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Employee Retention

By Eric Hilgenberg | September, 2014

Incentive deferred compensation: A tool for retaining executives

You sit back listening to your loan officer present a potential new credit. He demonstrates a sense of professionalism, providing you with a sense of pride. Reminiscing back seven years when this young up-start first walked into your office, you smile. Today, he exudes the qualities any banker would want on their team. His portfolio is impressive, its credit stellar, and his skills...MARKETABLE.

There are a number of financial instruments available to help retain your “marketable” talent. This article explores the retention value and design possibilities of incentive deferred compensation plans, a tool proven to be adaptable and powerful in helping to retain talent.

Golden Handcuffs: Taking care of your employees is extremely important and very, very visible. — Larry Ellison
Problem: When an organization’s compensation strategy is simply based on cash, what long-term retention tool exists? Each year, you may unknowingly be competing for your executive’s talent based on current cash compensation — your competitor might be a $15,000 salary increase from “wooing” away your top employee.
Consideration: Develop a deferred compensation plan where a portion of the executive’s compensation is deferred and vests over a period of time. This might result in more compensation expense initially but it can create a significant retention incentive via forfeiture if the executive were to leave. Additional forfeiture provisions also can be utilized in the plan, such as a non-compete clause.

Customize the Plan: Any customer can have a car painted any color he wants so long as it is black. — Henry Ford
Problem: Younger talent, with a retirement date 30 years in the future may be less influenced by the ultimate retirement benefits. They may have shorter-term goals like an upcoming child’s college education expense, or simply a dream home they are saving toward. A plan that can address both long-term retirement as well as shorter-term life goals can have more appeal to this demographic.
Consideration: Quite simply, deferred compensation payments don’t have to be distributed at retirement. Nonqualified plans provide flexibility by allowing an organization to craft plans that meet their executive’s goals. Deferred compensation payments, in compliance with IRC §409A, can be timed to correspond with the anticipated life events of the executive. If deferred compensation funds are not needed until retirement, they will enjoy the power of earning/accumulating on a pre-tax basis and receiving payments in retirement, presumably at a lower tax bracket.

Make Them an Owner: The reason why men enter into society is the preservation of their property. — John Locke
Problem: Many financial organizations throughout the Midwest are closely held, thus limiting the use of equity-based awards. However, it is still important for the executive to feel a sense of ownership, which can ultimately increase both long-term shareholder value and executive loyalty.
Consideration: The organization can tie crediting rates on deferred compensation account balances to bank performance. Even though this structure won’t provide actual ownership/voting rights, the executive will truly have “skin” in the game where they directly benefit from the success of the institution.

Let’s Win Together: One of the great mistakes is to judge policies and programs by their intentions rather than their results. — Milton Friedman
Problem: The organization sees the value of incentive deferred compensation as a retention tool, but may question whether the organization will benefit from the investment.
Consideration: With an incentive deferred compensation plan, the bank’s board or compensation committee can determine the goals and objectives of the
plan annually. The parameters can be based on overall bank goals, department goals and/or individual goals. Each year, the bank can evaluate the plan’s impact on bank results and make adjustments accordingly. Clawback and/or holdback provisions also can protect the interests of shareholders, in the event financials of the organization must be restated in the future.

Putting It All Together: Great things are done by a series of small things brought together. — Vincent Van Gogh
A well-designed nonqualified deferred compensation plan can benefit both the executive and the organization. The flexibility and design features available in a nonqualified plan allow for the goals and priorities of both parties to be addressed. If packaged properly, the plan will demonstrate the bank’s commitment to their executive’s future and help foster a new level of dedication from a “marketable” employee.

Eric Hilgenberg is a registered representative of, and securities are offered through, ProEquities, Inc., a Registered Broker/Dealer, and member FINRA and SIPC. Equias Alliance LLC is independent of ProEquities, Inc

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