Many banks have chosen to tie executive compensation to performance over the last few years, however with the economic volatility we’ve experienced this past year, that may not be the best option.
Compensation for your key leadership team is an essential aspect of your retention strategy. Because of this, you need to ensure your executive compensation is competitive in the market. In order to remain competitive, you must ensure that your team has adjusted the compensation strategy based on the event that occurred this past year.
How has COVID-19 affected compensation factors?
Over the past year, banks have experienced a multitude of issues while adjusting to the ‘new normal’ that became everyone’s reality. Adjusting to the economic volatility, along with changing work environments, and the changing needs of consumers, executive teams had a lot on their plates.
While you may have previously set goals based on prior years’ numbers, these metrics may need to be adjusted. The days of salary and bonus equally overall compensation are long gone as executives ask for other compensation benefits, including deferred compensation options.
How to remain strategic with your executive compensation.
Excess liquidity is top of mind for most banking professionals, as balance sheets were affected by the combination of stimulus deposits, tax refunds, low-interest rates, and other pandemic-relief financial initiatives. Holding too much of this liquidity is worrisome for bank executives as it takes a toll on the bank’s net interest margins.
These major changes in market conditions require the bank to restrategize in regard to its asset mix. As you work to restrategize, it may be beneficial to consider expanding your allocation of bank-owned life insurance (BOLI).
BOLI can offer tax-equivalent yields up to 3 to 4 percent when compared to the current low-interest-rate environment, this seems like a rather attractive investment. At a basic level, BOLI is intended to offset and recover employee benefit costs, like healthcare and 401(k). These BOLI plans are used to fund other deferred compensation plans or provide supplemental life insurance to the participant.
These BOLI plans can be extremely helpful in transitioning some of the excess liquidity on your balance sheet over to a performing asset. However, there are regulatory guidelines you must follow as you look to invest in BOLI.
Compensation and Retention
One of the most important aspects of enhancing your executive compensation plan is providing a retention tool to ensure your executive team remains intact. As we mentioned above, simple salary and bonus compensation is no longer the standard for executive compensation. According to G&A Partners, it can cost between 30 and 150% of an existing employee’s salary to replace them! Because of this retention should be a top priority in everything you do.
Your bank leadership team understands that there are many aspects to drive retention including culture, mission and values, work/life balance, and other ‘soft benefits.’ But these employees are also looking for concrete offerings that boost their overall compensation. These incentives can be in the form of deferred compensation plans that essentially act as ‘golden handcuffs,’ tying the employee to the organization for a long period of time.
At Newcleus, we understand how important executive retention is to the success of your bank. This is exactly why we structure our compensation packages to fit the needs of your executive, while also benefiting your organization. For more information, reach out to our team today!