving a handcuff for retention.”

“Banks can stand out from their competition by implementing … golden handcuffs in all different forms, whether it’s equity, synthetic equity, deferred comp or a combination.”
—Kathy Smith, Bank Compensation Consulting

Smith notes that deferred compensation has been a trend for a long time, but it continues to climb in popularity with community banks. In addition, banks are identifying other programs to help bolster retention rates, including special forms of monetary recognition. The Crowe survey found that since 2012, 15% more banks have implemented a rewards system based on years of service to encourage lower turnover and increase officer retention.

“Banks can stand out from their competition by implementing these golden handcuffs in all different forms, whether it’s equity, synthetic equity, deferred comp or a combination,” concludes Smith. “It’s not all the same, one size fits all.”

As each community bank determines its own program, one thing stands certain: The days where salary and bonus equaled compensation are over. In today’s environment, attracting the right talent may depend upon how creative a bank is willing to be with its compensation package.

How is COVID-19 affecting compensation?

Many community banks boast strong performance-based incentive plans and are now asking themselves, if goals have shifted due to COVID-19, what happens to compensation?

“Your budget got completely changed by the pandemic, and all of your priorities changed,” says Mark Heinemann, president and chief financial officer of Farmers State Bank of Hartland in Albert Lea, Minn. “But if you start changing things midstream on [staff], for good reason, they are unhappy.”

That’s why Kathy Smith, principal at Bank Compensation Consulting, encourages community banks to be flexible and to consider one-off allowances or overall shifts for 2020. She advises her clients to structure programs to allow room for models to evolve. If priorities shift, so, too, can compensation.

“I’m finding my current clients who already have a goal-oriented plan in place are [asking], ‘We set these goals up before COVID ever happened. Are we going to meet any of our goals?’” says Smith. “We’re trying to tell them, ‘Let’s be flexible, yet focused. Let’s see what’s going to happen at the end of the third quarter. … Then we can make a determination [on] what we need to do at the end of this year to adjust.’”

On the upside, COVID-19 also may bring with it new opportunities to expand intangible benefits, such as remote work. “We’re seeing, from recruiters even, a lot of candidates presenting the requirement of working from home [since COVID-19],” says Dan Maddox, chief executive officer of Citizens State Bank in New Castle, Ind. “We can really broaden our reach geography-wise and throw a much wider net to a larger pool of candidates.”

Colleen Morrison is a writer in Maryland.