Talent Challenges in Commercial Banking

July 9, 2018 Jim Young

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Last month Bank Director release its annual compensation survey, a study that always provides lots of insight about the current state of the industry. Of particular interest to us were the findings about commercial lenders: how well are banks attracting them (particularly younger ones); how are they handling compensation and incentives; and how attractive is commercial banking as a career option? 

Dallas Wells and Jim Young discuss all that - as well as a little bit about Millennials and Gen-Xers - in this week's podcast. 

   

Helpful Links

Bank Director 2018 Compensation Survey

Podcast Transcription

Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by Precision Lenders. We discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, Director of Communications, Precision Lender, and I'm joined again by Dallas Wells, our EVP for International Operations.

Today, we're gonna talk about some of the findings from the latest annual compensation survey that Bank Director puts out. We've got a link to the abstract for the survey findings in the show notes and then obviously from there if you wanna download the full report, we highly recommend that.

There's a lot of interesting findings in this piece, and again, go ahead and download that full report and give it a look, but for today, Dallas, I wanna focus on the section they titled Today's Talent Landscape. First, Dallas, the number one skills banks are recruiting for is ... wait for it ... commercial lenders. That's a similar story from what Bank Director had in its 2016 survey, and back then 40% of banks said they had put a priority on recruiting commercial lenders. Now, that number is actually up to 67%. What's your reaction and what conclusion do you draw from that?

Dallas Wells: Well, my reaction, just from the conversations we have is that's not surprising, that both the number and the trend, neither of those are surprising. What I found really interesting about this, is if you look at the positions that banks ... basically, I look down that and it looks like a recruiting priority list. So, like, we have X dollars to hire with, here's who we need. The one that I expected to see, that's pretty high on the list, is tech talent. So, technology folks, and as we've talked about lots of times here as banks are investing in tech and digital transformation and lots of the internal data heavy things that need to be done, all the banks that we talk to, all the banks you read about in the press say, "We need good tech talent. We need to make sure that we can recruit them, that we can compete with all the software companies out there that are taking them away from us. How do we do that?" 

That number was 38% technology. So, commercial lenders are at 68%. By my rough fingers and toes math, that's darn near double. So, the tech talent that everyone knows is critical to the future of the industry doesn't put a dent in the fact that we need commercial lenders. And what we hear is, banks are looking for good experienced commercial lenders that can move the needle. That's everybody's organic growth plan, is I'm gonna come steal your lender, then I'm gonna come steal your customers. And, that game has always been going on in the banking industry. It's as vicious, I think would be the word I use, it's as vicious as I've ever seen it, of bank's poaching each other's top performers. It's a good time to be a commercial lender, let's put it that way.

Jim Young: Which is interesting though, too, because a lot of times when you get into the AI discussion, you start to go down this route of oh, man, is this gonna make commercial relationship managers and lenders obsolete? And, if anything the numbers are telling us the exact opposite. That, as you mentioned, it is a good time to be. You're in demand and they can't hire talented ones fast enough.

Dallas Wells: So, the next one on the list of compensation challenges, the number two ranked challenge was tying compensation to performance. Again, if you listen to this podcast, this is an issue we have talked about ad nauseam, but how do you correctly incentivize your bankers? But, fair to say, based off of these numbers, that that's a riddle that remains unsolved.

Jim Young: It is, and I think if anything, from the conversations we're having ... again, it's anecdotal, we haven't done the survey that Bank Director's done here, but anecdotally, this has maybe gotten worse. So, first of all, you had some regulatory changes. This especially, I think, impacted smaller banks where your relationship managers, your lenders, hop between consumer and commercial stuff. So, figuring out what you could pay for and what you couldn't when it came to bonuses and commissions and that kind of stuff got really complicated. And again, the small banks where they're doing double duty, it got even messier.

And then, I think banks know this is a problem, so they work on it and they put together plans but also, it touches paychecks, so it's a really sensitive issue. And so what ends up happening is, they come in with grand plans about realigning incentives and matching everybody's compensation to where the bank's headed, but they can't really rip out the old stuff and just put in new. So, what they do is kind of tweak at the margins and add a few new metrics, and it just gets more complicated. We see bonus plans that have 20 different metrics, that they're measuring quarter by quarter. Guess what the RMs do? They ignore it, and they know that when it comes right down to it, if I generate volume I'll be just fine. So, I'm gonna go get deals, and I have to ignore the other 20 metrics to do that, that's okay.

So, if you make it too complex you're really not incentivizing anything, and I think that's what banks have settled into is, it's hard to just rip out something tied to compensation. People have mortgage payments and kids to send to college and all that good stuff to deal with. It's hard to put that stuff on the table and maybe change things around. So, it's not an easy problem but it does need to be addressed.

Dallas Wells: Is it a case, too, I mean based on the numbers we just showed about how in demand relationship managers and lenders are, is a case here where you've got the tail wagging the dog in the sense that you can't ... I don't wanna give too much power to the [inaudible 00:05:06] relationship managers but if you got good ones you need to keep them happy. And if the current compensation structure keeps them happy, you kind of have to weigh that versus whether that's the best actual compensation structure, right?

Jim Young: Yeah, so let's put a real example out there. Let's say you have a relationship manager and you pay them a six-figure base salary, and right now you bonus them just based on production. So, let's say it's that simple. So, grow your portfolio by 25%, your bonus is X, and maybe you ding them for credit problems. That's something that's fairly typical. We still see the small banks and big.

Let's say you go to now, your top RM, and as we've talked about before, maybe your top 5%, 10%, of relationship managers, they might be carrying half the book, half your production. So, you're gonna go to them and you're gonna say, "All right, in addition to volume ... or maybe we throw out volume, it's now about profit generated by your portfolio on a risk adjusted basis. So, throw out the old number that you've been hugely successful with. Now we're gonna nickel and dime you with, you'd have to worry about overhead allocation charges and you have to worry about risk adjusted margins, how much capital we're allocating to your deals. All that matters. And all of a sudden your RMs go from I just wanna get deals done to they will join in that internal debate slash fight about accounting things. Well, why did you assign that much overhead to me, right? 

Those things matter when it's a paycheck now. So, it can be a distraction, and they can throw up their hands and say I'm not gonna do it, and again, from the numbers we just saw, two-thirds of the bank in town are already knocking on their door anyway. They are getting calls from head hunters today. They'll just pick up and go. So, you're absolutely right. The market we're in, it's a really tricky problem.

Dallas Wells: Yeah. Something I noticed then on question three on this section, and the question was, is how have your bank's compensation and hiring practices changed over the past three years to attract and retain young talent? And I think it's interesting they put in the word young in there. 

Jim Young: Yeah. They list a lot of different options, all of them are valid but one thing I thought that was noticeable was missing was, they didn't have an option there along the lines of investing in tools to help the bankers do their jobs better. Were you surprised that that wasn't even an option listed?

Dallas Wells: Yeah, a little bit, just because of, when you look at a typical banking job ,most of them are going to spend the vast majority of their time staring at a screen and they will be eyeball-deep in whatever software program is most pertinent to their job. So, these are the people that know all the ins and outs, all the quirks of the system and they fight the bugs and they fight the messy workflow all day long. And it can take something that is simple and make it really complicated.

So, where I've actually seen this firsthand over the last year or so is in the medical field. Spent a lot of time in hospitals with my son, and watching the nurses who are there to care for these kids, they fight the software. They have to put in notes and chart things. So, they take your blood pressure, and then they spend the next five minutes fighting how to get it into the chart at the right time and override warnings, 'cause it was outside of range, and all kinds of stuff that is not caring for patients. 

Your bank staff deals with similar kind of things. They just wanna put in information in a customer record, and it's really, really hard. You have a messy sales force setup so your relationship manager wants to log a call. Hey, I met with so and so for lunch and we talked about this potential deal. And instead you've got 15 required fields. Well, what size was the deal? When do you expect it to close? What else can you sell with it? Did you offer them a credit card? All those are required things, and so pretty soon they throw their hands up and say either I'm not doing that or I wanna go to a place where it's just easier to get deals done. And you'll hear that a lot from lenders. When they talk about loving where they work, what they say is, "We can get deals done here." Part of that is the technology. So, I think it's important, and I think it's a conversation that's worth having and I'd love to see Bank Director add something like that.

Jim Young: Yeah, yeah. And another thing that struck me, we go through this list of challenges, as we've talked, these are legit challenges and not necessarily things that you can easily solve in the space of one podcast. 74% of respondents then say they're satisfied with their bank's ability to attract and retain young talent. Did that match up with the rest of the report to you? And anecdotally, does that match up with conversations you're having with bankers?

Dallas Wells: I think where this gets a little hard to measure is because they're talking about young talent, and so I think in banks' minds they're dividing that between, are we getting new young people into the business and are we able to retain them, versus, there's ... I think what banks feel like they're looking for a lot of times is these more senior strategic roles. So, I think they have done a good job of reshaping things a little bit to ... everyone knows there's been plenty of talk about millennials and how you hire them and how do you work with them and how do you pay them? I think banks have heard that. They know that it matters and they've done a pretty good job of it.

Anecdotally, when we walk in to meet with banks, and I think this is what gets to that disconnect, is, there's a big gap. There's young, talented, smart people in the room. There's very senior people who are leading the business, with frankly quite a bit of gray hair. And there's this gap in between of the next group of leadership, the ones supposed to be taking the reigns and driving the change and really pushing through these things. That is, just by the cycles that the banking industry's been through, there's a gap where banks didn't hire and train and recruit the right people into the business for that stretch of time and now they're really paying the price.

So, young people? Yes, I think they're doing well. The question is, is who takes the reigns next. That's what banks are trying to solve. Who drives the tech change? Who handles my most important relationships? And, who's the CEO at the top who can get that done?

Jim Young: Gotcha, okay.

Finally, there was, I thought, a pretty encouraging stat. When they're asked to ID the biggest barriers that could prevent their banks from recruiting and retaining the talent they need, only 13.8% said that banking was no longer an attractive career choice. And I think that's one of those things that's kind of easy to write off, and we've I think tried in our content to sort of prick the balloon in that case of this whole idea that banking is a stodgy, boring, yesterday industry. And this number seems to reflect that. The banks don't feel like they're having to fight that fight, and that to me says, if you have that there's a chance to overcome those other obstacles in terms of compensation, culture, recruiting techniques, et cetera.

Dallas Wells: Yeah, I think you're still recruiting into an industry that has some cache to it. If you call home and tell mom you got a job at a bank, I think that's still an appropriate answer, right? In fact, I had family members who were a little nervous when I left the banking industry and came to work in tech, came to work at a software company. They're like, "Are you sure? It kind of feels like you're leaving the good one and going to a risky one." So, I think that image of, it's a good place to work is still there. I think what banks struggled with for a while was, again, that younger talent, and is it stodgy? Is it stuffy? Are they gonna give me the resources I need? Or am I working on 40-year-old software that is irrelevant and then just patching it together?

So, banks have done a good job of changing their image, making it a little more young-person friendly, I guess would be the way to put it. And you see a lot of the dollars being spent on innovation labs and FinTech partnerships and trying things. Even some small banks doing it. And I think that's, even if you're not working on those things, just the fact that they're happening in the bank and you can maybe get to touch them and be a part of them. There's exciting things happening. So, I think you're right, there's a chance to overcome those other obstacles, and I think banks will figure out that the super strict rigid pay bans and the pay scales where you move slowly over and then up based on experience, those are the things that are gonna have to be broken for the type of talent they're looking for, the tech and the lending talent. They're gonna mess up your bands, and you're gonna have to get a little creative in how you incent them and how you pay them. 

Sometimes what's gonna happen, I think is ... we talked about that gap of ... that generational gap. Some of these young folks are gonna show real talent and ability, and you're gonna have to make them a stretch higher, to jump into a position that they don't have the experience for but they have the talent for. And so, there's some of those starting to happen. You see some really young executives in some of the banks we walk into, and that's again, I think another thing that makes this an attractive place. There is a gap there. There is a set of workers, leaders, that are getting ready to retire, lots of opportunity. And so, if banks just get a little freer with how they promote, pay, and don't be so rigid and hierarchical about it, there's talent there that can fill those gaps, and it's probably already sitting inside the walls.

Jim Young: Yeah, first, I can read between the lines and you're clearly pointing the finger at our generation, Generation X as having let everybody down. Sorry, again for that.

Dallas Wells: We did, yeah. Slackers, yeah.

Jim Young: Yeah, again, but I think what you're saying is absolutely right, is you can flit this sort of thing of what's potentially a problem, is now an opportunity. The problem, there isn't that clear next generation to take over at banks but that also then becomes that opportunity for the younger set [inaudible 00:14:01] look, you can come in here and it's no longer pay your dues for this time and then you move to this job and then you move to that job. It's you come in here and if you can do the job, and if you've got good ideas, and you can show a vision, then you can move up fast. And that's, I think, definitely a recruiting enticement that banks have now, if they position it the correct way.

Dallas Wells: Yeah, but we see now on a much more regular basis big, important, multimillion-dollar projects being handed to young executives, and a lot of times it's their first or second chance to really have a big thing for them to carry across the finish line. Some of them will flame out spectacularly, but so is everyone. That's part of the process. Others, we are seeing have huge success and they have bright futures ahead of them, and we've seen it. You and I have pointed out a couple. We've seen videos of some of our clients launching this stuff internally that we've done. Man, that guy looks 12 years old. Doogie Howser up there, but doing an exceptional job with it, so I think there are bright days ahead for the industry as some of these new leaders take over. It'll be an interesting transition to watch. There will be some hiccoughs because there is an experience gap, but that'll be trial by fire and that'll be filled pretty quickly.

Jim Young: Absolutely. All right, well, that'll do it for this week's show. Again, a reminder, if you wanna listen to more podcasts or check out more of our content, you can visit our resource page at precisionlender.com, or you can just head over to our home page to learn more about the company behind this content.

Finally, if you like what you've been hearing, please make sure to subscribe to the feed in iTunes, SoundCloud, Google Play Stitcher, and we love to get ratings and feedback on any of those platforms.

Until next time, this has been Jim Young for Dallas Wells, and you've been listening to The Purposeful Banker.

 

What's Next ...

To learn more about adding to your bank's talent pool, check out "How to Attract & Keep Top RM Talent at Your Bank."

 

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About the Author

Jim Young

Jim Young, Director of Communications at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender he manages the many ways in which the company shares its philosophy on banking and the power of relationships Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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