Banking Performance Insights

Bank Compensation, Incentives, and Talent Management Trends

July 26, 2017


By Patrick J. Cole, SPHR, and Timothy J. Reimink

BPI DFAST
As the competition for banking industry talent continues to intensify, it becomes increasingly important that management teams understand current trends in compensation, incentives, and human resource practices in order to develop a successful talent management strategy.

The Battle for Talent

There is always competition to attract high-performing employees in the banking industry, but the competition has heated up considerably in the past few years. One recent indicator of the intensifying competition for talent can be found in the 2016 Financial Institutions Compensation and Benefits Survey conducted by Crowe Horwath LLP.

Every year, Crowe surveys banks throughout the United States about compensation trends, benefits, incentives, and other human resource issues. The 2016 survey attracted participants from 378 banks, ranging in size from less than $250 million to more than $5 billion in assets. The survey results confirmed that the contest for talented employees is becoming increasingly competitive as employees change jobs more frequently and as the market responds to the basic law of supply and demand.

For example, employee turnover levels reported in the 2016 survey reached their highest levels in more than a decade. Turnover in officer positions reached nearly 7 percent in the 2016 survey, while nonofficer turnover levels climbed to nearly 18.7 percent (Exhibit 1).

Exhibit 1

employee-turn
Other survey responses suggest the competition for talent is likely to continue. The number of respondents who said their banks plan to increase staffing levels has grown over the past four years, while the number who plan to reduce or maintain staffing levels has been declining (Exhibit 2). Altogether, nearly half (49.4 percent) of 2016 survey respondents reported they plan to increase staffing levels over the coming year, either in response to normal growth or as a function of expansions or acquisitions.

Exhibit 2

staffing-plans
With higher turnover levels and continued growth in demand, it was inevitable that banks would begin pursuing more aggressive compensation strategies, and the survey results confirm that conclusion. The percentage of banks that plan to implement above-market compensation strategies has been increasing steadily over the past four years. In 2016, 28.5 percent of respondents reported their strategy is to attract employees by offering pay packages that exceed the market average for comparable positions by more than 10 percent.

Exhibit 3

comp-strategy
Taken together, these three trends – higher turnover, expected staffing increases, and growing use of above-market compensation strategies – suggest that the battle for talent is likely to continue and intensify.

The Total Rewards Model

While compensation trends offer the most tangible evidence of the intensifying battle for talent, it is important to bear in mind that compensation is only one aspect of an effective talent management strategy. Benefits, incentives, and less tangible factors such as supervisor and peer recognition and work-life balance also play powerful roles in attracting and retaining employees.

In an effort to identify and organize these disparate factors, WorldatWork, a leading member association for human resources professionals, developed the total rewards model. The model depicts the strategic elements of the employer-employee relationship, identifying programs and practices that organizations employ to attract, motivate, retain, and engage employees.

These elements can be grouped into six broad categories1:

  1. Compensation. This category includes both fixed pay and variable compensation such as bonuses, commissions, and other monetary incentives.
  2. Benefits. Health insurance is the most closely followed benefit, but other benefits such as income protection plans, savings, and retirement programs also contribute to the total rewards model.
  3. Recognition. This category includes both formal and informal programs that recognize and publicly acknowledge employee actions, efforts, behavior, or performance.
  4. Performance management. In addition to establishing expectations and assessing results, performance management also includes training, skills demonstrations, feedback, and continuous improvement.
  5. Work-life effectiveness. This component of the total rewards model is becoming increasingly important as employees look for practices and programs to help them achieve success both at work and at home.
  6. Talent development. The best-performing and most desirable employees tend to be those who are also looking for tools and opportunities to advance their skills, competencies, and careers.

These categories are closely related, of course, and in many instances, elements overlap. For example, performance bonuses are part of an employee’s compensation, but they also are a form of recognition. Despite such complexities, however, the broad elements of the total rewards model can provide a systematic approach for banks to use as they endeavor to develop a satisfied, engaged, and productive workforce that delivers value to the organization.

The Important Role of Incentives

One particularly important compensation trend demonstrated in the Crowe survey is the growing use of incentives, both as a way to attract and retain talent and as a tool for encouraging and rewarding specific employee behaviors and performance. Incentives also are important elements of several total rewards model categories including compensation, recognition, and performance management.

The 2016 Crowe survey responses indicate that incentive payouts have increased in recent years to levels that exceed their prerecession highs (Exhibit 4). Incentives, measured as a percentage of base salary, reached a 10-year high in 2015 and maintained that level in the 2016 survey – another clear sign that the battle for talent is continuing.

Exhibit 4

incentive-comp

Effective Incentive Compensation Practices

Incentive programs offer opportunities for attracting and retaining talent, but they also carry the risk of unintended consequences. Recent headlines offer clear examples of strong sales incentive programs that encouraged managers to focus on “making their numbers,” sometimes at the risk of cutting corners or overlooking the importance of building of strong customer relationships.

Careful supervision of incentive programs can help somewhat to alleviate such risks, and incentives should be carefully designed based on recognized sound practices. It also is important to differentiate between incentives – which reward individual performance – and year-end bonuses or profit-sharing plans – which reward overall organization success.

A preliminary (but by no means exhaustive) list of sound incentive practices includes:

  • Paying incentives for performance that exceeds normal expectations, not for just doing what’s expected.
  • Offering line-of-sight incentives so employees can see how their performance directly affects their rewards.
  • Reporting progress regularly – quarterly or even monthly updates help maintain interest and momentum.
  • Offering meaningful payouts – a meaningful incentive should offer the possibility of a 5 to 7 percent income boost for top performers.
  • Basing incentives on more than one metric alone in order to mitigate against unintended consequences. At the same time, though, do not over complicate the program – three to five metrics often is a good platform.
  • Offering a combination of team and individual payouts.
  • Setting “SMART” goals – that is, goals that are:
    • Specific
    • Measurable
    • Attainable
    • Rewarding
    • True to mission
     

In addition to designing their performance incentives carefully, banks also should establish sound governance and oversight practices for the incentive program. This oversight is needed both for regulatory compliance purposes and to help the program be more effective.

Winning the Battle for Talent

Human resource teams – as well as a bank’s overall management and executive teams – should remember that the bank’s reputation always is under public scrutiny. No matter how carefully the incentive and talent management programs are designed, and no matter how diligently they are administered, the effort is always subject to outside influences that could require a rapid response. This condition is particularly true today, as fast-moving social media trends can quickly add pressure to the competition for talent.

In this environment, a solid understanding of current workforce and industry trends is essential. Recognizing such trends and developing sound practices that reflect these trends can help banks do a better job of attracting new employees and, even more importantly, can help them build deeper loyalty among existing employees.




1 “What Is Total Rewards?” online resource by WorldatWork human resources organization, http://www.worldatwork.org/waw/aboutus/html/aboutus-whatis.jsp 

Authors
reimink-tim-150.jpg
Tim Reimink
Managing Director