Compensation and Benefits for Community Banks’ C-Suite

When selecting benefits for your executive employees, their wants and needs may differ depending on the state of the market, where they are in life and other factors. Learn how to tune into those needs and retain your top employees.

Compensation and Benefits for Community Banks’ C-Suite (independentbanker.org)

By Cheryl Winokur Munk

As the talent wars continue, community banks can come out ahead with a careful focus on executive compensation and benefits.

In addition to a competitive annual salary and bonus, community banks need to offer an appropriate mix of short- and long-term incentives, compensation consultants say. They advise using the more modern approach of tying compensation to the individual as opposed to a one-size-fits-all model. 

“Community banks need to consider the age and demographics of future leaders they are trying to attract and retain, and design compensation based on those needs,” says Karen Butcher, managing director with executive compensation consultancy Pearl Meyer in Boston.

Here are six tips to help community banks win the executive compensation battle.

1. Take the pulse of the market

Understanding the competitive landscape is critical, says Hal Wallach, director of executive compensation consulting at CBIZ Inc. 

Nowadays, it’s easy for competitors to attempt to pick off top-level talent with the lure of a significant—20% or higher—salary increase, he says. The issue is compounded by the fact that executives are more inclined to move to other areas of the country for higher wages or a better opportunity. 

From a competitive standpoint, compensation is highly correlated with a bank’s asset size, so this should be a consideration for community banks that have experienced or are experiencing significant growth, whether it’s organically or through a merger or acquisition. But staying on top of executive compensation is important even for smaller banks, because the costs of finding new talent add up. 

According to compensation consultants, community banks should undertake a market analysis every two to three years. Certain changes in market dynamics may also lead to a need for more frequent analysis. Factors such as a community bank’s size, its expected asset growth, inflation and market appreciation can have a significant impact on compensation levels. 

The average increase in bank officers’ salaries in 2022. They’re expected to grow 4.1% in 2023.

Source: 2022 Bank Compensation and Benefits Survey, Crowe Bank LLP

Taking the market’s pulse could be especially important now, given rising inflation and other factors such as the Great Resignation. 

Tori Harber, senior vice president and human resources director at $850 million-asset Peoples Bank in Lubbock, Texas, says her bank is planning a review this year. 

“It will help the bank assess where we are and where we want to be,” she says. 

Many community banks rely on salary surveys, and while those can be helpful, they may not tell the whole picture, says Rob Barton, managing director at Bank Compensation Consulting in Plano, Texas, who designs nonqualified deferred compensation plans for community banks. 

Instead, he says, it’s important to use a broad set of survey data as part of the benchmarking process. While he doesn’t do this type of work, he routinely refers banks to consultants that do.

Community banks can also do some of the legwork on their own, such as comparing data from similarly sized public banks in their region, says Mike Blanchard, chief executive officer of Blanchard Consulting Group in Atlanta. This will give them a good sense of what comparable banks paid last year in terms of salary, bonus, stock grants and other benefits. Blanchard recommends community banks gather this publicly available information for 15 to 20 banks in their region.

The goal should be to understand where compensation gaps may exist, says Andrea Parnell, chief people officer at $2.6 billion-asset Southern Bancorp in Little Rock, Ark. 

Questions should include: Does the bank have adequate golden handcuffs? Is it tailoring the benefits to each executive? And does the bank offer the right mix of guaranteed cash and discretionary incentive pay? 

2. Break down the individual parts

The next step is for a community bank to break down compensation into its various components, which will typically include salary, bonus and other long-term incentives. 

Certainly, community banks need to ensure they are paying a competitive salary to attract and retain top-level talent. On average, an officer’s salary rose 6.8% in 2022, compared with 3.7% in 2021, according to the 2022 Crowe Bank Compensation and Benefits survey. 

This year, officer salaries are expected to increase 4.1% on average, according to Crowe. 

Beyond salary and annual bonuses, banks need to ensure they are offering a mix of long-term incentives. Consider that 42% of participating banks have a formal, performance-based incentive plan for executives, according to Blanchard Consulting Group’s 2022 Compensation Trends and Employee Benefits Survey of 183 banks. Nearly all respondents—92%—paid bonuses/cash incentives based on 2021 performance.

When it comes to other incentives, 43% of banks polled offered some form of equity/long-term incentive program. Of those banks with an equity plan, 45% said they use performance-based granting or vesting. Twenty percent of respondents with an equity plan have formal equity ownership or holding requirements.

Examples of long-term incentive plans include stock appreciation rights or restricted stock. Not surprisingly, the survey found that asset size is a factor in how likely a bank is to use equity/long-term incentives. Banks with more than $1 billion in assets are more likely to use restricted stock or restricted stock units, the survey found.

Community banks that are private or family-owned can use “phantom stock” for key officers, which is typically cashed in or settled after three to five years, Blanchard says.

3. Consider additional high-level benefits

Another popular benefit many community banks offer to current and prospective executives is a supplemental executive retirement plan (SERP). 

A SERP can be especially compelling to executives as a way to enhance their retirement savings without the rules or contribution limits associated with a 401(k). What’s more, this type of plan can be offered alongside a 401(k), allowing the executive to set aside more for retirement.

A different option, which Southern Bancorp adopted about three years ago for top executives, is a restricted endorsement bonus agreement (REBA). This acts as a life insurance policy for an executive, Parnell says. It provides an annual bonus to the executive that is used to pay the premium for a personal life insurance policy.

To encourage retention, there are restrictions on the executive’s access to the policy’s cash value. The cost to the community bank is recovered when the death benefit is paid.

There are at least three variations of REBAs with different features and options, Parnell says. Because of the complexity, she recommends community banks consult with a qualified professional who deals in these types of plans.

A similar executive benefit option community banks can offer is split-dollar life insurance. This policy is a form of additional direct compensation.

The community pays some or all of the insurance premiums, and the executive’s beneficiary receives some or all of the death benefit, according to BoliColi.com, which offers executive and director benefit services.

There can be many variables, so community banks should speak to a compensation consultant about which option or options might be best for their situation. Consultants will work with the bank to design a program that works best for a bank’s specific needs.

4. Create customized compensation plans

Executive compensation isn’t a one-size-fits-all approach. Trey Deupree, senior consultant at NFP Executive Benefits, says he encourages community banks to meet with high-level employees to determine what’s important to them and what they value the most. Community banks can then use this information to design tailored compensation plans.

Officers in their 50s and 60s might be most interested in retirement benefits, for example, whereas younger officers might be interested in paying off student loan debt, buying their first home, preparing to welcome a child into their family or paying for their children’s college education. 

To illustrate, Deupree says NFP has helped community banks design deferred compensation plans where the payouts coincide with an executive’s children going to college. When they are graduating from high school or ready to go to college, the bank might pay between $10,000 and $45,000 a year toward that goal.

“If you’ve got a 30-year-old loan officer who’s knocking it out of the park, dangling a carrot out 37 years from now makes it hard to keep them today,” Deupree says. But helping them pay for college could be a major retention tool. 

Certainly, this type of incentive can make it cost-prohibitive for another bank to snatch up that executive—at least for a defined period of time—since they’d have to replace the lost income, says Tyler Brown, senior vice president and practice leader at NFP Compensation Consulting. 

The trick, he says, is to find out what’s most important to high-level employees and design plans specific to those needs.

“You can tie these plans to any number of major life events,” Brown says. “Employees like that it’s personalized.” 

5. Consider one-time bonuses

There may be banks whose performance or stock price is struggling based on outside factors, such as the impact of the high-profile failures of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year. 

Community banks that are feeling this type of pressure might consider an additional one-time award—cash or equity—for executives, in addition to their normal bonus, to transfer some of the value that’s been lost, says Brian Dresch, a senior client partner with Korn Ferry’s executive pay and governance practice. This could be particularly important now, he says, since unvested, long-term incentive awards may be worth less, lessening the cost of acquisition for a competitor.

6. Understand that nothing exists in a vacuum

Executives require more than just a large paycheck and top-notch benefits to stay long-term. Other critical components, including executive coaching and leadership development opportunities, must be part of the mix, Butcher says. “Otherwise, it doesn’t matter what you’re paying them.”