Compensation Costs Ratchet Up

cu360
September 1, 2006

A flattened yield curve, pressure on margins, and accelerating competition for loans and deposits all combine to push up the costs of compensation.

"There's more competition for good people and more competition for customers," said Alan Johnson, a compensation consultant who specializes in the financial services industry. "No matter how big or small you are, you need to pay to get the people you need."

One immediate consequence is paying employees to make loans and dig up deposits, according to American Banker newspaper. But the incremental expense of adding employees is not the only factor in rising wage and benefit costs. Just as important is the near-frenzy for talent that's driving up salaries across the board.

Salary and benefit expenses at banks and thrifts rose 11% last year, to $140 billion, according to regulatory data gathered by SNL Financial in Charlottesville, Virginia. The increase showed no sign of abating in the first quarter, when salaries rose at an annual rate of 11%.

Credit unions are projected to increase management salaries 3.47% and nonmanagement salaries 3.38% in 2006, according to CUNA's 2005-2006 Complete Credit Union Staff Salary Survey.

Bankers and consultants said recruiting efforts, which in 2004 and 2005 were centered on compliance and audit staff, now center on the employees most directly responsible for getting and keeping commercial borrowers: lending officers and relationship managers.

The 2005 commercial lending and business banking survey by Mercer Human Resource Consulting found that the median salary for experienced commercial loan officers and relationship managers at the 67 firms surveyed rose 7% from 2004, to $110,000. Salaries for other commercial and industrial lending positions, including business banking relationship managers and credit analysts, also increased.

Connie McCann, the managing director of the global search firm Spencer Stuart, called the current situation a "classic imbalance" that has had a predictable consequence. "There is tremendous demand for good talent, and it's outstripping the supply," she said. "One of the levers that you have in recruitment is compensation."

The dearth of commercial lending officers, along with furious branching in markets with attractive demographics, has stoked the fight for talent. As a result, base salaries are up, as are up-front and guaranteed bonuses and, in some cases, equity compensation.

Compliance Costs Continue

Though the competition for lending talent might now overshadow the booming compliance and audit functions, the consequences of the regulatory crush from the Sarbanes-Oxley Act and the Bank Secrecy Act remain.

McCann said compliance searches have emerged as "an important area" for Spencer Stuart. Institutions continue to increase staff as needed for Bank Secrecy Act and general compliance. "While costs have probably peaked," says one banking executive, "we'll be living with those costs for some time."

Don't Overlook IT Needs

Predictions for 2006 were that demand for IT talent would catch up with supply, and companies would pay more for skilled applicants. Going into the third quarter, those predictions seem accurate.

IT hiring continues strong in most parts of the U.S., according to the quarterly "IT Hiring Index and Skills Report" from Robert Half Technology. Business growth is the primary motivation for adding IT staff, according to executives surveyed.

Executives in the finance, insurance, and real estate industries are most optimistic about hiring activity. When asked what technical skills were needed most within their IT departments, respondents reported demand for Microsoft Windows administration (79%), other network administration (76%), and database management (69%).

One of the "hot jobs" identified by CIO Update is "the rare breed of technologist with a firm grasp of business processes who can deliver on projects."

Compensation for project managers who bring to the table both technology and business acumen, can manage large projects, and meet critical timeframes, is about $125,000 to $130,000, according to Victor Janulitis, president of technology consulting firm Janco.

Skilled IT workers can expect to see compensation rise by 5% or better, especially in jobs where demand continues to outpace supply. CIOs and directors who report to the CIO typically accrue bonuses based on company performance, according to Janulitis.

Recruiting Strategies

In the realm of commercial lending, financial services firms are thinking carefully about the best strategies for recruiting and keeping the lenders they desire. Incentives based on loan growth alone may become archaic.

Dallas-based Texas Capital Bancshares uses a compensation structure that goes beyond industry standards and encourages lenders to think of their jobs as necessarily producing significant income for the company.

"It's a much more entrepreneurial atmosphere," said George Jones, president and CEO of Texas Capital. "We pay a cash incentive yearly that's not only based on loan production, but how much income they produce for the company, not just loan growth. We also compensate them for retaining, growing, and servicing their existing customers."

Getting good talent is so crucial that the company views recruiting as a line of business, he said. Rather than relying on search firms or its internal HR department, his colleagues all assume the responsibility of bringing on experienced lenders, and they're compensated for recruiting.

Recruiters and executives say the current competition is cyclical and will eventually pass. But for now, says one consultant, a shortage of skilled lenders means "the fight for talent continues."

This article was published by CU360 at http://cu360.cuna.org and is reprinted with permission.