How to Develop an Executive Compensation Philosophy A Guide to Defining Your Bank s Mission Statement for Compensation
How to Develop an Executive Compensation Philosophy: A Guide to Defining Your Bank s Mission Statement for Compensation Your community bank already knows that it s crucial to attract and retain top executive talent and that you have a lot of competition from other banks and even other industries. If you ve been having difficulty with recruitment and retention, you may want to look to your compensation practices in order to address the issue. To ensure that your bank s practices are competitive, use a holistic perspective relative to market observations. A properly designed compensation philosophy accomplishes 3 things. It should: 1. Drive the pay culture of your bank 2. Bring consistency and clarity to pay practices 3. Convey to executives the specific reasons for the way they are compensated, which limits conflict and confusion philosophy is not your pay policy. It doesn t lay out the specifics of exact compensation plans. Instead, it functions more as a mission statement that drives how you approach compensation. Think of the mission statement for your organization and how it defines your bank s values. Similarly, a compensation philosophy influences the way you compensate your employees. For the purposes of this guide, we ll be discussing compensation philosophies with respect to your executives. Your compensation philosophy is not your pay policy. Instead, it functions more as a mission statement that drives how you approach compensation. In this guide, we ll explain what a compensation philosophy is and how to define your bank s. What is a compensation philosophy? Before we delve into the steps you need to develop your philosophy, it s important to define exactly what we mean when we refer to a compensation philosophy and why it s so important. Your pay How to Develop an Executive Compensation Philosophy - A Guide to Defining Your Bank s Mission Statement for Compensation 1
The 3 C s of Compensation Philosophies Your philosophy needs to be clearly defined, comprehensive, and consistent: these are what we call the 3 C s of a successful compensation philosophy. Clearly Defined Your executive compensation philosophy should bring clarity to your compensation practices; having a vague idea of that philosophy will not generate a competitive advantage in the retention or recruitment process. Your philosophy needs to be in writing, and your executives, directors, and HR personnel should be able to understand its main points with ease. Comprehensive Your philosophy needs to consider all aspects of executive compensation through a holistic approach. Successful compensation strategies incorporate a balanced compensation approach, leveraging various types of compensation to accomplish your stated goals. Consistent Your compensation philosophy needs to support the vision and fit the culture of your bank. Organizations that simply follow a standard template may find inconsistencies related to the bank s values, internal culture, and true needs. Assembling your compensation committee How do you create a philosophy that is clearly defined, comprehensive, and consistent? A great compensation committee is behind every great executive compensation philosophy. Who should be on your team? You need to determine who will work together in your organization to define your philosophy. Your compensation committee should include: Executives Executives are involved in influencing and leading the direction of your organization, and they therefore play a role in determining philosophies that tie into your bank s mission. HR personnel It goes without saying that HR personnel should be involved as they are the ones responsible for recruiting talent, letting recruits know of available compensation packages and why they should work with your bank. Having an understanding of the bank s direction with regards to compensation is crucial for conveying this information. Board members Board members need to understand how the philosophy will drive shareholder value relative to compensation strategies. If your bank has a compensation committee, it is the committee who will drive this process; if not, it may be appropriate to put together a few directors to head this process. How to Develop an Executive Compensation Philosophy - A Guide to Defining Your Bank s Mission Statement for Compensation 2
Creating your philosophy There are many factors you ll need to consider, from aligning your goals with your company s overall mission statement to how you ll approach the types of compensation you offer. Let s examine some key factors. What are your competitors up to? Yes, your compensation philosophy is something unique to your organization, but don t forget why compensation is so important: you need to remain competitive. Thus, you should be aware of what your competitors are doing with their compensation philosophies. Although some may publish their philosophies on their websites, SEC Proxy Filings (DEF 14A, under the CD&A) provides the most comprehensive examples regarding the activities of the Wells Fargo compensation committees. You should also look to other industries to garner additional perspectives. In some cases, you may want to attract top executives from those fields. Understanding what other industries are doing may help your organization attract the talent necessary to elevate your performance. Take the holistic approach to compensation All areas of compensation should complement one another rather than each component being viewed independently. Implementing this holistic approach to compensation provides the bank with the flexibility to design compensation strategies for all ages and life stages, a must when recruiting and retaining talent. Cover all areas of compensation, including the cultural elements. The compensation philosophy goes beyond pay structure. It is important to establish the cultural tone, and your philosophy should address or support the following: Do you take a pay-for-performance approach? Do you have a culture of stable leadership? When looking for what your competitors are doing, SEC Proxy Filings provide the most comprehensive examples. Are you establishing a culture of top performers? If you factor these considerations into your philosophy, it s more likely to represent your bank s culture and values. How to Develop an Executive Compensation Philosophy - A Guide to Defining Your Bank s Mission Statement for Compensation 3
Make your philosophy as consistent as possible Consistency is key The purpose for creating a defined philosophy is to develop a consistent approach to compensation. Your plans should be tailored to the individual executives, but your philosophy exists to set a framework. The philosophy s purpose is to drive a practice that can be relied upon and leveraged Compensation Philosophy Checklist Review your compensation philosophy to identify if there are any inconsistencies or contradictions to your company. Below are a few question to help with the process: Is your philosophy in line with your organization s values and culture? Was your philosophy crafted with input from the appropriate sources? To align your compensation strategy with your bank s overall values, have a look at your organization s mission statement. Is your philosophy aligned with the interests of your shareholders? Does your philosophy take the holistic approach to compensation? Will your philosophy make your organization competitive? Do you have a written compensation philosophy? Do the key executives, HR personnel, and directors understand the philosophy s key points? time and time again. Review your bank s mission statement, and make sure your compensation philosophy is designed to support what your organization is trying to accomplish. Remember, your people s talents are your greatest assets. How to Develop an Executive Compensation Philosophy - A Guide to Defining Your Bank s Mission Statement for Compensation 4
Need help developing your compensation strategy? The experts at Compensation Advisors possess over fifty years of compensation experience at the community bank level. We leverage that experience to design and implement relevant, innovative solutions that relate to current regulatory environments. Having worked with over six hundred financial institutions, the firm has the knowledge and expertise to navigate the obstacles associated with compensation practices. Our primary goal is helping our clients attract and retain key executives and top performers. Compensation Advisors is a member of the Meyer-Chatfield Group. Contact us today to get started. (866) 796-6222 compensationadvisors.com How to Develop an Executive Compensation Philosophy - A Guide to Defining Your Bank s Mission Statement for Compensation 5