Jon F. Dullnig
‘Better way’
The key to a bank’s success, as any chief executive officer will tell you, is finding and keeping good people.
Although many thousands graduate from M.B.A. programs each year, it’s getting harder to find the kind of managers with the experience and finesse needed to lead in the increasingly complicated world of financial institutions, say most bankers.
For that reason, banks are finding themselves competing for good talent. In order to accomplish this, a group of speakers at the BankWorld 2002 conference held last week in Cromwell, Conn., said, executives need to think creatively and change the way they compensate employees. BankWorld, an annual event geared toward those who work in the financial services industry in New England, is sponsored by the Connecticut Bankers Association and The Warren Group, parent company of Banker & Tradesman.
Jon F. Dullnig, director of compensation consulting services at Austin, Texas-based Benmark, said the face of compensation is about to change. Linking compensation to performance is one way to not only find but keep employees. Currently, banks that offer the best salary package are generally the same ones that are most successful in attracting employees, but finding ways of keeping talented workers from jumping ship to another company with equally handsome salaries often is an area not addressed, according to Wilfred M. Sheehan, senior vice president in the Duxbury office of Clark/Bardes Consulting.
There has been a major paradigm shift in executive compensation, said Dullnig. De novo banks, new products and lines of business, changing executive needs and new legislation and regulations are all contributing factors to the change.
In part because of those changes, expenses have increased and banks are increasingly looking for ways to minimize compensation costs to keep the bottom line in check.
“That’s fine, but there’s a better way of doing it [curbing salary expenses]” than what’s currently out there, Dullnig said.
One method is to turn the cost into an opportunity by linking pay with performance. Instead of worrying that an executive is being paid too much, worry that he’s not being paid enough. If you pay, for instance, $1 for every $10 the executive earns for the bank, you’ve got a built-in incentive, Dullnig said.
“What we’ve done now is turned the cost into an opportunity,” he said. “Everybody grabs an oar and we all start pulling in the same direction and we do this for the long run.”
Rewards of stock options and an increased emphasis put on virtual stock – of which all companies, private and public can take advantage – will help.
“The highest-paid people should be the best performers, not necessarily the CEO,” said Dullnig.
Another idea is to do away with the average 5 percent increase in salary per year, he said. For instance, if the average employee is paid $50,000 and receives the average raise per year for 10 years, at the end, the employee will be drawing a $75,000 yearly salary. Instead, if you give the employee only a 2 percent raise but pay them a yearly bonus of 12 percent of their salary, at the end of that same time period, the employee will be costing you nearly $10,000 less in salary per year. While the total cost paid to the employee may be nearly the same, if the bank has a bad year, the bonus can “go away” and the salary is substantially lower, Dullnig said.
“We think that’s a prudent way for all banks to manage their pay,” said Dullnig. There are many ways to link performance to pay including stock options, 401(k) plans and even how healthy a loan officer’s portfolio is.
“Let’s further enhance fiscal performance by using an investment in bank-owned life insurance as a strategy to help offset certain compensation and benefits expenditures,” said Dullnig.
Risk Variables
During a separate workshop on compensation and benefit trends, Sheehan, of Clark/Bardes Consulting, echoed Dullnig’s view that a major challenge for banks in the future will indeed be attracting and retaining talented employees.
“More so than ever, talent is going to be in a diminishing supply and those who will succeed will be those that are the best at attracting and keeping talent,” he said.
For years the idea of good pay has dominated how the industry compensates its employees, he noted. But instead, they should be looking at strategic compensation. The ideas of high salaries, regular reviews, competitive and equitable amounts have all been ideal to attract an employee, but what’s to keep the bank down the street from offering the same? What will keep employees is instead base pay with performance-based variables, which provide motivation and have a strong retentive value, Sheehan said.
While short-term incentives attract people, long-term incentives – for instance, allowing a vested interest in stock only after five years of service – provide strong motivation for staying put, he said.
But while considering the switch from traditional methods to performance-based compensation, bankers should remember exactly what position in life each employee is in to determine whether it would be a successful program to implement, Sheehan said.
According to a recently published survey by Clark/Bardes, 65 percent of the average bank executive’s compensation is guaranteed base pay while 20 percent is made up of short-term investments and 15 percent is long-term investment. That’s likely to creep up to a 50/50 split in the next decade, the study noted. Executives at the top of the largest institutions generally can afford to give up part of their salary to the uncertainty of performance-linked compensation because their requisite cost of lifestyle is taken care of by base pay. For instance, if a person makes $700,000 per year he is better able to give up a percentage to performance and, if even if that income proves less than expected, can still afford to live well. However, a teller making just above minimum wage needs all of his salary to devote to living. “Once again this is that RCOL [requisite cost of lifestyle] effect. The lower you’re paid the less you are able to put at risk,” Sheehan said.
Therefore, when determining who will benefit from performance-linked pay, it is important to include variables that address each employee’s position.
