Upcoming Forums:

BirdsEye View

Bob Gaddis, SVP at Colorado Business Bank, said:  "I would argue the exact opposite to Cathy Nash's opinion.  One of the things I see CEO's struggle with is they have more passion about the bank than they do about those that have kept the bank in business.  I am guilty of struggling with what is in effect a knee jerk reaction to an over imposing Fed and its impact on the perceived need to react overbearingly, which in turn flows from the CEO to the Chief Credit Officer and on down the line.

In most cases my relationships with customers date back 10 to 20 years, and the bank has made very good money on the backs of those relationships.  If we are to follow through on our claim to be a "relationship" bank (yes, the way overused marketing term that is a rarity), then we have to learn to stick by our long term customers through good times and bad.  There is a "passion" there because we are human and we live and breath the incredibly difficult discussions with real people in real life situations in which CEO's and the Fed never take part.

Oh, and by the way, the sales focus is always driven by the CEO.

PS.  I am speaking in generalities here and am painfully aware there are circumstances in which businesses and their principals are guilty of mismanagement and absolutely, in the interest of the solvency of a bank, must be moved to the "Special Assets Group."

On the personal front, Arik is kicking butt in football and I'm very excited for him.  He's also celebrating the first year's anniversary with his girfriend Paige.  Not bad for a fifteen year old!

Liat is back in Chicago hard at work for her senior year at University of Chicago.  She's letting her hair grow a bit longer again, which I LOVE!  Gil is doing well at UCLA with his triple major of math/economics/psychology, plus he's now gainfully employed at UCLA selling "bearwear" (their logo merchandise).   We spent last weekend in LA with him, where I attended my very first tailgate party prior to a UCLA game at the Rose Bowl.  I didn't know people can get so drunk so early in the day :)  

And Paul just rocked his accounting test and is doing well on all fronts, knock wood.  Liat and I will come to visit him in November and see the Wizard of Oz together.  I'm psyched!  Last, Dick is making all the forums possible behind the scenes while helping out the football team from selling Grizzlie-wear and doing chain duty on the field.  And I'm deeply into Forum season, and having a great time seeing friends, learning a lot and appreciating the solid attendance we're having.  

Anat

Article synopsis: Many are struggling with appropriate compensation plans for 2010.  These are unusual times, and what worked in the past is not necessarily practical today.  However, creative thinking and additional compliance do work.

TRENDS IN COMPENSATION

The new heights (or depths, depending how you look at it) of regulatory scrutiny of compensation practices is driving many an HR executive to distraction.  How does one handle the new ban on all short term bonuses and incentives if you're a TARP recipient, and even if you're not?  What to do now that your compensation system is perfectly divided among base, short term and long term incentives (1/3, 1/3, 1/3) yet common wisdom suggests that this structure is no longer ideal?

 

We held two conference calls for members of our HR executive Forums on the subject and spent some time listening to the regulators.  Here are some pointers as you finalize your budget for 2010:

• It's time to get tough on raises.  With unemployment at 10% or higher and general bank performance in the dumps, why are we still contemplating giving everyone a raise?  Even the most benevolent employers recognize that some employees are stars, and they deserve the moon and more, while others are slugs, and they deserve no extra cash.  Turnover figures have hit rock bottom for many employers, which isn't necessarily a good thing.  This is a great time to treat your best employees meaningfully different than your maudlin ones.

• Zero raises to top executives.  Many banks are freezing top 100 executives' compensation, some for the second year in a row.  With focus on expenses, you get far more "bang for the buck" by controlling pay levels of your highest paid employees.  An added benefit: being on the moral high ground when you ask others to tighten their belt.

• "Say on pay" is here.  Expect "input" into your top executives' pay levels and especially incentive compensation plans, TARP or no TARP.

• Regulatory oversight will intensify for compensation at all levels.  This isn't just for your highest level executives, but for anyone who receives any incentives, especially your top producers.  The key question is:  are your incentives and compensation practices contributing to increased risk levels throughout your organization?  Do you employ "claw-backs" to ensure ethical behavior?  Are incentive plans fully aligned with shareholder interests?

• "Back to the future" - increasing the subjective elements to compensation.  After years of working hard to reduce the element of personal judgment in incentive compensation, it's back with a vengeance, particularly at the board level and in CEO compensation.   However, discretion calls for transparency, so the logic behind discretionary actions must be clearly explained in the MD&A.

• Use true long-term objectives that respond to shareholders' needs as the basis for both long-term and short-term incentives.  One hard lesson learned in the past couple of years has been the dangerous side-effects of short-term thinking on executive and sales force behavior.  An accurate view of bank business lines and activities that build shareholder value helps incent the right activities.

• Clawbacks are "in".  They are perceived to be a strong risk mitigation tool by industry observers and regulators.  Time frames range from 1-3 years.

• Team-based plans.   Such plans can mitigate perceived risk and egregious individual incentive levels.

• Corporate alignment.  Inserting corporate-level modifiers to all incentive compensation plans is becoming more common and enhances plan alignment at all levels.

• Budget and govern total incentives as a percent of Pre-tax income.  One of the greatest fears of board members is paying several times for the same sale.  This actually happens often, as many banks have 40+ incentive plans.  A good discipline that ensures both employees and shareholders get their fair share is budgeting in advance all incentive payouts company-wide as a percent of pre-tax income.  This will ensure a fair distribution of the benefits created by team members between the employee and the shareholder, something that doesn't always happen.  If more than 25% of the profit goes to employees (with the exception of incenting recurring fees, such as insurance, brokerage and trust), ask yourself whether the profit split is appropriate.

• Accurate measurement is key.  As always, the devil is in the details.  For example:  Did you count risk-based capital more than once against several different product lines?  Did you consider risk trends vs. a point-in-time view?  Did you crisply identify the company's tolerance for risk?  Measuring activities and results is a first step toward effective compensation practices.  Following up by measuring secondary factors is also important.

• Phantom stock with 2-3 year vesting is an attractive tool to give employees at all level significant upside with no downside to the employee or the company (avoids excessive dilution due to low stock prices).  Paying bonuses with stock is another way to further leverage this tool.