Locations in:

Chicago, Dallas, Grand Rapids

Avoid The January Effect
Mar 01, 2017

Avoid The January Effect

Attracting and retaining the right people are the primary factors that allow banks to increase the value of their human capital. Regulatory issues can arise, costs of funds may increase, loan demand fluctuates, competitive pressures ebb and flow, but every single year attracting and retaining the human capital to make any business successful is a top priority. Human capital is one of the smartest and financially strongest investments a bank can make.

Financial Institutions have been quite fortunate in recent years. The supply pool of qualified employees has been ample. Prior to the recession, there were over 8,600 community banks in our market. That number is currently under 6,800 banks. A combination of the recession and the shrinking number of banks has favored banks in finding and retaining the talent they sought. But workers are gaining the confidence to make a move.

JOLT—the aptly named Job Openings and Labor Turnover survey—shows the surge in demand for labor is up and reaching levels last attained prior to the recession. 2.4 million Americans left their jobs voluntarily in October, the most since the recession ended and 15% more than the previous year.

In addition, competitors are not just banks anymore. Bank employees have dealt with regulation throughout their careers, making them a hot commodity due to growing regulatory pressure in other industries. Energy, oil and gas, trucking and distribution companies all love bank employees. When we couple that with the increased willingness to seek newer pastures, the pressure on banks to attract and retain their best grows.

Enter the January Effect.

Every year at banks with your average compensation plan, a veritable tidal wave of key people make the switch that hurts the most in the area of human capital: they go to work for competitors. Between the months of January and March anywhere from three to five times the normal turnover rate of key personnel leave! They get their bonus, they drop their two weeks notice, and in 15 days they are hard at work—strengthening a competitor’s position against their previous employer.

Senior Lending Officers, Chief Operations Officers and Chief Technology Officers that offer a great return and were a good fit for their company culture are hard to come by. A lot is lost if they depart. The effort that went into hiring them, the time spent on training, their experience with forces that threaten the company, and internal bonding needed to inspire teams to be assets are gone.

With only so many nickels in a dollar, where do we start and is there a way to do it without budgetary increases? There is. It’s called benefit engineer.
Most plans are set in a way that can be viewed simplistically. You set aside money, the money returns in bonus form. It’s like social security with a “benefit” label on it. And what’s exciting about social security? Unfortunately… not much. Same goes for these kinds of compensation plans.

Compensation structures do have a material affect on the retention of employees. The problem is the grand majority of these structures consist of a salary attached to a bonus that is a mystery to the employee. Why and how much they will get is neither clear nor goal-oriented. Call it “working for an intangible.” So we need to make it tangible. How?

We need to get them excited about what’s coming, that’s what. We need a plan they feel is for them. So the first thing to do is build the foundation of the plan through a focus on the people you really need to keep.

In a community bank this refers to handful of key people. In the area of human capital, this is where a nickel went spent is a dollar gained. We’re talking about going on the offensive to protect against the loss of the highest producers.

Get to know the ones that have the highest return on your shareholder value. Typically, they are managers. Their talent is in how they lead and influence their team. As we’ve established, competitors are actively courting them online and in person like they haven’t done since the recession hit. So now we need make them an offer that keeps their eyes on the company ball.

We need to reinforce their commitment to your long-term game. We need to create the most efficient and effective mix of retention tools to instill the desired results.

There are lots of tools in the market. They have names like stock options, phantom stock, restrictive stock, and acronyms like SAR, SERP’s, RSU, and BOLI. But here’s the deal, benefit options need to make sense to employees while allowing the bank to have innovative incentives structures that provide value for the money, making the most of the nickels the bank already has allocated to human capital.

The secret sauce that will retain them is a delicately engineered morsel that says to the employee that they and the company see eye to eye. Carefully stirring in the right mix of tools—with the bank’s goals in mind on one hand and the personal wants and desires of key personnel on the other—forms the base of that sauce.

It is only once we have a clear vision of what the needs should be and the tools we need that we can engineer the third step: combine the two into a benefit-engineered design that instills long-term commitment while getting the corporate ball up the field.

Knowing there are only so many nickels in a dollar, weaving the two in a way that makes it work within the bank’s current budget is at the heart of benefit engineering. We seek to dial up the “long-term dedication” of employees without bulging the financial plan. The employee will feel “taken care of” while the bank will find a performance advantage in “taking care of them” built into the mix.

The result is the employee will be in it for the long run because “the long run” is the bigger pay out, but this allows the bank to pay bonuses and offer incentives in such a way that the money spent on a bonus is being used to help the bank gain financially in a way that is mutually beneficial.

There is no cookie-cutter approach. Even in the same industry, every company’s vision is unique and players need to be inspired by benefits that secure them a better financial future according to their role. For the bank, having the players invested in them is a re-investment in the company’s future. An approach that is responsible to all requires taking stock of the current situation and periodic assessments of how those match with the bank’s goals.

Leaders in the community bank industry know how to act like the largest players do, while making every penny work twice as hard. A cornerstone of this is securing human capital with a benefit-engineered structure that focuses on top players. In order for this to occur, we need to reinforce the key player’s commitment to the long-term game, and simultaneously allow the bank the financial leverage that will give them an advantage in an economy that is returning to growth.

Benefit engineering, redefining and designing a plan, and moving employees from a focus on their compensation to an emphasis on hitting the company goals are key factors to banking success. Doing all of this while strengthening a bank’s human capital and their bottom line in the process: that’s simply a bonus of coming up with strategies that help you avoid the January Effect. Increase the value of how you compensate your key people and you not only attract the right people for your future, you will have honed your current human capital into a team you can bank on.