Understanding current trends in compensation, benefits, and incentive practices is important to effectively managing human resources. This is particularly true for financial institutions, which have weathered a series of tumultuous years and now are adapting to an increasingly complex and demanding regulatory environment.
Every year, Crowe surveys financial institutions throughout the United States to gain insight into current compensation trends. The survey responses can help banks and other institutions gain a better understanding of how their peer organizations are adapting to the changing employment environment. It also offers the opportunity to identify upcoming factors that will affect future employment practices, and suggest compensation practices and strategies that can encourage and reward employee performance.
The 2015 Crowe Financial Institutions Compensation Survey drew responses from 296 financial institutions in 30 states. The respondents represented a broad cross-section of the banking industry – 45 of the participating institutions reported total assets of $1 billion or more, while the remainder were smaller institutions below the $1 billion threshold.
The responses revealed some important differences among organizations of various sizes, particularly when year-to-year or longer-term trends are considered. For example, generally speaking, the smaller banks (those with less than $1 billion in assets), showed signs of being more aggressive in their compensation strategies.
The survey also showed a general decline in employee turnover among banks of all sizes and a gradual but continuing increase in the use of performance-based incentives as part of the overall compensation package. There also was a very sharp increase in the relative costs of employee benefits over the past year.
These trends, along with the widely anticipated effects of several important new regulatory and reporting requirements, suggest that banks will face a challenging few years as they work to balance strategic and competitive issues with significant new compliance concerns.
Size Matters – Divergences Between Larger and Smaller Institutions
Differences between the approaches larger and smaller institutions take to compensation issues are no surprise, but several differences noted in the 2015 survey merit particular attention. For example, as noted earlier, the survey suggests that smaller banks, in general, are becoming somewhat more aggressive in their compensation strategies. When asked to compare their compensation strategies to those of their competitors, just more than 16 percent of the smaller institutions reported that their compensation levels exceed the market average by more than 10 percent (Exhibit 1).
Exhibit 1: Above-Market Compensation Strategies
Although the percentage of smaller institutions that employ above-market compensation strategies declined slightly from the previous year, smaller institutions continue to outpace larger ones by a sizable margin. This continues a trend from 2014, and reverses the relative positions seen from 2010-2013.
Larger and smaller banks differ in other ways as well. For example, smaller banks tended to report slightly higher salary increases than the larger institutions. As illustrated in Exhibit 2, employees whose performance exceeded expectations received, on average, a 4.5 percent annual salary increase if they worked in a bank with less than $1 billion in assets, while the increase for those with similar performance in larger institutions was 4.4 percent. The same tendency was noted for employees whose performance met or fell below expectations: Annual salary increases were slightly but consistently higher in smaller institutions.
Exhibit 2: Salary Increase by Performance Rating
A more significant trend is the widening gap in the annual increases when comparing above average, average, and below average performers. In larger banks, for example, there was a 2.6 percentage point difference in the pay raises awarded to above-average and below-average performers in 2009. By 2015 that gap had increased to a 3.8 percentage point difference, which would suggest that banks are becoming more inclined to use pay raises to reward strong performance.
The past year also saw an increase in the degree to which banks use incentive compensation payouts to reward employee performance. Exhibit 3 compares total average incentive compensation to average base salary, showing year-to-year changes in both larger and smaller institutions. In 2015, the average incentive compensation for employees in larger banks was equal to 17.9 percent of base salary, a sharp jump from 2014, when incentive compensation was equal to only 11.3 percent of base salary.
Exhibit 3: Incentive Compensation Compared to Base Salary
Taken together, the widening gap in annual pay raises, coupled with the increase in incentive compensation relative to base salary, would seem to suggest banks are trying to do a better job of linking pay to performance.
Lower Turnover – More Costly Benefits
According to the survey results, banks of all sizes have experienced drops in employee turnover over the past three years. This trend is comparable in both larger and smaller banks, and for both officer and nonofficer positions (Exhibit 4).
Exhibit 4: Employee Turnover
The decreases in employee turnover suggest a stabilizing industry, with the turmoil of the recovery period now receding, and employees and officers alike settling in for a period of less volatility.
Unfortunately, another common trend shared by most financial institutions is not as promising. That trend is a significant jump in the cost of employee benefits over the past year. In 2015, the average total costs for employee benefits was equivalent to 26.8 percent of the employee’s base salary – jumping eight percentage points in a single year to the highest levels ever reported over the past decade (Exhibit 5).
Exhibit 5: Benefits Costs Compared to Base Salary
The surge in benefits costs is the result of sharp increases in the costs of both health and retirement benefits. Unfortunately, these spikes are not likely to be one-time events, but rather are likely to continue for some time. Insurers indicate they foresee continuing price increases and instability stemming from the unforeseen effects of healthcare reform. Meanwhile, the wave of baby boom retirements has only begun. The rising costs stemming from these concurrent trends are likely to pose challenges to all businesses, including financial institutions, for a number of years.
Coming Challenges and Complications
The continuing rise in benefits costs is just one of the challenges banks will face in the near future. A variety of imminent regulatory changes also will complicate the challenge by directly affecting the way banks compensate many of their employees.
For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) already has had an impact on executive compensation due to new requirements related to mandatory clawbacks of unearned compensation, transparency of incentive compensation agreements, and shareholder “say-on-pay” advisory votes. For publicly traded financial institutions, two new major disclosure requirements are now on the horizon:
- Pay-for-performance disclosures. The Dodd-Frank pay-for-performance disclosure rule will require publicly traded companies to disclose the relationship between executive compensation and an organization’s actual financial performance. Publicly traded financial institutions will be required to produce a clear description of the relationship between the pay for certain named executive officers (generally C-level executives) and the cumulative total shareholder return (TSR), which includes both dividends and changes in share price. Banks with more than $5 billion in total assets will face additional disclosure requirements. The regulations for implementation are expected to be finalized shortly, and are likely to go into effect for the first fiscal year beginning on or after Jan. 1, 2017.
- Pay ratio disclosures. New pay ratio disclosure regulations already have been finalized, and banks will be required to be in compliance by the first fiscal year beginning on or after Jan. 1, 2017. These regulations require banks to compare the total compensation paid to the principal executive officer (typically the CEO) with the median total compensation paid to all other employees. Smaller reporting companies – those with a public float of less than $75 million or annual revenues of less than $50 million – are exempt from this requirement.
In addition, possible revisions to overtime rules and minimum wage laws likely will affect financial institutions.
- Overtime rules revisions. In mid-2015 the U.S. Department of Labor announced a proposed rewrite of the overtime rules for salaried administrative, executive, and professional employees. The potential effect on financial institutions could be significant, as the proposed rewrite would more than double the salary threshold that makes white-collar managers eligible for overtime pay, raising the bar from the current $23,660 to $50,440 per year.1 Many branch managers and other managers would thus become eligible for overtime pay if they work more than 40 hours in a week. The proposed rule is likely to go into effect in 2016, but it is not yet clear how banks will respond. Some might choose to limit hours and duties for these managers; others might reduce the number of management positions altogether in order to control costs.
- Minimum wage laws. Several labor organizations have announced plans to place minimum wage increases on the ballots in numerous states in 2016, often proposing hikes to $15 an hour for nonexempt employees.2 In addition to directly affecting numerous entry level positions, such hikes inevitably would have a domino effect on various other positions in banks’ retail and administrative functions.
These pending and potential changes will complicate financial institutions’ compensation strategies over the next few years. The effects of the new overtime threshold, for example, almost certainly will be seen in the 2016 Crowe Financial Institutions Compensation Survey.
When these events are considered in light of the other trends revealed by this year’s survey – such as increased use of performance-based incentives and continuing increases in benefits costs – it is clear that banks will face significant challenges as they work to refine their methods for compensating and motivating employees. In pursuit of that effort, the ability to compare the policies and practices of peer institutions through the use of objective surveys will continue to be an important capability in the years to come.
1 "Proposed Rulemaking to Update the Regulations Defining and Delimiting the Exemptions for 'White Collar' Employees,” U.S. Department of Labor Wage and Hour Division online fact sheet (undated, accessed Dec. 28, 2015), http://www.dol.gov/whd/overtime/NPRM2015/factsheet.htm
2 Lydia DePillis, "The big 2016 minimum wage push just got a powerful new ally," The Washington Post, Oct. 21, 2015, http://www.washingtonpost.com/news/wonkblog/wp/2015/10/21/the-big-2016-minimum-wage-push-just-got-a-potentially-powerful-new-ally/