PUB. 18 2021 ISSUE 3

14 RECOGNIZING THE VALUE OF INCENTIVE COMPENSATION PLANS By Trey Deupree, NFP T here was a time when building a top-notch management team seemed to be a relatively straightforward task. Times, however, have certainly changed. Traditional benefit programs and merit pay systems often fall short as tools for attracting and retaining such talent. Banks of all sizes compete for experienced lenders with relationships/ portfolios they would like to have at their bank. With the growing demand for quality performers, how can your bank secure the management team needed to ensure maximum bottom-line results? Traditional qualified retirement plans such as 401(k) and defined benefit pension plans have typically provided rank and file employees with retirement income equaling 70 to 90% of final compensation (when combined with Social Security benefits). Not a bad reward for years of dedicated service. Yet, the same does not hold true for most bank executives. Due to limitations on contributions and benefits, these plans often provide executives with retirement income of only 30 to 50% of final pay – far below the retirement percentages of rank- and-file employees. In growing numbers, community banks recognize the need to enhance traditional management/director compensation packages with supplemental benefits. Whether it be stock look- alike plans, stock awards or some other form of mid- to long- term cash awards or supplemental retirement benefit, careful consideration should be given to the strategy or combination of performance-based strategies that are most appropriate. For example, a deferred compensation plan with payments paid at three to five years or timed to when the officer’s children are college age can be highly valued by an officer who is not focused on a retirement benefit. In addition, enhanced benefits such as supplemental disability or long-term care can be included. Then, when properly designed and administered, these plans can be a powerful tool in creating a more level playing field for both executives and directors and the bank itself. Historically, many institutions made up shortfalls in executive benefits through nonqualified salary continuation plans (often called SERPs). These plans generally provide a monthly retirement benefit based on an executive’s long- term service to the bank. More recently, however, banks