With the dearth of talent at many community banks, particularly in the executive suite, it has become increasing important to make sure that key employees are appropriately incented to stay put and not pack their bags for the competitor down the street. Adopting a carefully drafted incentive compensation plan can have the benefit of not only incenting executive loyalty, but also driving revenue-enhancing or other desirable behaviors.
Each employee may be motivated by different things, so it is often difficult to gauge what will have the biggest impact from an incentive perspective. Cash has the advantage of immediate gratification, whereas equity awards are often subject to vesting requirements and can be difficult to monetize due to the virtually non-existent markets for most community banks’ stock. However, equity awards have the advantage of providing a longer-term benefit to the bank, in that executives will be loath to leave while they hold unvested equity awards. If you do choose to issue equity awards, be aware that any stock issued must be issued pursuant to a registration statement with the SEC or an appropriate exemption must be available.
There are endless creative ways that community banks and their compensation consultants have employed to determine when and how many incentive compensation awards should be earned by their executives. So much of this is driven by the types of behaviors that the bank desires to drive. However, there are a few things to keep in mind as you decide how to design your particular plan.
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