Careful planning key to successful compensation strategy

Northwestern Financial Review, Jul 1-Jul 14, 2004

Bankers should consider both longand short-term goals when determining compensation for directors and key bank personnel, according to experts from Clark Consulting, a Bloomington, Minn.-based consulting firm that specializes in compensation issues. The company recently led an executive compensation discussion at a community bank peer group meeting in Savannah, Ga.

"The bankers' main concern was finding affordable strategies for retaining their key people," commented Mike Blanchard, vice president in the firm's compensation group. He explained that, although each bank has unique compensation planning needs, the basic principles of a successful compensation program are universal. Banks must design a program aligned with bank objectives that includes both short- and long-term incentives to keep top executives focused on achieving the bank's overall strategic goals. Since a director's role is to provide long-term direction for a bank, boards are discouraged from participating in annual incentive programs, he said. Therefore, the peer group also discussed how directors can be included in long-term incentive programs that reward them for their critical role while promoting long-range decision-making.

Questions regarding the specific needs of those banks in attendance were also addressed. For example, Blanchard explained how synthetic equity is a useful tool for closely held banks and mutual companies since it is purely a cash transaction based on the increase of stock price and does not result in the allocation of actual shares. In addition, Blanchard emphasized that no matter how competitive a bank's compensation package is today, it is imperative to benchmark it to the market every 18 months to two years in order to ascertain its continued effectiveness.

Besides examining the elements that comprise successful compensation packages, discussions included bank-owned life insurance and its impact on benefit plans.

The peer group consisted of community bank presidents and CEOs who regularly meet to discuss industry issues. Clark Consulting is a major provider of BOLI products and services.