As the banker population is aging and many executives are getting closer to retirement, thinking about executive succession planning is crucial. Regulators want to see that banks have succession plans in place in both the long term and the short term, and boards need to understand the process for their leaders. Succession planning isn’t just for your C-level employees. It’s for your entire workforce as you plan for the future. Here are 4 considerations to be aware of when you strategize your succession planning process.
1. Align succession planning with the long-term goals of the bank, and be prepared to compensate accordingly
Your succession planning process should be aligned with the long term goals of your bank. Consider looking further down the road when thinking about succession planning. You want to lead the bank toward better performance, and this might require paying more compensation to get better talent, but if you have the long term in mind, you can justify the necessity of doing so. More specifically, your bank may have goals like expanding or going public, and you want people on board for support as you go in that direction.
For instance, let’s say your bank is looking to double the size of its organization. As you hire new talent, you may want to look at executives who have worked in banks double your size. Another example would be a bank that is going public and has a CFO who is retiring. The new CFO should have experience with larger public banks. To get this experienced person on board, you need to pay accordingly. A CFO who has experience with large public banks will likely demand a package similar to what was held at the previous company. This may disrupt the compensation practices at your institution. Thus, the board and executives will need to be in agreement regarding your longer term objectives.
2. Consider how long or quick transitions to leadership should be
Transitions to leadership may be quick, but they may also stretch out over a period of years. When you make a long term plan for succession, consider how long the “fade out” should be. It can take time to get someone up to speed. For instance, maybe you’re planning for a new CEO from outside the organization to ultimately replace your retiring CEO. They may need to work under the current CEO for two to four years to gain an understanding of how things work in your organization.
Whether it’s better for the executive to transition out quickly and no longer be part of daily operations or to transition out slowly is contingent on the level of knowledge of the successor. As a general rule of thumb, if your successor has less experience, they may need to be given more guidance, but it depends on the dynamics. You need to think about what is right for your organization and your specific situation.
3. Have a plan of action for short term succession of leaders, and make sure you’re prepared for emergency situations
It’s crucial to have a plan for short term succession in scenarios where an executive unexpectedly leaves your organization or passes away. The person who assumes that executive’s position should be someone who is already familiar with the organization (like a director) who can step into that role and immediately take care of duties. The next step will be making plans for the future. A component of the plan you have in place for unexpected death scenarios should be key man insurance. Whether used in the form of term insurance or Bank Owned Life Insurance (BOLI), this will help ease the transition and should provide working capital to recruit a new executive. Although this is a requirement for public entities, many privately held community banks have overlooked the necessity of life insurance.
Being ready for short term succession isn’t just for your executives. The question is, do you have a pivotal person who controls an important component of daily activity that no one else could take over if that pivotal person left suddenly? If so, this is a problem. Providing your employees with the right education and cross-training to ensure that you have a versatile workforce can help you to avoid these scenarios.
4. Understand that different generations have different expectations for compensation
A large part of the succession planning process is understanding the different generations and how to compensate them in leadership roles. Most of the current bank leadership is from the Baby Boomer generation. Baby Boomers have been compensated according to that generation’s wants and needs, but other generations have different needs, so the governance or compensation committee needs to take this into account. While it’s not true that every member of a particular generation is the same, there are some common trends in the types of benefits and perks that appeal to different age groups:
- 34 and Under: Base pay, career opportunities, retirement plans, low health care costs, bonuses/incentives, flexible schedules.
- 35-49: Retirement plans, low healthcare costs, bonuses/incentives, paid time off, and flexible schedules.
- 50-64: Retirement plans, low healthcare costs, bonuses/incentives, paid time off, and doing the type of work they value.
- 65+: Retirement plans, low healthcare costs, bonuses/incentives, paid time off, and working for a respectable organization.
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,” this also creates a wonderful opportunity for banks that are aggressively seeking the right talent.
Define your succession planning process to prepare your bank for future success
The future of your bank’s leadership and growth depends on careful succession planning. The 4 considerations covered in this article scratch the surface of a very complex process, but they should help you get started. The compensation aspects of succession planning are crucial as you work to create the right strategies, and a qualified compensation consultant can set you on the right path.