4 Bank Compensation Committee Best Practices

By JR Llewellyn, Senior Vice President, Compensation Advisors. This piece was originally featured in Bank Director.

Compensation committees are responsible for setting the foundation of a bank’s compensation program, subsequently impacting the bank’s underlying culture. The banking industry is more competitive than ever, so attracting and retaining top talent should be the committee’s number one priority. With a compensation committee that is educated on industry trends and modern-day compensation best practices, your bank will be on its way to developing programs that attract and retain top talent. Here are the top 4 best practices a bank’s compensation committee should consider.

1. Make sure your bank’s compensation committee members take steps to stay educated

Your committee members are responsible for staying aware of compensation trends. They need to always be in-the-know of complications, IRS penalties, and other factors with unintended consequences or expenses that can impact both the bank and the executives. Committee members should regularly review market trends in executive compensation; staying aware of banking trends as well as trends in other industries will better position the bank for success in recruiting, rewarding, and retaining talent. Your board should also be educated by the committee regarding your bank’s compensation philosophy and how the committee functions.  

A few areas the compensation committee has direction over include equity grants, incentive structure, benefits, qualified plans, board compensation, and other aspects of compensation. They should have a full understanding of structuring compensation plans, and if not, the committee should consult an adviser.

2. Establish the duties and responsibilities of each compensation committee member

In addition to staying educated, members of the compensation committee must have a framework for their efforts. This involves establishing the duties and responsibilities of each member, but before you begin, you’ll need to develop a compensation philosophy if you don’t already have one. Without an established compensation philosophy, your compensation committee will lack direction, clarity, and consistency regarding compensation practices. In addition to putting your philosophy in print, you should ensure that everyone on your committee understands it and is able to relay its message. The philosophy should be comprehensive as well as consistent with the culture of your bank, the interests of your shareholders, and market trends.

Committee meetings should be organized on a schedule to ensure that members are staying on track according to their responsibilities. For example, clearly identify which meetings are for reviewing information and which are for making decisions. Here’s a bonus  best practice: Prior to committee meetings, make sure everyone on the committee receives a meeting agenda  containing discussion topics, notes from previous meetings, and links to any documentation pending review. By staying organized, committee members will find making headway on recruiting and retention to be a conquerable task.

3. Review the compensation committee’s performance quarterly

Quarterly, you should hold a meeting to assess the success of your committee. Check on what’s working and what isn’t with regards to committee function, meeting processes, and other aspects. It’s important to look at whether you’re hitting benchmarks—and whether you’re attracting and retaining the talent you need to hit those benchmarks. There’s always room for improvement, so discuss what the committee may need to change in order for your bank to be more successful with recruiting and retention.

This performance review may be best facilitated by a third party with expertise in executive compensation. An outside expert will have a fresh perspective on your internal processes and can guide you in the right direction.

4. Engage expert compensation consultants when necessary

There’s a delicate balance that must be struck with compensation; it needs to be competitive enough to retain executives but as efficient as possible to drive shareholder value. With the increasing competition for talent and the rising costs of benefits like health care plans, many banks have been pre-funding benefits through plans such as BOLI packages. Choosing the best insurance carriers and structuring pre-funding plans is something that requires outside help from qualified consultants.

Professionals can help you determine competitive compensation packages and discern what investments will bring you the greatest return for the lowest risk.

Following these best practices will bring success to your bank by attracting and retaining top talent

If you don’t feel your compensation committee is hitting the mark, it’s time for something to change. Rewarding talent and funding those rewards is a complicated topic, so outside help from a compensation consultant who specializes in banking may be helpful to bring direction to your committee. If your committee follows these 4 best practices, you’ll be on a path to success  applying your finest approach to compensation and benefits plans.

Talk to a compensation committee consultant