Crafting a Compensation Strategy at Tech-Forward Banks

Creating differentiation through technology continues to play a larger role in the banking industry as numerous banks transition their strategies to include tech-forward services and partnerships such as banking-as-a-service, payments and cryptocurrency.

As banks’ strategies evolve to support their tech-forward ambitions, care should be taken to ensure pay practices are competitive in the broadened labor market they are participating in. Compensation committees of tech-forward banks are reevaluating their compensation strategies to ensure they remain competitive with their evolving talent pool.

Seven Compensation Considerations for Tech-Forward Banks

1. Build benchmarking peer groups that look beyond traditional banks. In the early stages of implementing a tech-forward strategy, banks should consider other tech-forward banks in their peer group that are further along in their evolutions. While traditional community banks tend to focus on asset size and geographic location to determine peers, tech-forward banks should consider business model alignment, revenue, market cap, valuation multiples and financial growth trends.

2. Appropriately consider fintech talent markets. Tech-forward banks often have fintech partners and customers that will naturally introduce uniquely qualified bank employees to potential fintech suitors. Tech-forward banks should consider which positions are at risk of being poached by fintech startups and understand what those competitive markets pay for similarly situated talent.

3. Include success metrics for tech-forward initiatives in the corporate scorecard. In addition to common banking financial metrics — such as earnings per share, return on assets and credit quality — tech-forward banks often include a broader set of metrics that reflect their specific tech-forward strategy. Examples include deposit growth and deposit mix, fee-based revenue and strategic growth metrics such as customers, accounts and product rollouts. Qualitative evaluations of success of initiatives may be appropriate for early-stage endeavors.

4. Emphasize long-term incentives. A heavier long-term incentive mix is aligned with the value creation objective and risk profile of the tech-forward initiatives and the multi-year timeframe to realize success.

5. Customize annual incentive plans for specific roles. A bank’s corporate plan may not be the best fit for the leaders of a developing fintech venture or subsidiary. A customized annual incentive scorecard specific to achieving strategic objectives may better support these businesses in the critical early stages.

6. Customize long-term incentive plans for specific roles. Similarly, changes in the bank’s stock price may not be indicative of the performance and growth of a developing fintech business unit. Therefore, some tech-forward banks consider an additional incentive program tied to the growth of these businesses. These programs may be in the form of a cash-based plan with long-term growth targets or profits interests in the fintech business to provide the opportunity to share in future growth of the business.

7. Prioritize risk management. Despite key differences in their business strategies, tech-forward banks are still chartered banks and thus should continue to reward financial and strategic success only when risks are effectively managed.

While tech-forward banks lead the way on innovation in the industry, they face many challenges from both a business and talent management perspective. It is critical when considering any changes to the bank’s pay practices to ensure that they support the tech-forward strategy while maintaining a focus on effective risk management and core banking operations.