Long-term succession planning handing of the baton

Most financial organizations have an aging workforce where many executives are getting closer to retirement.

Thinking about executive succession planning is more crucial now than ever.

In the 2018 Bank Director Survey, over 37% of banks cited succession planning for executives as a top 3 challenge.

Another 25% said they were dissatisfied with their bank’s succession planning efforts.

What are your top compensation challenges in 2018?

Top compensation challenges in 2018

That’s an alarming amount of organizations with unsecured futures.

Succession planning isn’t just for C-level employees either — it’s for your entire workforce as you set the groundwork for long-term goals.

You should always be looking for ways to incentivize, retain, and train all levels of talent.

Here are 5 considerations to be aware of when rethinking your succession planning process.

1. Align succession planning with the long-term goals of your institution, and be prepared to compensate accordingly

Succession planning should align with your institution’s long-term goals, so consider looking further down the road when reviewing your succession planning process.

Let’s say you are looking to double the size of your organization.

To meet that goal, you should aim your sights on executives who have worked in financial institutions double your size.

You may find yourself compensating experienced individuals more, but you are ultimately investing in long-term growth.

Obtaining greater talent will almost always require paying more compensation, but as long as securing your organization’s future success is a top priority, you can justify the necessity of paying more for top-tier executive or someone with high potential.

Keep in mind that obtaining the talent you need may disrupt typical compensation practices at your institution. Thus, your advisory board and executives will need to be in agreement regarding your longer-term objectives.

Another example would be a financial institution that is going public and has a CFO who is retiring.

The new CFO should have experience with larger public financial institutions. A CFO who has experience with large public banks will likely demand a package similar to what they held at the previous company.

To get this experienced person on board, you need to pay accordingly.

(Recommended Reading: The 4 Habits of Successful Bank Compensation Committees)

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 as 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 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 backup plan of action for the 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.

This is even more important to consider in a job market that currently favors job seekers, and where compensation packages have become more competitive.

Are you satisfied with your organization’s ability to attract and retain the talent needed to ensure future success?

Ability to attract and retain the talent needed to ensure future success.

Ideally, the intermediate 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, Credit Union Owned Life Insurance (CUOLI), 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 and credit unions 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 leadership in the financial industry 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.

What is the age of your bank’s CEO?

How old are most bank CEOs?

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:

  • Millennials (Born 1981-96): Base pay, career opportunities, retirement plans, low health care costs, bonuses/incentives, flexible schedules.
  • Generation X (Born 1965-80): Retirement plans, low healthcare costs, bonuses/incentives, paid time off, and flexible schedules.
  • Boomers (Born 1946-64): Retirement plans, low healthcare costs, bonuses/incentives, paid time off, and doing the type of work they value.
  • Silent (Born 1928-45): Retirement plans, low healthcare costs, bonuses/incentives, paid time off, and working for a respectable organization.

Less than 10% of bank CEOs are under age 50, while 32% are 60 or older and nearing retirement. The challenge?

There is limited “top executive talent,” however, it also creates a wonderful opportunity for financial institutions that are aggressively seeking the right talent.

Consider changing your incentives and compensation packages (short and mid-term incentives) to appeal to younger generations.

While Baby Boomers currently fill the majority of executive roles, Millennials will soon be key decision makers in the industry.

(Bonus) 5. Create a succession planning template that helps prepare your organization for future success

The future of your institution’s leadership and growth depends on careful succession planning. While the 4 considerations covered in this article just scratch the surface of a very complex process, they should help you get started with defining and creating a general template for your succession planning process.

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.


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