By JR Llewellyn, Senior Vice President, Compensation Advisors. This article was originally published by Bank Director.
A reoccurring theme with bank regulators is the retention and succession of talent. The question continues to come up: What are bankers doing to incent their employees to stay, or to recruit new talent? The use of incentives in employee compensation plans remains alive and well within the banking industry, despite the negative press they’ve received in recent years. However, the shape, form and purpose of compensation incentives continues to evolve depending on the objective.
Let’s ask the question differently: What does that employee value? Of course, this will differ from person to person. However, before going into specifics about the types of incentives that will help drive a company’s value through talent retention or recruitment, we should pause. It is essential to understand that if the proper hiring decision is made, particularly given the new set of values demonstrated by the next workforce generation, traditional incentives will not be the only dynamic force behind performance, retention or recruitment.
Daniel Pink, in his book “Drive: The Surprising Truth About What Motivates Us,” clearly articulates this point when he writes that intrinsic motivation effectively trumps extrinsic incentive rewards, a value that is more tangible in nature. The goal is for the activity itself to be the reward, thus the drive to do something because it is interesting, challenging and for the greater good is in itself the incentive. This is not to dismiss the importance of compensation, but to speak specifically to the true value of extrinsic incentive rewards. Thus, there must be a cultural shift to extract the intrinsic motivation that resides within your employees in order to take your bank’s financial performance—or retention and recruitment—to levels that cannot be reached solely by extrinsic incentive rewards.
That said, structuring incentives to drive specific behaviors—which is the purpose of financial incentives—is a necessity when trying to influence an outcome. So the question becomes: What are you trying to accomplish? Keeping in mind the concerns of the bank regulatory agencies about retention and succession, how do you incent people to stay with, or join, your company?
Realistically, while you cannot customize incentives for each individual, you still need to remain flexible in terms of how to meet their needs. Below are a couple of descriptions of highly valued programs that continue to have a lot of success at banking institutions.
These can help employees handle major financial undertakings like college tuition, elderly care and meeting wealth accumulation goals, to name just a few. Whether in the form of cash or equity, the design will create an account balance that remains at risk, which is to say it is subject to forfeiture unless the employee meets the terms and conditions of the plan documents and participant award agreement, and therefore can influence retention behavior. With additional performance metrics built into the plan, it evolves and becomes organic. The plan’s criteria and objectives can be set annually, allowing the bank to determine where they want the individual to focus his or her time, which helps align the employee with the bank’s strategic goals as they are revised from year to year.
Executive Retirement Plans
A highly desirable plan for those employees who are focused on retirement will provide the appropriate incentive, assuming it is designed properly, to retain key employees until retirement. Although there has been negative press associated with these types of arrangements, they are clearly an incentive to recruit or retain the bank’s talent. If retention or recruitment is an objective of the bank, then the use of such plans is a key component in the process.
Other extrinsic incentive rewards could include rapid advancement within a career path, advanced education, mentorship programs and professional certifications. Again, this all reverts back to what is valued by employees. However, without proper vesting schedules embedded into the rewards, such as service obligations for advanced education programs, there could potentially be little retention associated with the plans.
In today’s business environment, human and relationship capital will continue to drive the success of organizations and be a strong differentiator. Given the concern over talent and succession planning by the regulators, looking at incentives—not simply for a financial reward based upon performance, but rather as a means to influence behavior, specifically related to attracting and retaining talent—is critical to create the desired franchise value.