By Chris Call
As the year waxes to a close, banks and credit unions across the nation turn their attention to impending salary adjustments for the coming new year.
Staffing services, industry trade groups and consulting firms produce their annual salary guides to assist with the difficult task of gauging market-competitive salaries, often charging a hefty fee for the results of their latest market surveys. Financial institutions gobble up these surveys as valid, research-based data upon which they can rely to justify company-wide salary adjustments.
Unfortunately, a fatal flaw in these surveys makes their results dubious at best and may lead to inappropriate salary adjustments.
Virtually all compensation surveys conducted for the banking/credit union industry are based on the asset size of the institution. Any tenured banking professional knows that assets, i.e. the combination of loans and investments resulting from bringing in deposits, are easily acquired. Just offer 50 basis points higher on a CD rate than your competitors and watch the money flow in. It can sit as cash or short-term investments while it waits to be turned into loan assets. Given the right amount of capital, an institution could grow its assets exponentially in a relatively short time.
Appropriate? No
But is that the measure of a successful financial institution? No, how those assets are deployed and how well the resources of the institution are managed is really the more appropriate measure of success. Two $500-million financial institutions may produce vastly different operating results.
So, why should asset size be used as the basis for compensation? Common salary surveys would throw both CEOs into the same asset based bucket and reward them according to what other institutions of the same size are offering. To wit, they are rewarded not for performance but rather for a rather arbitrary but easily acquired balance sheet number.
Astute boards and executives will include a performance factor in their compensation analysis, but still the underlying basis for compensation is, more often than not, asset size. The market-based surveys parse their data by the most simplistic standard possible and then herald the high correlation between that standard and the reported salaries. If institutions are using the same asset-based market surveys every year to adjust salaries then of course there will be a high correlation to that standard – it’s a self perpetuating non sequitur.
The Correct Correlation
The correct compensation correlation should be value-based. Compensation rewards performance so it follows that high-performing executives would be rewarded better than low performing ones, regardless of whether they are stewards over the same amount of assets. Market surveys based on institutional Return on Assets would be far more appropriate than assets alone to reward executives.
Of course, the complexity of the institution also needs to be factored in. The CEO of a small credit union may generate a better ROA for her institution than the CEO of a multinational bank and there would be obvious disparities in their compensation. But as institutions begin the process of evaluating salary levels for the coming year they should view the asset-based market surveys with a jaundiced eye.
Value-contributed should be the primary criteria with asset size being one of many secondary components. Reward performance and higher performance will follow.
Chris Call is CEO of North Bay Credit Union in Santa Rosa, Calif.