At one professional organization with which Matthew, Young – Management Consulting has assisted with compensation planning and communications for many years, almost 92% of employees responded positively to the statement in their engagement survey, “I am paid fairly for the work I do here.”
“Often we get so busy at year-end, both at work and with the holidays, that we do not do the best job pausing to say thank you. I want to make sure I express our appreciation for all of your hard work on our account. Please also thank the rest of your team. We are very pleased with our new-found relationship with Matthews, Young and are very happy to be partnering with you!”
– SVP, Director of Human Resources
When our Firm initiates a new CEO search or Succession Plan, we work with the owners and/or Board of Directors of the client company to build an “Ideal Candidate Profile.” This profile, while useful, is a target which can seem unrealistic when you start to see real live candidates.
I often simplify the Profile to a short list of Knowledge, Skills and Abilities (KSAs) that are critical. This becomes a “must have at a minimum” list. We recently produced a list of critical “musts” for a community bank CEO search. Listed below are the five traits that we all agreed were needed by any bank CEO of the future:
- Ability to see local community needs and think outside the “Banker Box” to envision how the Bank can satisfy the unmet needs.
- Ability to inspire all constituencies with a vision that creates value for customers, staff and shareholders.
- Keen risk management skills to manage risk under all economic scenarios.
- Ability to manage a wide diversity of products and service lines.
- In-depth understanding of how technology is changing the marketplace.
Given enough time, some of these critical KSAs can be developed with internal succession candidates, but there must also exist within such candidates a propensity to think broadly and deeply enough to be simultaneously analytical, creative and eloquent. Often, an outside candidate is able to strengthen an already strong internal team with these KSAs.
I would be happy to present this and other succession planning topics to your owners, Board and/or your Management Team as an introduction to our Succession Strategy, Executive Development and Executive Search services. Call me at 919-732-2716 or complete the request form below and I will reach out to you.
Executive compensation and performance-based pay continue to be a hot topics in board rooms and in the press. Corporate directors should be wary of compensation plans that can distort the pay for performance equation. Two pending SEC rule changes may impact how public companies implement executive compensation in the future: the Pay for Performance disclosure, and the CEO pay ratio. Where CEO pay and company performance are misaligned, proxy reporting will raise a red flag for shareholders and investor groups. Large pay packages that result in problematic CEO pay ratios (the ratio of CEO pay to employee median pay) have been key topics in the press as companies anticipate the implementation of the SEC’s new pay ratios rules.
As the deadline nears for implementing these new pay disclosure rules, public boards and executives should focus on the effectiveness of all elements of executive pay. Since a large part of CEO compensation is long-term incentives, typically stock-based or plan-based compensation, these plans should be closely evaluated. While public companies will be concerned with the new pay rules, private companies will also be interested since pay for performance is a best practice. Consequently, long-term incentive pay will be a focus in the near term.
Historically, long-term incentives were granted to retain executive talent; executive retention is greatly enhanced when adding a vesting feature and a forfeiture clause for executives who leaves before vesting. Retention in the form of long-term incentives generally were implemented using stock grants, primarily in the form of restricted stock and RSUs with vesting after three or five year’s continuous service. Stock options could also be used to help with retention; however they often lose their effectiveness when the stock price drops and options fall underwater. While these types of grants are effective retention tools, they lack the focus that is generated with performance-based incentives.
We believe that a meaningful way to measure the effectiveness of long-term incentive compensation is to evaluate whether the incentives reward senior executives for meeting and sustaining the strategic goals of the company. While service vested stock grants have an element of performance, too often vesting of large stock grants occur during a time when the company’s performance is declining. This misalignment of pay and performance can send a bad message to shareholders and regulators. A better message to send occurs when a large block of stock vests when the company achieves a key success or during a period of excellent performance. For this reason, we believe that long-term incentive pay should be primarily tied to company performance that is linked to long-term, sustained improvement in shareholder value.
Naturally, these incentives should be linked to the executive team’s success against the main goals outlined in the company’s strategic plan. This can be a complicated task. Executive teams are leery of setting performance expectations too far into the future due to the uncertainty of the business environment. The need to set goals that are measurable and meaningful is a significant factor in a plan’s success. A few key goals can be far more meaningful than a long list of performance objectives that may be difficult to track and fraught with confusion about final outcomes. Ultimately long-term incentive plans should (1) be simple enough to communicate to multiple constituencies, (2) reflect the expectations of the board over a long time period and (3) align with sustained and improved total shareholder value.
However, long-term incentives tied to key performance objectives often compete against the desire to meet annual incentive plan goals. Focus on short-term earnings performance and near-term outcomes to satisfy investor groups can be a detriment to achieving a long-term strategy. For public companies, too much emphasis is placed on quarterly results at the expense of meeting longer term objectives. Private companies have less pressure, but the tension between short-term performance and longer term strategic objectives still exists. Successfully implementing performance-based long term incentive plans is one way to counter the pressure of shorter term thinking.
For example, most financial institutions are experiencing pressure to boost their earnings because of declining revenues due to low interest rates. Could this lead bank executives to seek higher interest rate loans with greater risks or higher market concentration in order to generate higher rates and more fees? Could this pressure to boost earnings cause executives to drift away from the long-term strategy of the bank? Of course it could; this is reasonable outcome when pressure on short-term earnings overshadows the long term strategy of a bank; this focus could be a problem for future success. Our suggestion to counter this short-term behavior is to establish long-term incentives linked to an emphasis on loan portfolios that are more consistent with the bank’s strategic direction.
So what are some of the key issues to address if you want to implement a performance-based long-term incentive plan? As a first step, do you have an up-to-date and effective strategic plan? If not, start here. Next, you need to decide whether stock or cash is the best way to provide executive incentives. Also, determining the best time frame for vesting is another important step. We think a minimum of three to five years makes sense. However, you may want to tie the vesting to a major business initiative or a future liquidity event; these events don’t always occur on a fixed schedule. Using multiple grants (annual or biennial) can add another favorable dimension to the plan design. Having rolling vesting dates can help sustain the plan’s long-term momentum. These plan design features and many other plan design decisions must be made when implementing a new plan or moving the emphasis away from service vesting toward performance vesting.
In summary, performance-based long-term incentive plans are a recognized best practice among industry experts and corporate governance groups like ISS and Glass Lewis. With the SEC implementing new rules that will spotlight pay for performance and CEO pay, this may be an excellent time to evaluate your current executive compensation plans to make sure that executive pay is closely aligned with company performance. Finally, directors and executives should examine both the annual bonus plan and the long-term incentive plan to validate that these plans are fulfilling the long-term strategic needs of the company.
Author J. Henry Oehmann can be reached at Henry.Oehmann@MatthewsYoung.com
The Wells Fargo incentive pay problem is at least as old as Matthews, Young; and we’ve been advising the banking industry on performance-based incentive compensation for over 40 years. Decades ago when we discussed design of incentive plans, we would half-joke about avoiding the creation of an employee mindset of “open an account and get a new toaster; open three new accounts and get three toasters”.
Our experience tells us that a cardinal rule of incentives is that you get what you pay for – in terms of employee behavior and results. If your bank sets new account goals without incorporating a balancing measure like branch customer satisfaction, you are sending a problematic message: account growth matters and gets rewarded and customer satisfaction does not. If your incentives are driven by Net Income growth without corresponding Return on Assets / Equity measures, you are telling management that it’s okay to inflate the balance sheet for that extra dollar of profits. If loan growth is the key to incentive earnings without corresponding credit quality requirements . . . well, we all know where that got us in the recent past!
Business news reports of the Wells Fargo problem indicate that another cardinal rule of incentives may have been violated: employees must have a reasonable chance of achieving goals and not fear losing their jobs for failing to achieve what they perceive as unobtainable results. Such a situation will cause some employees to quit trying and others to start their search for different employment. Or in the Wells Fargo case, employees will find a way to achieve goals even when they know their behavior is inconsistent with customer interests and, ultimately, shareholder return.
We also believe that Wells Fargo’s decision to cancel incentive plans is an over-reaction. Well-designed incentive plans are an effective management tool to:
- focus attention and action plans on key results
- motivate individual effort and teamwork
- link company and employee success
The Wells Fargo story will fade in the press, but we believe it should be a wakeup call for banks to take a fresh look at incentive plans. With the new year approaching, now is the time to ask the tough questions: Are performance measures balanced with respect to growth, profitability, soundness, and customer satisfaction? Are expectations reasonably obtainable and do employees have the proper tools and training to perform at their best? Are payout levels competitive but reasonable compared to base pay (e.g., are high incentives necessary for cash compensation to be competitive)? Are we supporting our incentives plans with effective employee communications that explain expectations for results and behavior?
Matthews, Young has been advising banks, thrifts, and credit unions for over four decades on the use of sound incentive compensation. We are experienced in the design of new plans as well as the review of existing plans. Contact us at: Info@MatthewsYoung.com.
Boards of Directors have a difficult, but critically important job to do with CEO succession planning. If a Board selects the right person to succeed a departing CEO, shareholders, employees and regulators will be happy with the results. On the other hand, a failure with CEO succession can bring about the failure of the enterprise. If it is not THE most important thing a Board does, it is very close.
I am often asked whether a retiring CEO should be on the Search Committee. There are times when the answer is an obvious “no.” However, there are situations wherein the Board feels more comfortable with their role if they have a long-term, successful CEO heavily involved in the process. My 35 years of participation in these processes has taught me that no two companies are exactly alike, so there is no right or wrong answer to the question. To me the ideal is for both the CEO and the Board to have important, but different well-defined roles in the process.
The most productive role for a CEO in succession planning starts the day they become CEO. From the beginning, a CEO should start preparing their potential internal successors by assessing strengths and weaknesses, getting them training, development and coaching as needed while exposing them to the Board. The CEO should be sure the Board understands the efforts being made to develop successors internally and frequently share candid assessments with the Board. If this work is done properly, the Board should have a good idea of their “bench strength” in case of an emergency and when it is time for the CEO to retire.
The role of the Board (usually with the help of a Search Committee) is to select the best candidate from inside or outside the company. If the departing CEO has done his/her job, the internal candidates should be strong contenders, given their intimate knowledge of the company and its culture. Nonetheless, today, most Boards feel like it is their fiduciary duty to look outside the company as well as inside. So, most often the Board or Committee will have some good internal and external choices. When it comes time to make a choice, a long-term, successful CEO should be available to the Board, but should take a passive role except in extenuating circumstances.
The departing CEO will justifiably favor the internal candidates, and any external candidates the CEO brought in early. However, the departing CEO is most often not going to have to live with the consequences of the selection. The CEO can still be on-call with the Board to answer technical questions about the job, but the sorting and grading of the candidates should not include the CEO unless there are strong reasons to include him or her. Sometimes, the Board will choose a successor a year or two before the departing CEO steps down, in order to give the new CEO time to learn from the departing CEO. In other situations, the departing CEO will be staying on in a Board role, which has its own issues that we will discuss in a future blog.
For now, suffice it to say that including a CEO in the final selection of their successor is fraught with issues and should be avoided unless there are compelling reasons to keep them involved to that extent. If it would help your Board to have a full discussion about this issue, call me at 919-732-2716, or click here and give me your contact information.
For years, larger companies have routinely budgeted to increase base salaries of employees by a few percent based on what everybody else is doing. Then, the annual increase is usually spread among employees based on where they are paid in their job’s policy salary range and, hopefully, based on a merit performance score. There is a good deal of logic in such a process, but it is worth rethinking given the realities of today’s labor market.
Why does an annual increase in the guaranteed base salary make sense? The fact that it is routinely done at the same time each year gives employees a sense of security and if your strategy emphasizes low risk, steady growth with retention of a stable staff, then this approach to base salary management makes sense. On the other hand, if your organization’s strategy is for more risky growth where high levels of performance can make a big difference, perhaps a different approach to base pay would make better sense.
Maybe some of the base should be shifted over time to incentive pay. Perhaps base salary reviews should be done less often with bigger increase potentials when salary increases are eventually granted. How you mix pay between the guaranteed portion and the at-risk portion is a matter of strategy and to be effective, your pay strategy must support your business strategy. We hear HR professionals worrying about the annual 2% to 4% increase having become an entitlement. However, management of companies that have had depressed revenues during the recent economic recession have little patience for any entitlement attitude. HR professionals need to think about how their office can better support the organization’s strategy. Rethinking the annual base pay increase entitlement is a good place to start.
Of course, every organization is unique and there is no one-size-fits-all solution to managing base salaries and overall compensation. Having worked with hundreds of organizations, for-profit and not-for-profit, fast growing and declining, risk-averse and risk-tolerant, we understand the need for a custom solution. As the economy slowly improves, this is a good time to step back and question your organization’s compensation management. We would appreciate your thoughts. Please email, call or comment below.
Citi is finally getting CEO pay plans right! After losing their shareholder “say-on-pay” vote at the 2012 Annual Meeting of Shareholders, new Chairman Michael E. O’Neill, who just took over as Chairman last April, interviewed a large number of important shareholders. He was told that paying their CEO a $6 Million Incentive based on a two-year (2011 and 2012) cumulative pre-tax profit of $12 Billion, may sound like a good deal for the shareholders, but it was fraught with problems.
To begin, the Company had 2010 pre-tax profit of approximately $12 Billion. So, the hurdle for earning the $6 Million was half of the actual earnings in 2010. Yes, the economy has made earnings difficult to produce, and yes, Citi is trying to overcome internal problems, but shareholders were unwilling to allow a hurdle rate that low. There were other problems with the design of the Plan.
Cumulative two-year pre-tax earnings ignores the fact that the bank could grow assets at a decreasing return on each dollar and meet the earnings hurdle while increasing their capital requirements significantly. Using volume of profit as a management performance measurement always has this inherent problem. In fact, increasing volume of profit can and often does result in lower returns on equity in banking. For that reason, shareholders can lose as management earns more, and a lose-win plan is never good.
Finally, building on the last point, there is no clear link between shareholder returns and management pay in the Plan Citi was using. A common objective of executive compensation plans is to align the interests of management with those of the shareholders. The old Citigroup, Inc. Plan did the opposite to some degree. The Board of Citigroup consists of intelligent and successful people, but they got some bad advice along the way. After Chairman O’Neill spoke with shareholders, he tasked the Board’s Compensation Committee to redesign the CEO’s Compensation Plan to address the shareholders’ concerns. He was not about to get a negative “say-on-pay” vote after his first year as Chairman.
Now, in my many years of studying and designing executive compensation plans, I have yet to see the perfect plan. It just does not exist. Business is too complex to allow for such a thing, and the need to keep the plan as simple as possible is an important constraint. Yet, the new Citigroup, Inc. Management Compensation Plan addresses shareholder concerns with an elegantly simple design.
Executives will be granted units worth a certain amount in three years if certain performance is achieved. Citigroup stock must perform in the top three-quarters of a carefully selected peer group of stocks of similar companies, and Citigroup’s Return on Average Assets over the three years must beat a hurdle equal to the previous year’s actual or there will be no units rewarded. Furthermore, if the Return on Average Assets over the three years is better than the previous year by a significant percentage, then a target number of additional units will be awarded.
This design is superior to the old design because it clearly:
- aligns management’s interests with those of the shareholders and
- it is tied to relative performance compared with peers as well as the Company’s strategic goals.
There are some potential draw backs to such a plan, but the new plan is so much better than the old plan, I will not spend words on the risks in this particular blog. Perhaps in the future, we can look at some of the potential flaws. In the meantime, I say congratulations to Mr. O’Neill. I may go buy some Citigroup stock!
It is never too soon to start developing a succession plan for the top executive positions in an organization. Such plans take time to develop and come to fruition. Here is a brief outline of the steps:
This step should be in process continuously. It involves determining which positions need successors and what knowledge, skills and abilities will be needed for those positions in the future to have a successful enterprise.
This, too, is ongoing. It is the training and development of the inside candidates and the search for and recruitment of outside candidates that fit the ideal candidate profiles. This step takes time to implement…maybe years if you hope to develop talent internally.
Here you are screening, selecting and negotiating terms with the successor. Often, you will need to circle back and revisit plans and development steps if strategies change. Eventually, though, a successor must be chosen.
This is the handing off of the baton from a retiring executive to his or her successor. It is fraught with risk and should be carefully planned and
monitored. Most new employment relationships that are going to go bad will do so during the first six months while a transition is occurring.
There is a lot to do to make succession planning work. We will be happy to present an overview of the process to your executive team and/or Board at no cost
Click here and request a contact, or call me at 919-732-2716.
According to new research at Rock Center for Corporate Governance at Stanford University, more than half of companies today cannot immediately name a successor for their CEO, should the need arise. Boards spend, on average, only two hours a year to discuss this topic, and less than 50% have a written document detailing the skills required for the next CEO. There are large planning and communication gaps, but we have found some helpful suggestions for boards.
If a succession plan exists, but it is intangible, companies can feel a false sense of security. Boards should draft a succession plan one to three years prior to needing one. This is so candidates can be groomed to acquire the knowledge and skills necessary to handle the responsibilities of the role if and when it falls upon them. It is also important to create open and direct lines of communication between the board and potential internal candidates, while keeping the “runners up” happy, just in case.
Small companies may think they lack the time to do such planning and development, but a good process only requires a few hours up front and a steady focus over time. A little advanced planning and organizational development, when combined with an effective external search process, will offer your company the most viable pool of candidates. It’s much better than picking names out of a hat.
We have helped six bank boards through CEO transitions over the last two years, and three of the new CEOs came from inside the organization. In these cases, as you might imagine, there were succession plans in process long before the departing CEO reached retirement age. “Rising Stars” were identified and exposed to matters that might have been outside their normal roles, but that process helped to develop the next generation.
Each of these Boards felt that it was their fiduciary responsibility to look outside as well as inside to find the best successor available. Makes sense, but we all know that outsiders have “halos” on when the come for the interview, while inside candidates’ weaknesses are usually clearly known. The search must, therefore, be structured to balance the playing field if there are serious inside candidates. This is particularly tricky since many outside candidates are happily employed and only got involved because we sold them on the idea of an opportunity. The last thing you want to do is alert their current employers until you know that they are the chosen candidate.
This is just one of the very sensitive issues that must be resolved in a succession plan. Others include:
- the amount of overlap between the two CEOs,
- the structure of the Management Team’s compensation to facilitate transition,
- a plan for managing communications during either a sudden transition or an orderly retirement succession, and
- success planning for the first year of the new CEO’s tenure.
Every situation is different, but the list of topical issues is the same. Board’s of smaller companies tend to put off this difficult and sensitive work. No one wants to appear to be pushing the current CEO out, but developing inside talent takes a long time especially in a smaller company. We have found that engaging a Board with a review of the list of issues they need to consider helps get them focused and motivated to start the planning process. Our Firm has become deeply experienced in C-Level Succession Planning and Execution, and we are happy to educate your Board in these matters. For a complimentary presentation of the key issues they need to consider, please reply here, call Tim O’Rourke at 919-644-6962 ext. 1109 or complete the request form on our website when you click here.
Some Federal officials and others from sectors that are removed from day-to-day commerce want to blame risk takers, represented by Wall Street investment bankers, for high unemployment and frozen financial markets, and certainly risk exploded during the decade leading up to 2008. While Wall Street firms need to bear their share of the responsibility for participating in risk-run-wild, there is plenty of blame to go around, including government policies before and since the liquidity and credit crisis hit in late 2008.
It is important now to fully diagnose the reasons for our recent economic woes and pass regulation that helps identify the size and nature of systemic risk in the future. It needs to start with governmental policies, federal, state and local, that interfere with the normal market-driven risk and reward mechanisms that have controlled free enterprise from its inception. Risk rating agencies need to be truly independent in the future. Corporations must do a much better job of assessing the risks they create or support in the marketplace. In addition, American consumers need to be better educated in economics and free enterprise so that they can detect risk in offers that are too good to be true.
FDR is often quoted as saying in his first inaugural address, “The only thing we have to fear is fear itself.” We need to remind ourselves of this wisdom in these times of frozen job markets and banks. One of the primary tenets of capitalism is “no risk, no return.” Fear of risk has things frozen. It is time to take measured risks again, not the senseless risks we saw in the mortgage funding government policies or mortgage-backed securities that could never have produced a lasting return, but reasonable risks that produce reasonable, long-term returns.
One of our greatest risks at this point in the history of our great nation and its great economy is, as FDR put it, the “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” We risk becoming so risk averse that we will never move ahead. Government needs to stop punishing and get out of the way of growth. Banks need to make loans in support of reasonable new ventures. The unemployable must learn new skills. Corporations need to expand and hire people to grow their businesses. The global market will make a comeback if we don’t let our fears of risk prevent it.
The DISC style profile instrument is quick, inexpensive and impressively accurate in capturing work style preferences. Instrument is a basic 4 quadrant profiler that has been around since 1934, has been enhanced/validated several times,and is available via web. Great tool for search and selection as well as team building. The DISC is only available through a certified consultant.
I have been a certified user/provider since 1991. We use it at MYMC in our search and team building practice areas, and also supply it to clients. We train clients in interpretation/usage of the instrument, support client usage, and/or simply provide clients with a secure web-based profiling process. I have seen consultants and clients overuse and over-rely on profiling instruments – using numerous instruments in the mistaken thought that they then have all the answers. Such over reliance abuses the very process they were brought in to support, and often the participant as well by trapping him or her in a limited “box” of prescribed behaviors, while also increasing the cost. I recommend a more thoughtful and selective approach to using supportive instruments for search and team building. While valid instruments can provide insights into capabilities or preferences, they can never replace the need to talk with people. We have found that while people have preferences, they also, in the right circumstances, have a remarkable range of performance capabilities. We at MYMC try to always look at “what are we trying to accomplish” first, and then use a few (seldom more than one or two) select and targeted instruments to augment our interview and team building processes.
The right instruments can help provide insights and even a meaningful framework within which to examine how an individual fits with the requirements of a particular job, or into an existing or newly formed team. Ever have doubts about whether or not you really know that team-mate or candidate? Ever get fooled by circumstances, a clever interviewer, or a halo effect? Then try augmenting your interview, selection and or team building processes with instruments like the DISC Style Profiler.
We will be glad to assist. Call me at 919-644-6962.
Today’s “American Banker” had an editorial called “Chief Factor in Small-Bank Survival? It’s the Chief.” No question about it! Leadership matters and while the banking industry has always been about people, the quality of the leadership has never been as critical.
The model for success in the future for community banks is changing radically. Margins will be thinner on the traditional business of gathering funds and lending them out. Costs for doing business are rising, if for no other reason than increasing regulation. Customers are shifting banking habits requiring banks to invest more in technology-based solutions. The challenges to success will be sizable. So, what does the ideal candidate profile for the future community bank CEO look like?
I am sure we don’t yet have all of the answers to this major question, but many of the features can be seen in other industries that have gone through massive change. Retail distribution went through similar change over a couple of decades leading to the development of big-box and chain retailers taking the place of the local hardware store and clothier. Some leaders saw the change coming and innovated. Some changed the channel of distribution. Some narrowed the definition of their niche. In every case, survival depended on strategic vision, detailed knowledge of their communities and customers and the leadership abilities to take their people through the wrenching change without destroying their loyalty.
The ideal community bank CEO of the future will need to have a wide array of skills and abilities. They will need a mix of technical skills and interpersonal abilities that may be difficult to find. Technical skills to recognize and analyze risk and understand the opportunities and the limitations of technology will be key. In addition, the leadership traits of visionary strategists and change agents will be essential. The CEO of the future will also need to be able to drive a sales culture and hold people accountable for results. They will need to be a community leader and a master politician to help the local community understand why he or she demands performance and is willing to turn over staff members that may be their neighbors.
We build “Ideal Candidate Profiles” for Boards who ask us to find executives, and while every organization has its unique needs, there are certain traits that are usually needed based on the executive position. We are exploring the changes needed for the future and the community bank CEO profile is one that will change dramatically. Click the button below and register for a free presentation to your Board about the CEO of the future, or call 919-644-6962 and ask for Tim.
According to a recent WorldatWork survey of large companies, over 30% have no succession plans in place and 50% of executives say they do not have a successor for their current role. Why? They cited a number of reasons:
- Not enough opportunities for employees to learn beyond their own roles (39%)
- Process isn’t formalized (38%)
- Not enough investment in training and development (33%)
- Not actively involving employees or seeking their input (31%)
- It only focuses on top executives (29%).
A lack of succession planning can lead to a lack of strategic direction and weakened financial performance, but it is hard work and Boards tend to make it a task instead of a strategy. We will be happy to share an outline of succession planning as a strategy. Just go here and request it: http://matthewsyoung.com/contact.htm
Or, you could use the three envelope approach. I learned this approach from a fellow who had just been hired as the new CEO of a large, publicly held company. The CEO who was stepping down met with him privately and presented him with three numbered envelopes. “Open these if you run up against a problem you don’t think you can solve,” he said.
Well, things went along pretty smoothly, but six months later, the net interest margin took a downturn and he was really catching a lot of heat. About at his wits’ end, he remembered the envelopes. He went to his drawer and took out the first envelope. The message read, “Blame your predecessor.” The new CEO called a press conference and tactfully laid the blame at the feet of the previous CEO. Satisfied with his comments, the press – and Wall Street – responded positively, the stock price began to pick up and the problem was soon behind him.
About a year later, the company was again experiencing a slight dip in margins, combined with serious balance sheet problems. Having learned from his previous experience, the CEO quickly opened the second envelope. The message read, “Reorganize.” This he did, and the stock price quickly rebounded.
After several consecutive profitable quarters, the company once again fell on difficult times. The CEO went to his office, closed the door and opened the third envelope. The message said, “Prepare three envelopes……….”
You don’t need three envelopes if you use succession planning as a strategy. http://matthewsyoung.com/contact.htm
We have been contacted over the past 6 months by a number of large employers across the southeast, who have recently experienced a compensation audit by the U.S. Department of Labor. Key parts of these audits have been requests for documentation on the Company’s compensation policies and information to support how the Company’s practices match policy. Key areas reviewed included overall compensation policy, base compensation, distribution of salary adjustments, incentive plan structures, and FLSA compliance (interestingly these audits do not seem to have targeted ERISA or other key DOL areas).
As with any audit, preparation is always a “best practice”. If you have questions about what being compliant means, if we can assist you with an audit of your current pay practices, and/or if you need help developing policies and processes that match Company intent and are legally compliant, please contact us at 919-644-6962, or complete a contact request at http://matthewsyoung.com/contact.htm.
All of the prognosticators (including us…see The Future Community Bank Model – Greater Diversity of Revenues and Reduced Risk) are talking about the need for community banks to diversify their product mix, rely less on concentrations of commercial real estate loans and develop new fee-based services. The problem is that the current staff of most community banks has a set of knowledge, skills and abilities that do not apply in this new world community banking environment.
Commercial and Industrial Lending (aka C&I Lending) is a very different process than Real Estate lending. Will the banks retrain real estate lenders or recruit C&I lenders from other banks? Where can they find trained lenders? Large banks have relatively few credit trained C&I lenders because these banks shifted years ago to a “hunter/gatherer” strategy that deployed many relationship developers (hunters), with limited credit training, who would bring the loan request to a few credit underwriters who made the deal work for the bank. When this shift occurred, the large banks no longer developed the trained staff that community bank recruiters needed.
Banking gurus are also pushing the point that fee-based businesses need to be developed in the community banks to offset some of the continuing pressure on traditional net interest margins upon which community banks have historically depended. There has been much written about understanding your local communities’ needs and the share of wallet your bank is getting. This is how you determine what additional services are needed in your communities. All true, but where do you get the talent to develop and then manage these new businesses? Banks have not traditionally had strong sales teams, so once the new businesses are developed, will banks be able to build the businesses.
It has been estimated that half or more of the staff currently in most community banks will need to be replaced with people with new knowledge, skills and abilities needed in the new model of community banking. In some cases, the change needs to begin at the top of the organization. We hear from capital market players that investors often want a new team to deploy the new capital. CEOs would be well advised to aggressively rethink their strategies for their banks and include strategies for attracting and retaining the new talent that will be needed in the new world of community banking.
For an assessment of your community bank’s strategic plan, click here:
The SEC issued Final Rules regarding public company requirements to disclosure and ask shareholders for a non-binding vote on executive compensation practices, known as “Say-On-Pay.”
- The new rules specify that say-on-pay votes required under the Dodd-Frank Act must occur at least once every three years beginning with the first annual shareholders’ meeting taking place on or after Jan. 21, 2011.
- Companies also are required to hold a “frequency” vote at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. Following the frequency vote, a company must disclose on an SEC Form 8-K how often it will hold the say-on-pay vote.
- Under the SEC’s new rules, companies also are required to provide additional disclosure regarding “golden parachute” compensation arrangements with certain executive officers in connection with merger transactions.
- The Commission also adopted a temporary exemption for smaller reporting companies (public float of less than $75 million). These smaller companies are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after Jan. 21, 2013. “Public Float” is typically defined as the portion of a company’s outstanding shares that is in the hands of public investors, as opposed to company officers, directors, or controlling-interest investors.
For further details see http://www.sec.gov/news/press/2011/2011-25.htm.
Margins in the financial services business “stink” right now. (Stink is a technical term meaning “what margins?”.) Rates are so low, and liquidity needs are so great, community banks and credit unions have little to no margins to help rebuild capital following serious loan losses over the last three years. Margins are likely to improve in the short run, but in the long run competitive pressures will continue to keep margins tight. Community financial institutions need to be more efficient in the future, but increasing regulation will require new staff and management time. Cooperating in cost sharing pools or merging to get bigger will be needed in order to compete.
Cost sharing makes a lot of sense. Compliance and certain Audit functions could be outsourced. Many Human Resources and some Marketing functions can be outsourced as well. With the right sources, financial institutions can get access to more senior talent at lower costs because they share the resources. The keys to making this work have to do with reliable service providers working with peer groups of financial institutions that are not competitors. I expect the remaining bankers’ banks to offer such services and consultants will provide services as well. We have been approached by small institutions looking for such services and asking us to organize peer groups for sharing costs.
There is little doubt that small community banks and little credit unions are under a great deal of pressure. Will the growing weight of new regulations and other requirements do them in or will new technologies and cooperative efforts save them? Let us hear your ideas with comments below, and if you want to know more about our offerings, call me at 919-644-6962 or ask us to contact you at http://matthewsyoung.com/contact.htm.
With the “Boomers” reaching retirement age, executives are beginning to retire in large numbers, but will the new CEOs walk into empty Boardrooms? Let’s face it, becoming a Board Member is not as glorious as it once was. The liability one takes on in the current litigious environment and the work necessary to do the job well is rarely offset by the rewards, financial or otherwise.
We worry about attracting and retaining qualified directors to represent shareholder interests in the future. Recruiting and grooming future directors needs to be an ongoing process of a Nominating Committee. We have been on the lookout for practical solutions to this dilemma, and recently found a case study in the “ABA Banking Journal.” A number of years ago, First United eliminated its three Advisory Boards. In their place, an Advisory Council was created. Care was used in terming it a “council” and not a “board.” This made it clear that the role was advisory, and it did not bear the legal responsibilities of the Board.
According to William Grant, chairman and CEO, the Council meets six times per year, in a dinner meeting following our Board meetings. This affords our Board members the opportunity of attending and observing. The Council’s agenda is to kept abreast of the bank’s activities, and to solicit their input on a number of market‐related issues. The majority of the Council members are community oriented businesspeople, and able to bring this perspective to the meeting.
This arrangement provides the following advantages to the Bank:
- It serves as a valued “blue sky” advisory group to help the bank establish and execute strategies
- It provides a “farm system” for future directors by affording members the opportunity of learning about the bank, its mission, and its culture. The bank gets to know them. If there is a fit, then that person may eventually become a director. In fact, the last several directors at First United have come to the board by this route. If there is not a fit, then that becomes known before a member is placed on the board, and one side or the other comes to this realization.
- It facilitates an environment where the Council member and various directors come to know each other, making the selection and nomination of future directors an easier chore.
This approach seems to address the issue nicely. We would love to hear other ways that have worked for you. Please comment below. Thank you. To discuss your Board’s succession planning process, call me at 919-644-6962 or complete a contact request at http://matthewsyoung.com/contact.htm.