Issue 3 • 2021 15 – recognizing the value of management incentives – have begun tying current and long-term compensation to bank performance. When properly designed, performance-driven incentive plans can: • Align management goals and incentives with the annual strategic goals of the bank. • Focus executives and employees in the areas that are key to the success of the bank in the short term and long term. • Allow executives to share in the bank’s success. • Provide competitive compensation. • Enable the bank to attract, motivate and retain top talent. While performance-driven benefit strategies can take various forms, they must comply with regulatory guidance on incentive compensation plans by providing incentives that appropriately balance risks and rewards in a manner that does not encourage imprudent risk-taking. Incentive plans should have earnings-based goals and strategic goals such as asset quality, capital raising, and core deposit growth. Plans that focus solely on earnings-based goals could encourage a focus on short-term profit without adequate consideration of risks. Striking the proper balance between plan attractiveness to executives without excessive expense is also significant when designing the benefit plan. Financing employee benefits is a costly endeavor for banks of all sizes. With the cost of benefits continuing to rise and volatile investment returns, finding a reliable benefit-financing option can be a complex task. Implementing a bank-owned life insurance (BOLI) program can help your bank offset current and future costs of existing benefits (e.g., medical, group life) and new programs (e.g., incentive deferred compensation and supplemental retirement benefits). Approximately 72% of New Mexico banks have implemented BOLI as a strategy to recover the cost of employee benefit plans based on FDIC data as of the first quarter of 2021. Our research, conducted in July 2021, shows that BOLI is an earning asset that currently generates a return in the range of 2.60% to 3.10% after all expenses are deducted, which translates into a tax-equivalent yield of 3.29% to 3.92% (assuming a 21% tax bracket). With its ability to minimize earnings pressure – while balancing liquidity and risk factors, as well as hedging against rate sensitivity – BOLI has emerged as a preferred financing vehicle for banks of all sizes. The significant potential financial impact when your bank loses key employees or cannot attract additional resources quantifies and underscores the value and importance of retention, so it is critical that executives meaningfully and competitively compensate these employees. Banks without a strong corporate culture and a competitive compensation plan in place are at a higher risk of losing key employees and may have a potential retention problem. n For a complementary analysis of effective compensation plans or a copy of recent educational presentations, please contact Trey Deupree, 972-672-8245 or Trey.Deupree@nfp.com. With the cost of benefits continuing to rise and volatile investment returns, finding a reliable benefit-financing option can be a complex task. Implementing a bank-owned life insurance (BOLI) program can help your bank offset current and future costs of existing benefits (e.g., medical, group life) and new programs (e.g., incentive deferred compensation and supplemental retirement benefits).