Publications & Resources

November/December 2009
Focus: Directors Issues

 

Executive Compensation: One Size Does Not Fit All in the New Community Bank Economy

By Stephen A. Enna

The traditional compensation strategy must be re-evaluated to meet the needs of today’s community bank executives. The elements of executive compensation have not changed. Base salary, short term incentives (bonus), long term incentives (equity) and benefits are still the tools in the tool kit. Traditional strategies regarding those tools have worked in the past but those strategies may need to be re-thought and re-worked given today’s environment.

With almost all equity granted to community bank executives, during the past four years, underwater and performance based bonus plans left in shambles and totally unachievable by an economic crisis that has not been experienced since the great depression, bank boards are faced with an enormous challenge.

How Do We Motivate and Retain the Team of Executives Needed to Move the Company Forward?
Couple this with the extensive TARP regulations regarding executive compensation, we now have, not by desire, the perfect storm from which the executive team may sink and with them the performance of your bank or surface and sail into calmer waters carrying the benefit to shareholders with them. 

One thing is for sure. A board can’t right the ship alone. They must have a strong executive team to do so.

Over the past decade, executive compensation advisors and professionals have stressed a strategy that has been proven to work. Simply stated, put less emphasis on base salary, set performance based incentive plans that pay out with significant performance achieved against pre-determined goals, use benefits wisely and don’t lead the market in benefits and use equity as a retention tool to align executive success with that of shareholders.  This strategy was generally applied to all members of the executive team. Payouts varied based on organization level but the strategy was the same.

What’s Different About Today’s Environment?
Enter today’s environment. Each executive member of the team is different in many ways. For example age, family size and personal goals may all be different.  In the past this was true as well, and with equity grants coupled with stock price growth, each executive was able to plan for the future knowing that the tools were in place to enable them to meet their individual objectives.

The current economic crisis has eliminated that ability to plan for future needs. All equity is gone; as is much of accumulated long term savings in 401(k) plans. Banks, unlike many civil service organizations, had to give up defined benefit plans a long time ago because they simply could not afford them. Few, if any, bank executives can look forward to a defined benefit plan that protects their future income. A perfect example is the retirement of the chief of police in San Francisco. After 32 years of service, the retiring chief will receive a pension benefit of $230,000 per year for life. I simply am unaware of any community bank president, with that kind of service, receiving that level of benefit. And after a full career in community banking, I don’t know of anyone who can retire at age 53.

How to Face the Challenge Ahead

So we are faced with a new challenge. Assuming we have the right management team in place and we don’t want to lose them, then we need to rethink how we go about motivating and retaining them. From my perspective, it starts with a few simple steps.

Talk to each member of the executive team about their individual needs, personal financial objectives and the things that motivate them.

Review the tools in the tool kit and develop a three year strategy for each executive using the tools available.

Determine the overall value you want the compensation package to be set at. Then think of it as a pie that is of the size that the position warrants. Once you have the size determined for each executive, then slice the pie based on the individual needs discussed.  Each executive will have the size of pie proportionate to their position; but, the slices in each executive’s pie will be of different sizes.

Put a three year contract in place for each executive that outlines the individual strategy developed.

What About Everyone Else?
For everyone else in the organization, don’t disregard the strategies of the past. In fact, I would recommend that you continue to use the strategies of the past throughout the organization. Set base salaries at a competitive level, review employees annually for merit increases. Pay bonuses based on position, market and performance, and continue with a solid benefit program. These will continue to work for the majority of the workforce but now is a time to re-think the strategy for the leaders.

Stephen A. Enna is director of EW Partners, Inc. in Walnut Creek, Calif. He can be reached at 925-472-8050 or steve.enna@ewpartnersinc.com.

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