Compensating employees appropriately

How much should community banks and credit unions pay their employees in the current tough banking market? That’s a question that we probed in the 2014 edition of our Retail Salary and Benefits Study for Community Banks and Credit Unions.

We found that over the past 22 years, salary and benefits (S&B) rates for front-line employees, on average, have risen 84%. That figure by itself is not disconcerting. However, over the same period, labor costs per-transaction (LCPT) have risen 104%. If this increase were based upon S&B increases alone, the figure should be the same: 84%.

This suggests the existence of other inefficiencies in the branch that are impacting LCPT. Essentially, financial institutions (FIs) are paying employees more, but in exchange (at least collectively), they are seeing less for their money. As a result, individual banks need to watch their S&B rates closely to make sure they’re not paying too much on a relative basis.

On that score, we found significant disparities between rates from region to region, as well as between FIs of different sizes. Interestingly, there was less uniformity than one might expect across the various classifications. For example, large institutions might have the highest average S&B rates in one region, whereas small or mid-sized institutions might have the highest rates in another. This underscores the importance for FIs to understand and account for the myriad of factors that impact S&B rates for their organizations and address them in their calculations.

Challenging Logic

The results of our study challenge not only common assumptions, but also basic logic regarding how S&B rates should rise and fall with organization size and location. For example, for full-time employees, the smallest institutions (1-5 branches) had widely varying S&B rates per region – from a low of $16.62 in the Midwest to $20.92 in the West. This is logical, given the economies and cost of living differentials between the two places. However, that was not the case for the largest institutions, where rates in the West were lowest, at $16.23 per hour, and Midwest rates were the second highest, at $17.12.

Furthermore, rates between different categories followed no particular pattern. In the South, S&B rates for 15-25 branch FIs ($19.62) were the highest in any FI size classification while the lowest were seen in the West ($15.55). These discrepancies underscore how important it is for branch management not to make assumptions about “averages,” especially when comparing their own rates against those of larger or smaller FIs. S&B rates are truly unique to each region and size classification and, we suspect, vary significantly within those designations.

These results can help FIs adjust S&B rates – and to push back on personnel who insist they are being underpaid compared to competitor institutions. Once an organization has evaluated the averages for similar FI size and region and determined its ranking in relation to them, management will be in a position to develop a strategy for making adjustments. Following are three potential strategies that might be employed using this data:

Reduce S&B rates to lower labor costs. If an FI’s rates are higher than the average, management will have a valid argument for reducing them. Yet, as most managers recognize, cutting S&B rates for existing employees, without offering alternate, equivalent rewards, can dramatically reduce morale. Such strategies should be reserved for branches that are in danger of closing due to unprofitability.

More effective strategies, in general, include: reducing starting salaries for new workers and consider replacing departing full time workers with part time; offering workers non-monetary perks, such as flex hours, in exchange for accepting a pay cut; offering production staff a new salary structure that reduces their hourly rate, but includes the potential for higher earnings through performance incentives; and notifying staff that they are being paid above the regional average and institute a program whereby they must expand their education, training or skill set before receiving further increases.

Increase S&B rates to improve competitive advantage. The data in our study does more than help organizations justify offering lower wages, not giving increases, and taking other cost-reduction measures. It can also be used to promote the FI as a “high wage employer” to attract top talent or high-volume producers.

If an institution is already paying above average S&B rates and doesn’t need to reduce them for new hires, then it can begin promoting this fact immediately. If it is below, or at the average, management can perform a cost-benefit analysis of offering above-average S&B rates in appropriate situations.

Keep S&B rates below average to contain costs. If FIs are underpaying, they don’t necessarily need to increase salaries. In fact, if management is satisfied with branch profitability and performance, executives may simply wish to pat themselves on the back. Before they do, however, they should evaluate their future plans.

FIs lucky enough to be in this category are in a position to incorporate performance incentives and other productivity boosters that will attract top talent and take their branches from being satisfactory to stellar. Conversely, if an institution with lower-than-average S&B rates is not hitting its profitability and performance goals, management should be ready to dig deeper and uncover the problem.

Ms. Deen is chief operating officer of Alpharetta, Ga.-based Financial Management Solutions, Inc. (FMSI), which provides financial institutions with business intelligence and performance management systems for efficient branch staff scheduling and lobby management. She can be reached at [email protected].