In recent years, bankers were often able to receive their full bonus by making more loans to old and new clients.
But this year, those who are hoping for a bigger payday will have to hone another skill: bringing in those clients’ deposits.
The shift is another sign of how banks are battling for deposits, thanks to the Federal Reserve raising interest rates sharply and putting an end to the days when the industry could stand by without paying much, or anything, to their depositors.
With deposits now heading out the door at many banks, industry executives are revising their employees’ bonus targets. How well bankers do at bringing in deposits, as well as holding onto existing ones, is suddenly taking center stage.
Alan Johnson of Johnson Associates, which advises megabanks, regional banks and investment firms on compensation, noted that banks want the cheapest possible source of funds.
“That’s true for a giant bank or a community bank,” he said, adding that incentivizing deposit-gathering can help banks in this regard.
The picture has changed quickly from last year, when banks were awash in deposits that arrived earlier in the pandemic, and there was “more liquidity than anyone could possibly imagine,” Johnson said.
Loans remain a top priority for bankers’ incentive plans, since interest and fees from borrowers are banks’ primary way of making money, particularly at smaller institutions.
Deposit outflows concern banks because they increase the risk of a shortfall in the amount of liquidity needed to fund the loan volumes they are targeting.
Deposits have long been part of many bankers’ incentive plans, but they took a backseat for much of the pandemic as banks fought for any loan growth they could get.
Now, the deposits that banks use to fund loans are making up a larger share of bankers’ bonus targets, said Mike Blanchard, CEO of the Atlanta-based Blanchard Consulting Group, who focuses on community banks.
If deposit growth previously made up 10% of a loan officer’s bonus total, that figure is now at least 20%, Blanchard said. For retail branch managers, the already-heavy emphasis on deposits has escalated. And bank boards are also basing more of senior executives’ bonuses on their ability to bring in deposits.
“The focus this year is almost 100% on good, core deposit growth,” Blanchard said.
Bankers have been talking about the shift in recent weeks.
At the top of Ameris Bancorp’s priorities this year is “deposits, deposits, deposits,” CEO Palmer Proctor told analysts on an earnings call last month.
“All our incentive plans have been adjusted to reflect that across the board in a more intense level,” Proctor said, though he noted focusing on deposits is “nothing new” for the Atlanta-based bank.
At Dime Community Bancshares, CEO Kevin O’Connor said on a recent earnings call that incentive compensation plans “from top to bottom are designed on prioritizing” growth in demand deposits. Those funds do not pay interest, which helps to keep the Hauppauge, New York-based bank’s interest expenses down.
PacWest Bancorp is also tweaking its incentive-pay programs to prioritize deposits. Additionally, the Beverly Hills, California-based bank is making sure that the loans it makes generally come with a deposit relationship, executives said last month.
PacWest has always had teams focused specifically on deposits, but now it’s “not just one group,” said Chief Operating Officer Mark Yung. “It’s everybody, from the lenders to the top of the house all the way to the front line.”
Banks are not seeking just any deposits. They particularly want core deposits — the main deposit accounts for consumers and the accounts for businesses’ operational funds, which they use for payroll and other key expenses.
Those deposits are seen as far more “sticky” than non-operational deposits, which are a bigger flight risk as customers chase higher-yielding options elsewhere.
Those better-paying options include Treasury securities and higher rates on deposits — sometimes at online banks, but also at brick-and-mortar banks with higher rate specials posted on their windows.
Karen Butcher, managing director at the compensation consulting firm Pearl Meyer, said that banks are using metrics such as their clients’ average monthly balances to help judge employees’ performance.
“Retention is really as important as the acquisition,” Butcher said.
The focus on deposits is likely not new to bankers who specialize in commercial and industrial loans, the credit that banks extend to businesses for general purposes or specific projects. But those who focus on commercial real estate loans are increasingly seeing some sort of deposit-related requirement added to their incentive-pay plans, according to Butcher.
“I think we’re going to see more of looking to those lenders to say, ‘How can we get some deposits from your customers?’ whereas in the past that hasn’t been a focus,” Butcher said.
Looming over compensation decisions, however, is one of the biggest sales scandals in banking history.
One lesson from Wells Fargo’s fake-accounts scandal is that bank management should establish targets in a realistic way that don’t encourage “malfeasance,” said Blanchard, the Atlanta-based community bank consultant.
Wells continues to operate under an unprecedented asset cap after aggressive sales targets set by prior management prompted branch staffers to open unauthorized customer accounts.
Bankers should always have a board committee or similar structures to review incentive plans for anything that could put the bank at risk, Blanchard warned.
“They need to make sure they have good corporate governance, because you’ve got to be careful,” he said.