Banking Performance Insights

A Practical, Effective Approach to Compensation Benchmarking

June 27, 2016


By Patrick J. Cole and Timothy J. Reimink  

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Regardless of shifting business trends and challenges, attracting and retaining talent is always one of the top priorities in any bank. Competitive compensation is a fundamental component of this effort.

A compensation benchmarking program can be a very useful tool in developing and maintaining a competitive compensation strategy. Although benchmarking sometimes is regarded as a complex and highly technical practice, it need not be overwhelming. The basic elements of effective compensation benchmarking can be achieved in financial services organizations of all sizes, and can be expanded and enhanced as necessary to meet a bank’s specific challenges and unique circumstances.

Compensation Trends in Growing Banks

As banks and other financial services organizations grow, the need for a more formal salary administration program becomes more obvious. This tendency has been demonstrated repeatedly over the years in the annual Crowe Horwath LLP Financial Institutions Compensation and Benefits Survey. As the survey responses depicted in Exhibit 1 illustrate, larger banks are more likely to have implemented a formal salary administration program.

Exhibit 1 – Salary Administration Programs

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Source: 2015 Crowe Horwath LLP Financial Institutions Compensation and Benefits Survey

As a critical component of a formal salary administration program, a well thought-out and professionally administered benchmarking effort also offers benefits that become more evident as banks grow in asset size and geographic footprint. Yet anecdotal information suggests many organizations have only basic benchmarking programs, or in many cases no program at all.

For example, when participants in a recent banking industry webinar were queried about the use of benchmarking as part of their compensation strategies, 20 percent indicated they did not use benchmarking to adjust pay rates and ranges at all. Almost half (46 percent) said they were engaged in benchmarking, but their programs used fewer than 10 benchmark positions to assess competitive pay rates. In other words, two-thirds of the banking industry participants had either no benchmarking programs or programs that could be described as rudimentary at best. (See Exhibit 2.)

Exhibit 2 – Use and Extent of Benchmarking

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Source: Online survey of Crowe banking industry webinar participants, March 2016

The gap between the growing need for formal salary administration programs and the use of compensation benchmarking as part of such programs suggests there are significant opportunities for improvement in many banks.

Getting Started – First Steps Toward Effective Benchmarking

An important early step in preparing to introduce or enhance a compensation benchmarking program is to define the general compensation strategy the organization intends to pursue. In recent years, a growing number of banks have pursued either above-market or below-market strategies, in which their overall compensation practices diverge from average market levels by significant amounts.

Exhibit 3 – Trends in Pay Strategies

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Source: 2010-2015 Crowe Horwath LLP Financial Institutions Compensation and Benefits Surveys

As Exhibit 3 illustrates, the percentage of banks reporting base pay levels significantly above or below average remained relatively small for a number of years. In the 2013 survey, however, this trend began to change as the proportion of banks using above-market strategies jumped sharply. In 2014 there was a large jump in the proportion of banks using below-market strategies as well.

These diverging patterns likely reflect a talent market that is becoming more challenging and complex, with changing expectations and priorities. As this happens, a growing number of organizations are responding to the challenge by making significant shifts in their compensation strategies. Some of those shifts involve changes in the way incentive compensation programs are designed in combination with base pay.

In addition to defining a strategy, another essential early step is identifying reliable sources for benchmark data. Although they might spark some spirited employee conversations, media-generated stories on salary trends generally lack the precision and specificity that are needed to serve as reliable benchmarking tools.

Ideally, a bank will use several surveys, not just one, as sources of objective, industry-specific information about compensation trends. In addition to the Crowe survey cited earlier, a number of other useful studies, including studies sponsored by state, regional, and national banking associations are available. Larger organizations or those located in very competitive metropolitan markets can also benefit from large-scale general salary studies such as the U.S. MBD: Metropolitan Benchmark Survey and the various studies compiled by the Economic Research Institute.

Implementing a Benchmarking Strategy

With a strategy defined and reliable data sources identified, it’s time to begin putting the information to work. This can be a highly complex and technically challenging process, but it is built around a small number of fundamental practices. These include:

  • Identifying core and key positions by job family and level. It is important to recognize that different compensation strategies might be applied to reflect specific bank priorities. This is where a bank’s business strategy and compensation should align.

    For example, management could make a deliberate decision that, for select positions, it will vary from its general compensation strategy (at-market, above-market, or below-market). The reason for such a decision could be to attract certain talent that is needed to expand a line of business that is crucial to its business strategy, or possibly to begin attracting and grooming stronger mid-management leaders for future succession planning.
      
  • Identifying critical and hard-to-fill vacancies. Here again, different strategies might apply for certain high-demand positions. Information technology offers many examples of positions where qualified personnel are often hard to find, which makes it difficult to identify an appropriate and competitive pay rate. Having reliable benchmark data for these kinds of positions is particularly important.
      
  • Comparing actual job duties, not just job titles. Distinguish various levels within general job titles and develop benchmarks for each level. For example, there normally are differences in compensation for entry-level, experienced, and senior-level tellers, and for managers of small, midsize, and large branches. A good survey will make such distinctions between levels, so it is important to read the full job description for each survey job title to be sure the comparisons are accurate and appropriate.
      
  • Identifying relevant pay ranges. This is another area where understanding the nuances of the chosen benchmarking surveys is important. Some surveys will report just one number, such as the mean or median pay for a specified position. Others report low, average, and high ranges; still others report more precise data such as the 25th, 50th, and 75th percentiles. Salary administrators and policymakers must understand and adjust for these differences in order to establish appropriate pay ranges.
      
  • Defining salary bands and grades. Once the general pay ranges are established, it is possible to begin spelling out the specific adjustments that can be made to reflect individual employees’ performance, training, longevity, and other attributes. Salary bands or grades should be defined using these factors. The various factors that define these bands should be spelled out with as much clarity as possible, ideally based on quantifiable metrics that are objectively related to the value each position adds to the bank.
      
  • Updating and adjusting on a regular basis. Effective benchmarking is an ongoing effort, not a one-time event. Management should plan to make regular, periodic pay range adjustments to reflect job changes, the addition or elimination of certain duties or responsibilities, changes in general economic or competitive conditions, adjustments for geographic or market differences, and other variables. 

Compensation Strategy and Risk Management

The primary purpose of any compensation strategy is to help a bank attract and retain a motivated and productive workforce without incurring unnecessary costs. A carefully structured, credible benchmarking effort can be a cornerstone in this endeavor, providing management with specific information it needs for effective decision-making.

Establishing an appropriate pay range for every job can help clarify each job’s value to the organization, while at the same time providing a budgetary control to prevent underpaying or overpaying employees. It also provides a basis for aligning pay decisions with performance appraisals in a pay-for-performance program.

Beyond these competitive, operational, and strategic benefits, however, effective benchmarking also can contribute to a financial services organization’s compliance and risk management efforts. The consistent application of a compensation strategy that is well-designed and executed and that is based on reliable and objective benchmarking can help demonstrate a commitment to equity and fairness to all concerned – employees, regulators, and shareholders alike.

Authors
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Tim Reimink
Managing Director