Retaining Key Bank Executives for the Cost of Glue (article)

Retaining Key Bank Executives for the Cost of Glue (article)

During a recent conference of the National Association of Plan Advisors, commentators talked about the current “negative unemployment” environment for mission-critical executives in the mid and large bank markets. The conversation was partially based on a CNN economic contributor who recently reported that large companies with larger budgets are approaching executives in the mid-markets to fill key executive positions.

Negative unemployment implies that there are more executive positions than there are capable people to fill them. Competition for talented banking industry executives is intensifying. Executive officer turnover has been increasing since 2014. Banks are taking a closer look at the effectiveness of their compensation and benefit strategies and the costs related to them. The key question: Are banks meeting their objectives related to attracting, motivating and retaining their mission-critical executive talent?

The Real Cost to Replace a Mission-Critical Executive

Forbes Magazine reports that studies on the costs of executive turnover are all over the board; however, there is agreement that it costs more to replace mission-critical executives than it costs to retain these same individuals. When you factor in executive search fees, advertising, interviewing, screening and hiring, it can cost 200 to 400% of an executive’s salary to replace them.

Onboarding, training and management time are additional cost factors, not to mention lost productivity and perhaps lost clients during the new hire ramp-up period. Then there are the intangible costs associated with cultural impact. When a mission-critical executive leaves, other employees take the time to ask why and become concerned about what other changes may take place.

Not a New Problem – But Perception is Reality

Clearly it is expensive to lose a key executive. It is also very expensive to protect your organization from being raided by competitors with large recruiting budgets. How do mid-market banks compete? Competitive compensation and benefit packages is a common approach. In addition to those programs, attractive cash performance bonus programs may be offered to motivate and retain select executives. Note, however, that the success of these additional bonus or benefit programs will very often depend on their perceived value.

Take, for example, the large regional medical center in Virginia that, like other regional medical organizations, had an ongoing problem of keeping their key emergency room specialists. Every two or three years, contracts came up for renewal, and the specialists would either negotiate for higher salaries and bonuses or look to other hospitals that will pay the higher compensation. Hospitals kept increasing their bonuses to keep their key medical management team intact. The upward spiraling costs were unsustainable. Hospitals started to consider closing their emergency room services. Hospital management concluded that it became too easy for their specialists to discount the value of the additional bonus programs. Many specialists started to consider their bonuses as just additional salary and were using them to increase and sustain more expensive life styles. When it came time to pay for college expenses or to think about retirement, their bonuses were mostly spent. Hospitals looked for a way to manage the ever-increasing compensation expense by influencing how the specialists looked at their compensation program.

With the help of nonqualified executive benefit consultants, the hospital sought to design or redesign a cash bonus plan in a way to increase the perceived value of the benefit. The objective was to blend features into the benefit that would provide income tax savings, wealth-building benefits and incentives to remain with the hospital.

There are various custom plan designs to achieve targeted goals. The fastest growing type of nonqualified plan is the Defined Contribution Supplemental Executive Retirement Plan (SERP), which was the choice of this hospital. It required that an annual bonus or a portion of the bonus be credited to a nonqualified plan on behalf of the executive specialist. Each plan-year contribution would vest on a rolling five-year vesting schedule. Contributions to the participants’ accounts are not taxable until their funds are distributed to the plan participants in the future, and distributions can be scheduled to correspond to participant life events. The deferred bonuses are invested in various mutual funds selected by the plan participants, similar to the funds in their 401k retirement accounts.

In this way, plan participants see the growing value of their accounts online, showing their vested and non-vested balances. They are reminded how much wealth they are accumulating and how much they would forfeit if they left the hospital prior to the completion of the vesting calendar. Seeing wealth in their account balances grow, income tax savings on the contributions, growth to their accounts and the possible forfeiture of the unvested part of their accounts is the “glue in the seat.”

What does success look like?

In this example, the new nonqualified mission-critical specialists’ bonus savings program increased the perceived value of the specialists’ compensation package. Increases to the annual bonuses no longer were spiraling upward. Turnover decreased meaningfully. The medical specialist plan participants talked about the benefit plan with each other, while morale increased. The program started to attract new medical specialist talent. Compensation expenses were also controlled with security and funding strategies designed to recoup all or part of the executive compensation expense. Within 12 years, over 100 hospitals implemented the same or similar program. The success of this model can easily translate to other industries, including mid-level banks and financial institutions.

Related Resources

Nonqualified Plan Fact Sheet

Alive, well and growing – Bank Owned Life Insurance

Your Team

To discuss putting “glue in the seats” of your bank executive team and controlling the costs of retaining mission-critical bank executives while preserving bank culture, don’t hesitate to give Greg Ochalek a call or shoot him an email (440.591.8581 or [email protected]).

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