The 3 Pillars of a Community Bank Compensation Philosophy

An executive compensation philosophy functions as a mission statement and a guide that positions your organization to retain and recruit talent. You may be under the impression that compensation philosophies are only for national banks and other large organizations, but they are crucial for community banks, too. Compensation philosophies are for forward-thinking, proactive organizations looking to generate maximum value from their compensation dollars and hire consistent, high performing talent.

Attracting and retaining talented and dedicated employees is a paramount concern for every organization, and chances are your community bank already knows the struggle well, considering today’s banking environment. Your compensation packages play a major role in bringing in top talent, but figuring out the right approach can be a challenge. Having an established compensation philosophy helps your bank make decisions about executive compensation. To compete with large banks and all other entities vying for the same leadership talent, you need to remain competitive, and your philosophy will be the backbone of your compensation strategy.

There are three major factors that a successful executive compensation philosophy needs. Your philosophy should be clearly defined, drive consistency, and be comprehensive. Let’s take a look at what that means and what you need to consider while developing your philosophy.

1. Your community bank compensation philosophy needs to be clearly defined.

An executive compensation philosophy should bring clarity to your compensation practices and drive your bank’s pay culture. Having a vague idea of your compensation philosophy isn’t enough to accomplish these goals and keep your compensation competitive. It should bring clarity to how the organization views salary and pays for performance awards, benchmarking, and benefits. It should also include cultural guidelines with respect to compensation.

You may think your approach to compensation is clear, but unless it can be recited definitively by your executives and HR personnel with ease, it’s easy to contest its clarity. Your executive team and HR team should sit down together, discuss problems and successes with regards to attracting and retaining employees, and start thinking about whether you have the right strategy in place. Many community banks have not penned their compensation philosophy, which is a mistake in today’s competitive world. Although it may be a challenge to actualize the philosophy, it is an exercise that will flesh out contradictions and provide a clear roadmap for your bank moving forward.

2. Your approach to compensation for executives needs to be consistent.

Although your philosophy provides a framework, it is important that it does not limit flexibility in specific situations. For instance, compensation for executives in marketing, lending, and IT may need to deviate from standard practices due to the high demand for these positions in modern banking. Still, the compensation philosophy should provide consistent guidelines as to how to structure the compensation.

3. Your compensation strategy needs to be comprehensive.

Your philosophy needs to consider all aspects of compensation for executives. It is no longer enough to simply state the bank wants to “retain, attract, and motivate” top talent. Boards and executives should learn to view compensation as an investment rather than simply an expense. Successful compensation strategies incorporate a balanced compensation approach, leveraging various types of compensation to accomplish your stated goals. 

In today’s banking environment, the need to understand leveraging compensation to drive shareholder value is a new reality. Establishing a culture that pays for performance and recruits the best talent is an intentional, disciplined decision. Moving forward, company culture will continue to play a cornerstone role in attracting and retaining employees. This cultural tone should be partly set by your comprehensive compensation philosophy, and it is a critical component to the success of companies.

With the right philosophy in place, you can develop policies that drive the success of your bank

Human capital is the driver behind successful entities. Developing and implementing a clear, consistent, and comprehensive compensation philosophy will help further the success of your bank. Without top talent, organizations will wander in the land of mediocrity, which is unacceptable for shareholders. If your bank is having difficulties establishing a tangible philosophy to support your compensation strategy, you may want to engage a compensation consultant to provide general direction or relevant examples. If approached the right way, your community bank compensation philosophy will ultimately help retain and recruit the talent you need to thrive.