Rewarding and Retaining Commercial Lenders at Your Bank

One of the findings of the 2016 Bank Advisor Compensation Survey was something many community banks already knew well: the need for talented commercial lenders. Commercial lenders are currently in high demand, and banks are snatching up the best talent. The lenders you currently employ could be receiving offers. If you already have great lenders who are securing a significant amount of revenue for your bank, other banks and financial institutions will be watching them. It’s necessary to make an effort to reward and retain skilled lenders who will help make your community bank more profitable.

Why lenders are in high demand and banks are having a difficult time finding them

Financial technology (often referred to as FinTech) companies, credit unions, and crowdfunding all dilute the pool of loans. New competition in the marketplace makes it that much more important to have a solid lending team. Although the industry is ever-evolving, banking is still about relationships, and banks need lenders who can build those relationships.

With lenders in such high demand, many banks are willing to compensate highly for the top talent in the field, and attracting lenders is therefore getting more expensive. In Bank Director’s survey, 43% of respondents said there aren’t enough talented commercial lenders in their markets. This concern is least significant for banks with greater than $5 billion in assets (only 20% believe there aren’t enough talented lenders), but for smaller local banks, especially those with less than $250 million in assets, 56% report that it’s a problem.

The problem with short term compensation for commercial lenders

Many lenders, as salespeople, are used to getting compensated in the short term via commission. The long term compensation strategies often used by banks for rewarding and retaining top talent may be unfamiliar to them. However, trying to appeal to lenders by offering compensation in the form of commission can easily backfire. Let’s say the lender gives a loan to a business that goes bad, meaning the bank loses revenue, but the lender has already been paid through commission. This is why long term incentives are best. Lenders need to be invested in the long term performance of the bank, not their commission payments.

Types of long term compensation for lenders

When thinking about long term compensation that aligns the lender’s interests with the bank’s, equity compensation may come to mind. There are three types of equity compensation, and each has its own pros and cons.

  • Stock Options: Stock options don’t have intrinsic value, and employees may not value them if they lack the cash to pay tax on exercising their stock options. This results in the bank investing in the stock without creating a successful retention incentive. There is also a risk of dilution for the bank. However, if employees do see the value in stock options, they can be a powerful retention tool.
  • Restricted Shares: Restricted stock plans should be designed so they do not put a tax burden on grantees when the stock vests, but they do have intrinsic value (and thus, intrinsic retention value) so long as the awards are unvested.
  • Synthetic Equity: While synthetic equity is similar to traditional equity, it is settled in cash. Determining the value of synthetic equity can be difficult for banks unfamiliar with the practice, so it is usually most effective when used alongside true equity plans.

Though the three types of equity compensation each have their benefits, they do come with a certain amount of risk. Nonqualified deferred compensation plans with lifetime benefits leave a lot less to the unknown. Banks must be careful how these plans are designed as to not violate IRS/ERISA Top Hat limitations, but in some cases, these types of designs are appropriate and compliant.

With the right strategy, your bank can capture the best lenders in the industry

Banks need to focus on structuring plans to retain, reward, and recruit lenders. If you need help creating compensation packages that will attract the best lenders to your bank, consult with an institutional advisor who specializes in bank compensation.