The Importance of Competitive Pay

In the midst of the Great Recession, a number of community banks found themselves the beneficiary of an unexpected inflow of talent. In particular, veteran bankers and commercial lenders who were stuck in dead or dying institutions jumped ship to a safe port during this major storm. Obviously, this was highly beneficial to those institutions seeking new senior leaders or major producers, but in some cases it also created a false sense of “talent security”—the idea that a stream of good bankers would continually find their way to the bank.

While there are indeed some high performing community and regional banks that have become “destinations” for top talent, this remains the exception to the rule. Furthermore, given the demand for talented bankers and lenders in excess of the supply (in both rural and urban markets), compensation has returned as an important factor in bankers’ consideration of where to deploy their talents.

This is not to say that an executive’s primary motivation to pursue new opportunities is financial: all of the data affirms that this is not the case. We have observed, however, several evolving dynamics regarding executive compensation, which have significantly impacted the market for senior banking talent over the past several years:

• Banks are increasingly locking in their high performers and senior leaders with tools such as equity grants that vest over time, phantom shares for private banks or deferred compensation. In this still uncertain economic climate, few executive level candidates are willing to walk away from real dollars for the privilege of joining another institution. Candidates are usually reticent to leave money on the table, and thus these retention tools designed to “handcuff” executives are working in many cases.
• Career moves that are financially lateral are becoming increasingly rare. As institutional and regulatory risks remain uncertain—often impacting an executive’s willingness to consider a career move—the “change premium” needed to attract new senior talent has increased. In addition, the due diligence conducted by senior bankers on potential career destinations has never been more thorough. This often complicates negotiations, impacts offer terms, and in some cases even results in a banker’s decision to pass on a superior opportunity due to a bank’s regulatory status or cloudy future.
• Institutions that do not have the liquid currency of equity to work into the compensation mix—including privately held banks, mutuals, institutions whose equity plans have expired and those under some form of regulatory agreement—often face a greater challenge in structuring an appropriate compensation package when in heavy recruiting mode. Making up for lost equity, pending bonus payments, and deferred compensation may be especially challenging when the sole or primary compensation tool available is cash.

As evidence of this shift in executive recruiting economics, nearly every CEO search assignment we have been involved with over the past five years has also involved the bank’s compensation consultant. We have partnered with our clients’ compensation advisor—firms such as Pearl Meyer, Meridian and McLagan—in order to ensure not only that the proper financial package can be designed, but that the structure of such packages is appropriate and defensible.

Talent is so important, that one of the prime reasons some banks sell to another bank is the lack of a succession plan or the limited availability of talent.  At the end of the day, talent drives the execution of strategy, and people are always the variable in a bank’s ability to execute that plan. Thus, banks that want to survive and thrive must have the strongest possible executive leadership, as well as a cadre of good lenders. Of course, “A” players always have the most options, while “B” players are more plentiful.  However, it is always the “A” players who move the needle in terms of performance, while also commanding market compensation. “B” players may be less expensive but rarely move the needle, and the savings in hiring a B player will never make up for the lower performance.

Compensation is always a sensitive issue in banking, particularly for publicly traded institutions. And yes, it often feels that the competition is always driving up the cost of talent, impacting the bank’s bottom line. In reality though, the two most vital ingredients for banks to succeed in this environment are capital and talent. In banking as in most businesses, you do get what you pay for most of the time. Banks that are willing to invest in competitive compensation packages will be better poised to attract the best talent, and win the never-ending battles in the marketplace.