Changing of the Guard

A changing of the guard is slowly transforming bank boards and executive teams as baby boomers exit the workforce. For this reason, succession planning and board refreshment are the primary focal points in Bank Director’s 2019 Compensation Survey, sponsored by Compensation Advisors.

It will be a gradual transition, says Flynt Gallagher, president of Compensation Advisors. “I do think we’re going to see an increasing number of key executives retire; I don’t think it’s going to be at quite the pace we thought [it would be] a couple of years ago, because we’re seeing a reluctance for boomers to actually leave.”

This leadership transition will have significant consequences for a number of banks over the coming years. Seventy percent of the directors and executives responding to the survey indicate their bank’s CEO is a baby boomer-ranging from 55 to 73 years of age, as defined by the Pew Research Center.

After leading Community Bank System for almost 13 years, Mark Tryniski-the 58-year-old chief executive of the Dewitt, New York-based bank holding company-finds succession planning is receiving more attention from the board.

“I’m not as young as I was when I assumed the role-it takes on a more frequent cadence of dialogue,” he says. “It’s something that we talk about years in advance.”

“Succession planning and the whole process of appointing CEOs is one of the most important jobs that the board of directors has,” he adds. “It’s a topic that we discuss frequently at board meetings.”

An effective succession plan is formally addressed on an annual basis and should be discussed regularly by the board.
At Community Bank System, succession plans cover a number of positions, but focus particularly on the senior management team. The $10.9 billion asset bank has both emergency and long-term plans in place for key executive positions. “We actually have discussions on both levels [short and long-term] for all of these positions-what if there’s an immediate turnover in that position, and what are we doing in terms of the longer-term succession planning within these different business units and functions to develop, retain and promote the talent to ensure continuity of leadership,” says Tryniski.

Despite the importance of maintaining the future viability of the organization through the effective and seamless transition of bank leadership, 37 percent of respondents indicate their bank has not designated a successor or identified potential successors for the CEO. Twenty-eight percent do not have successors lined up for key executives.

Without suitable successors, these institutions could find themselves on the selling block when the CEO chooses to step down or is no longer able to lead the bank, warns Gallagher. “The banks that are in that position, their plan is, ‘we’re going to ride the CEO as long as we can get him to stay, and then we’re going to sell the bank,’” he says. “There isn’t a strong candidate to step in.”

Gallagher says the clock is ticking if the bank has designated a successor, as indicated by 31 percent of survey respondents.

“The longer you keep the designee in waiting, the more discontent there is and the greater risk that they’re going to get tired of waiting and leave,” says Gallagher. “If they’re good enough to lead your bank, they’re good enough to lead another bank.”

Designating a successor at a family-owned bank may not carry the same risk-but the process shouldn’t be any less formal or well communicated.

At The Friendship State Bank, a $373 million asset institution based in Friendship, Indiana, the transition occurred over a five-year period, with current CEO Christopher Meyer working under the tutelage of the bank’s former CEO-his father-in-law, James W. Lemon. In addition to external training, Meyer attended board meetings as secretary, which helped him get to know directors and understand the dynamics of the board. “While I was observing and learning from the inside, I was also furthering my knowledge-and the succession plan dictated that,” says Meyer.

Lemon shifted to a part-time schedule in 2016, when Meyer was named CEO, and fully retired from management when Meyer was named president earlier this year.

If the bank has a strong candidate, the board should do all it can to keep that individual, says Gallagher. But, “if you don’t have somebody [who is] clearly the best candidate, then you need to develop a pool.” This can foster competition for the position, and reduce the risk that successors will grow frustrated and leave, adds Gallagher.
However, just one-quarter say their bank has identified potential successors to replace the CEO.

The nominating and corporate governance committee at Brentwood, Tennessee-based Reliant Bancorp is actively working to identify qualified candidates to develop its CEO succession pipeline. Sharon Edwards, a board member at the $1.8 billion asset bank holding company, says the organization has engaged an external search firm to understand the skills and expertise their next CEO will need. The current CEO, 64-year-old DeVan Ard Jr., was promoted to the position in 2017.

Edwards says Reliant also clearly communicates with and develops potential internal successors.

Clear communication and the right mix of compensation play important roles in retaining potential successors.

Gallagher recommends long-term compensation “that’s going to mature or vest over a long period of time [to] make sure they stay-because if they leave, they forfeit” the reward. This can be a cash-based award, equity or a retirement benefit.

Equity seems to be preferred by CEOs as a way to enhance their own compensation. Thirty-eight percent believe their compensation package would be improved if their bank offered equity or some form of ownership in the bank, and 29 percent would like to receive a greater amount of equity. Twenty-nine percent believe the bank should offer non-equity, long-term incentive compensation. The same percentage, it should be noted, believe the bank should award a higher salary.

The CEO has the greatest influence on the performance of the bank, so Gallagher says it’s a good sign when the CEO values equity as part of his or her compensation package. “That tells me that they’re really focused on making this company even more valuable, because their net worth is tied up in it,” he says.

Tryniski believes retention starts with culture. “It starts with creating a very productive work environment where people have a great deal of pride in what they do,” he says.

That said, compensation plays a vital role, he explains. “It’s very much a pay-for-performance environment, that way you ensure you’re properly incenting and motivating people on a proactive basis-that’s one of the value drivers of [the succession planning] process, it makes us sit down … and look at where we need to have conversations, [where] we need to challenge people, and [how] we need to compensate people, so a lot of good outcomes come out of that formal analysis.”

Retention is particularly critical for smaller banks operating in rural communities, like Decatur County Bank, a $118 million asset financial institution based in Decaturville, Tennessee. Jay England, the bank’s CEO, counts himself lucky after hiring promising candidates that were interested in moving into the community-despite their lack of banking experience.

“I knew they were good, intelligent people [who] could do a good job here,” says England. The talent windfall arrived as several key employees were ready to retire. “We have probably 10 to 12 people in their 40s here that are the next round of senior management-some already are, and some will be.”

The career path for these promising employees is clearly communicated, and England believes that will help prevent turnover. “We have a formal succession plan in place, and those folks all know where they fit in, they’re all happy with where they fit and where their [careers are] headed-by being able to do that and compensate them a little better than average, we don’t anticipate any of those folks leaving us,” he says.

The Friendship State Bank also operates in a rural community, and Meyer understands the need for a strong executive bench. “We want to remain fiercely independent, and the way to do that is to have a good senior management team,” says Meyer.

Meyer is also ensuring he has successors further down the organization-particularly on the lending team. “I got handed a situation where most of this organization was aging out in two to 10 years,” he says. As lenders retire, that expertise is leaving the bank. Meyer is overstaffing in the short term-keeping two loan officers on staff where he only needs one-to ensure the bank isn’t caught short when a seasoned lender decides it’s time to step down. “I don’t mind overstaffing while people are learning,” he says.

In the survey, 36 percent of respondents say recruiting commercial lenders is a top challenge for their organization in 2019. That might seem surprising, given the more recent focus in the industry on growing deposits over growing loans-but it’s another indicator of the glacial baby boomer exodus.

Fifty-nine percent of respondents say their banks are tying CEO compensation to the strategic plan or corporate goals. This represents a 21-point increase from 2016, when this question was last asked in the survey. Across the board, more respondents indicate that they’re relying on specific metrics as well, including net income (52 percent), return on assets (44 percent), return on equity (34 percent) and asset quality (34 percent).

This significant shift can be at least partly attributed to the increasingly prominent influence that proxy advisory firms like Institutional Shareholder Services and Glass Lewis play in individual bank’s compensation plans. “[ISS and Glass Lewis] mandate that compensation be tied to performance on almost every aspect other than salary, and then they even measure salary levels based on how well the institution performs against peers,” says Gallagher.

Gallagher recommends that the metrics used by the bank correspond with its objectives. But one metric he does not favor is total shareholder return, since it is tied to the performance of the bank’s stock and is outside the direct influence of management. Total shareholder return is a metric favored by ISS, and is used by 14 percent of survey respondents overall and 22 percent of respondents from public banks.

The influence of proxy advisory firms is also becoming more prominent when it comes to the composition of the board. ISS announced a new voting policy in November 2018, which will take effect in February 2020, mandating that the boards of Russell 3000 and S&P 1500 companies include at least one female director. Following a one-year grace period to recruit qualified female directors, ISS will recommend against the nominating chairs of boards that lack gender diversity.

But diversity goes beyond gender, and 47 percent of respondents say their board-often through the nominating and governance committee-is working to recruit younger directors.

Baby boomers dominate boardrooms-the median age of the directors responding to the survey is 64. Boards are also frequently composed of white men. This uniformity encourages groupthink.

What’s more, Edwards points out that this isn’t what a bank’s customer base typically looks like, on the whole. Boards should work harder to reflect the demographics of their markets, which includes attracting younger directors who have the skills the board needs. “They’re probably more likely to have skills such as IT [and] cybersecurity than your older board members are,” she says.

At the same time, the mandatory retirement age for directors has risen-to a median of 75 in this year’s survey, up from 72 in 2015, when Bank Director last asked this question.

It all boils down to keeping experience on the board, along with the difficulty in attracting qualified younger candidates-primarily Gen X’ers-to the board. For respondents whose banks are working to recruit younger directors, more than half say candidates lack the necessary experience. Forty-two percent say these candidates are too focused on building their careers to serve on the board.

Forty-one percent of respondents indicate their board has a mandatory retirement age in place-a policy that can be a double-edged sword, says Tryniski. The retirement age for the directors of Community Bank System is set at 70. “You lose some good directors. On the other hand, it forces you to have the board discussions around succession and refreshment and skills and expertise and the like, which is productive,” he says.

Another way to create room for fresh perspectives on the board is to conduct a board evaluation. One-third of respondents say their board conducts an evaluation annually and of these, 59 percent say the evaluation is used to identify underperforming or less engaged directors.

Reliant uses both approaches-an annual evaluation and a mandatory retirement age, instituted just this year and set at 75-to address expertise gaps on the board. The board also moved from staggered elections for directors to annual ones.

Reliant has conducted self-appraisals as well as peer assessments, says Edwards. The results are shared with each director and help the board identify where it can improve. “Given the size that the bank was reaching now, we had some board members that were going to retire, and we thought we needed to improve our skill sets, [and] we were looking for some diversity-diversity of thought as well as gender, and being able to bring a different perspective to the table,” she says. The board identified specific skill gaps in technology and cybersecurity.

Edwards questions if director pay is too low for the industry, making it more difficult to lure younger qualified candidates. “Bank boards typically pay a little bit less than other public company boards,” she says. Reliant is publicly traded on the Nasdaq exchange.

The survey finds that an annual retainer is becoming an increasingly popular way to pay the board. Seventy-four percent pay an annual retainer to the chairman, at a median of $30,000, and 69 percent pay an annual retainer to outside directors, at a median of $20,000. “In your smaller banks, meetings are lasting longer, because there’s more material to cover,” says Gallagher. “There’s more responsibility and liability on directors than ever, so you’re seeing efforts to shift pay practices to accommodate that.”

About the Survey
Bank Director’s 2019 Compensation Survey surveyed 348 independent directors, chief executives, human resources officers and other senior executives of U.S. banks to examine trends in director and CEO compensation, and how banks approach succession planning and board refreshment. The survey was conducted in April 2019. Compensation data for directors and CEOs in fiscal year 2018 was also collected from the proxy statements of 103 publicly traded financial institutions. Thirty-one percent of respondents represent a financial institution between $1 billion and $10 billion in assets, and almost one-quarter a bank between $500 million and $1 billion. Forty-nine percent represent a publicly traded institution. The 2019 Compensation Survey is sponsored by Compensation Advisors. The complete results are available in the research section at BankDirector.com.

Questions About Our Research?
Contact Emily McCormick at [email protected] if you’d like to know more about Bank Director’s research initiatives.