Designing Plans to Reward andRetain Employees

Incenting Your Team to MaximizeValue

By JR Llewellyn

Incenting Your Team to Maximize Value - Designing Plans to Reward & Retain Employees | 1

Incenting Your Team to Maximize Value Designing Plans to Reward & Retain Employees

By JR Llewellyn, Senior Vice President | Compensation Advisors

Incentives for Attracting and Retaining Bank TalentToday’s banks need to find ways to attract and retain talent that will help move them forward. Technology is

ever-advancing, shaping products and operations, and the demands of consumers are changing to match.

There’s no denying that banks need to be agile, and that means they need the right people steering the ship.

Banks are battling to attract and retain talent for reasons that are multi-faceted.

Most of the current bank leadership is from the

Baby Boomer generation. Only 13% of bank CEOs

are under age 50, while 40% are 60 or older and

nearing retirement. Although this is a challenge

as there is limited “top executive talent,” it also

creates a wonderful opportunity for banks that are

aggressively seeking the right talent. As the Baby

Boomer generation retires, the next generation of

bankers will need to lead, but not all banks are

taking advantage of the new ideas and perspectives

that Millennials can bring.

The banking industry is also highly competitive.

Financial institutions as well as other types of

organizations are aggressively recruiting talented

personnel and may have their eyes on your

most qualified executives. Industries with fewer

regulations than banking appeal to some personnel,

and top talent will continue to exit the industry at an

accelerated pace.

Mergers and acquisitions are on the rise, a trend

that is unlikely to slow down over the next few years.

Along with the expense reduction that results from

consolidation, one of the factors driving M&A activity

is the shortage of qualified executives. For some

banks, selling is the way to escape their troubles.

For those who don’t sell, succession planning and

attracting and retaining talent is critical to success

now and in the future.

So, how do we succeed in the

battle for talented candidates? In this guide, we’ll explore

using incentives to maximize your

team’s value.

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Creating IncentivesThe most basic definition of an incentive is

something that encourages a person to do

something.

Relating specifically to compensation, an incentive

can be defined as compensation that drives

specific behavior.

Understanding IncentivesThe goals of incentives:

• Reward and motivate to achieve bank objectives

• Align employees with shareholder interests

• Limit risks and enhance shareholder value

• Attract and/or retain key talent

Compensation Trends According to Bank Director’s Compensation Survey

The 2016 Bank Director Compensation Survey

262 bank directors, chief executive officers, senior

executives and human resource officers responded

to questions on topics including:

• Executive Retirement and Succession

• Attracting Talent

• CEO, Executive, and Board Compensation.

The survey is comprised of fiscal year 2015

compensation data for CEOs and directors. Data

was also collected from the proxy statements of 105

publicly traded banks.

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Understanding Our ToolsHow do we conquer our compensation challenges

going forward? We need to look at what’s in our

“compensation arsenal.”

The Balancing Act

SALARY • Low Risk• Low Retention

• Low Risk• High Retention

• High Risk• Low Retention

• Moderate Risk• Moderate Retention

ANNUAL INCENTIVE

EQUITY BASED INCENTIVE

NQDC BENEFITS

Bank Considerations Plan Challenges

Retain & Motivate Employees Will employees think long-term?

Promote Team Work Plan Costs

Guard Against Competitors Market Trends / Environment

Accounting & Tax Efficiency Regulations (IRC 409A & 280G)

Alignment with Shareholders Strategic Objectives

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What Do Executives Value?

WHAT TYPES OF COMPENSATION DID OUTSIDE DIRECTORS AND

CHAIRMEN RATE AS THE MOVE VALUED BY EXECUTIVES?

ACCORDING TO EXECUTIVES, HOW EFFECTIVE ARE STOCK

OPTIONS OR EQUITY GRANTS FOR TYING THEIR INTERESTS TO

SHAREHOLDER INSTERSTS?

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What Do Employees Value?

34 & Under 35 - 49 50 - 64 65+

Base Pay Retirement Plan Retirement Plan Retirement Plan

Retirement Plan Low Health CareCosts

Low Health CareCosts Type of Work

Low Health Care Costs Bonus / Incentives Bonus / Incentives Bonus / Incentives

Bonus / Incentives Paid Time Off Paid Time Off Low Health Care Costs

Flexible Schedule Flexible Schedule Type of Work Working for a Respectable Organization

Desired Benefits and Perks by Generation

The below chart illustrates compensation values by age (across) and by importance (top to bottom):

There is a purpose for each component of compensation.

SALARYAttractstalent

Annual Cash Incentive Drive specific

behaviors

Equity & LTI

Executive & shareholder

linkage

NQDC Plans Focus on franchise value &

retention

Perks & Benefits

Provide tools for client

relationships, bank image, &

executive peace of mind

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Compensation OverviewThere is no right or wrong in compensation

design, but compensation must:

Retention

Be Reasonable

Not Encourage Excessive Risk Work

Base Salary

Equity

Annual Incentive

Deferred Compensation

0 5 10

Retainable Years

15 20 25

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Short Term Incentives vs. Long Term Incentives vs. NQDC Plans

Short Term Incentives

“High” Risk / Low Retention

• Drive specific behaviors/execution

• Awards typically in cash (paid within 75 days

of FYE)

• Clawbacks are required but difficult to

implement if needed

Long Term Incentives (3-7 years)

Moderate Risk / Moderate Retention

• Focus on longer term goals and objectives

• Link employee interests with shareholder

interests through award growth

• Generally, awards are equity based or have

the “feel of equity”

• Clawbacks are required, but easier to institute

because of deferrals associated with

the awards

NQDC Plans (10+ years)

“Low” Risk / “High” Retention

• Focused on driving franchise value (“Debt is

good”)

• Retention play

• Succession becomes a bigger focus (is being

stressed by regulators)

• Generally, the awards pay post-retirement

over a period of time“ Banks need to be agile. That means

having the right people to steer

the ship. ”

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Annual IncentivesKeep your incentives SIMPLE!

This will make your incentives easier to

communicate. It’ll also be easier to determine if

they are reasonable.

Shareholder should get paid first

The minimum acceptable return (MAR) approach

is an incentive model that requires minimum

performance before the incentive is paid.

Annual incentives are there to drive

specific results

They should support long term goals, which

should support strategic objectives.

Metrics should be limited

Limit the number of criteria to ensure that there

is a dedicated focus for each objective. We

recommend a maximum of four.

Long Term Incentives

Long term incentives that help banks retain

employees include:

• Equity

• Deferred Compensation

• Retirement Benefits

Long term incentives also exist to support long

term goals and strategic objectives. The incentives

should be tied to factors that employees can

influence on some level. “ Keep your incentives simple. ”

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Equity & Benefits

Equity (Dilutive)

THREE PRIMARY TYPES

• Voluntary Deferral Plan• Supplemental Executive Retirement Plan (SERP)• LINQS+

• Restricted Stock Awards• Vesting tied to performance• Vested shares increase or decrease based on actual performance• Less dilutive to shareholders, but more upside to participants

• Incentive Stock Option (ISO)• Nonqualified Stock Options (NSO)• Restricted Stock Awards• Performance Adjusted Restricted Stock (PARS)

• Share price must appreciate to have value• Dilutive to shareholders• Participant must buy shares• Appreciation taxable as Capital Gain (ISO) or Ordinary Income (NSO)• Expensed over vesting period

• Stock Appreciation Rights (SARS)• Restricted Stock Units (RSU)• Full Value Rights

• “Gift” to Participant• Taxed as Ordinary Income upon vesting• FMV expensed over vesting period• IRC 84b election available• Less dilutive to shareholders

EQUITY

OPTIONS

SYNTHETIC EQUITY

RESTRICTED STOCK

NONQUALIFIED PLANS

PERFORMANCE ADJUSTEDRESTRICTED STOCK (PARS)

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Synthetic Equity (Non-Dilutive)Also known as”shadow stock” or “phantom stock.”

Benefits (NQDC)

• Similar to restricted stock• Granted a number of “shares” at award• Cash payment is settled upon vesting

• Similar to SERP• Payments paid until death (lifetime)• Less expensive than SERP• Payments made by third party• Creditor risk eliminated in certain designs

• Similar to options• Expense equal to value upon vesting• Value of appreciation received upon vesting• Paid in cash

• Participant contributes earnings (Elective NQDC)• 100% vested in contributions• Tavable upon payout• Individual election to participate

• “Units” are awarded at time of grant• At vesting, units are converted to cash (or equity)• Flexibility to settle award with both cash & equity

• Paid by Bank (Non Elective NQDC)• Payments begin upon retirement• Lump sum or periodic (Typically - 15 years)• Taxable when received

STOCK APPRECIATIONRIGHTS (SARS)

VOLUNTARY DEFERRAL

RESTRICTED STOCKUNITS (RSU’S)

SERP

FULL VALUE RIGHTS

LINQS+

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Non-Qualified Deferred Compensation Designs

There are lots of regulatory standards to follow:

IRC 409A

• Governs all NQDC plans

• Highly restricts flexibility after plan is in place

IRC 4999/280G

• “Parachute Payment” limitations

• 2.99x “AVG” Base Amount

• Most banks trip over this code section

inadvertently

• Conduct annual reviews (equity grants affect

calculation)

ERISA – Top Hat Plan Qualifications

• Limited to approximately 10% of the employee

base...but there is no safe harbor (simply must

meet definition)

Financing SERPs with LINQS+: Lifetime Income Non-Qualified SolutionLifetime Income Non-Qualified Solution (LINQS+) is

a proprietary, non-BOLI solution designed by Meyer-

Chatfield Compensation Advisors to specifically

address the expense associated with Supplemental

Executive Retirement Plans (SERP). LINQS+ can

be implemented as a new benefit or integrated with

existing benefit plans for an average cost savings of

28% over traditional SERP plans. LINQS+ provides

lifetime payment streams to the participants as

benefits that are not contingent upon investment

performance.

The Takeaway

Incentives drive the results you want.

• Performance/Shareholder Value

• Retention of Key Talent

• Recruiting for Succession or Growth

Compensation must be vauled; otherwise it is useless.

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About Compensation AdvisorsThe experts at Compensation Advisors possess

over 50 years of compensation experience at

the community bank level. We leverage that

experience to design and implement relevant,

innovative solutions that relate to current

regulatory environments. Having worked with

over 600 financial institutions, the firm has the

knowledge and expertise to navigate the obstacles

associated with compensation practices. Our

primary goal is helping our clients attract and

retain key executives and top performers.

Compensation Advisors is a member of the Meyer-

Chatfield Group.

Contact us today to get started.

(866) 796-6222

compensationadvisors.com

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