Mergers. Consolidation. "One size fits all" banking services, thanks to technology, the Internet, and interstate banking laws. Foreign banks such as Deutsche Bank and Societe Generale building up their U.S. presence in a drive to provide full service around the globe. Boutiques encroaching on investment banks, with New York commercial banks in the middle. It's hard enough to keep up with banks and financial services, much less find and fetter the best people at the top to lead the way. No wonder executive compensation levels have gone astronomical and recruiters become comet- catchers.
"The financial services industry is changing so rapidly in terms of technology, product delivery, and consumer preference that the greatest challenge is to have senior people who can understand the changes and be at the leading edge, not get blindsided," says John Platte, managing director of the banking practice at Russell Reynolds Associates Inc. He points to the Advanta experience with the almost overnight deterioration in consumer credit quality as an example of what can happen if you blink. "CEOs want no surprises like that," he adds.
Where is Everybody?
While the jobs become more complex and competitive, the number of CEO and COO positions and traditional talent pool contracts. Besides, the Wall Street crop is small; fewer people entered the securities industry in the late 1980s and early 1990s; some were laid off. That leaves fewer experienced people in a game of musical chairs with the ante wound way up, especially in the buoyant stock market of 1996.
In the search for fresh blood to compete with Merrill Lynch, Putnam, Fidelity, G.E. Capital, and the like for investment management and financial planning capability, Wall Street is an obvious (albeit costly) shopping mall for banks. But the search for the right executive can also start a lot closer to home, if you know where to look. Centura Banks, Inc., based in Rocky Mount, NC (earnings per share for 1996: $2.61) recently hired Steven J. Goldstein, its new CFO, from the consulting group A.T. Kearney, a subsidiary of EDS. Goldstein had worked with $6.3 billion-asset Centura for five months as a principal in Kearney's financial institutions group.
Hiring Goldstein was an "absolutely conscious effort" to go outside banking, according to Centura's Cecil W. Sewell, Jr., chairman and CEO. "We wanted someone outside our formula to be a measuring stick for what we have internally," he says. Centura senior executives regularly rotate duties to both enlarge their own perspectives and bring fresh perspectives to different parts of the company. The newcomer is part of the state-chartered bank's corporate reorganization to create a financial services supermarket earning half its revenues from non-interest income. The new leadership structure is flatter, more streamlined, and closer to the customer.
Whatever the source of the talent, the money at the top is big, and part of a national trend. Senior-level pay in corporate America rose some 30 percent in 1996. Industry experts conservatively estimate that bank CEO pay has quintupled in the last ten years. "If you were the CEO of a top-50 bank ten years ago, you couldn't get rich," says Alan Johnson, managing director of Johnson Associates, Inc. "After taxes, you could have a huge home, a few million dollars. But by most standards you could not become rich. If you were one of the top five executives in one of the fifty banks today, by any standard you could become rich (see compensation chart). America at the senior level now is obsessed with money."
How do banks balance the pressure to pay more to fill leadership positions with stockholder perception that they are spending too much? "Management no longer looks at compensation in a linear way, paying X amount more than previously, but from the viewpoint of 'What does it take to get the best person?'" says Andrea De Cholnoky, head of global services and wholesale banking at Spencer Stuart. "Trader, banker, or research person: The best people are paid well. (The justification is:) Don't waste your money on mediocre talent. If you do it right, then results will show it. If you don't, someone else will, or (the new executive) will get whisked away a year or two later."
This argument makes perfect sense to Sewell. "We are convinced that the industrial age model of capital investment is no longer pertinent," he says. "We are in the information age; capital investments in technology are manageable. The human side is where the real assets lie. At Microsoft, their biggest assets walk through the door at five p.m. You must compete for the best talent."
More than the dollar amounts, what's really at stake in snowballing compensation packages over the last five or ten years is ego gratification, say those close to the situation. "It's a matter of, 'If you want me, then you have to treat me at least as well as, if not better than, you treated so-and-so or how some other company treated so-and-so because I'm worth as much as he is," says Carol Bowie, editor of Executive Compensation Reports, Springfield, VA.
Disparate pay structures clashing amidst a merger magnify the problem. Morgan Stanley, Dean Witter, Discover & Co. is a case in point. According to a recently published report, Philip J. Purcell, the Chairman and CEO of the the combined organization, got $4.3 million in cash and stock last year from Dean Witter. This pay package was smaller than those of all five of Morgan Stanley's top execs, and less than half of the $10 million Morgan Stanley paid John Mack, who is president of the merged firm.
How should management handle the discrepancy? "Raise Phil's pay," says Johnson. "Pay him a third of what they make and everybody'll think he's not the 'real deal' or raise his pay. Or you cut the others, which in the real world would be extremely tough to do." Management plans to keep the two broker-dealer firms separate, but top execs from Dean Witter can probably expect big raises this year to put them on a par with their Morgan Stanley counterparts, he adds.
Similarly, compensation specialists say turmoil ensues when new people get top dollar and existing counterparts get left behind. Witness the recruitment of commercial bankers to investment banks over the last six months.
Putting the Package Together
As compensation escalates, the balance shifts from cash to equity. Salaries take up a smaller percentage of the total (see compensation chart), specially to circumvent the recent $1 million salary cap on corporate tax deduction. Within the last five or six years, options have been the favorite compensation tool. They are not charged off to earnings, and, like other performance-based renumeration, they link executives with shareholders. The market's done well and executives have done well.
Performance-based pay works well for Centura, too. One third of Sewell's compensation was at risk last year, and he wants it to be 50 percent by 1998. The bank is moving toward a higher percentage of performance-based pay because it makes recruiting easier. "We just hired a CFO. He was much more interested in equity, bonus, and the strategies of the company," he says.
As banks become more sophisticated in their pay packages, they come closer to the securities industry model (see renumeration chart). The evolution trickles down from investment banks to New York banks and the regionals. This year the major change is in regional banks, reports Diane Posnak, managing director and partner, Pearl Meyer & Partners, Inc. The regionals are pushing up in terms of the amount and structure of packages. They now offer one half compensation from options, thus doubling the dollar value of packages.
Even so, in this downsizing, post-company-loyalty era, megabucks alone won't tether top performers. Johnson says that employers must guard against innate restlessness. "People are more demanding in terms of staying interested and challenged," he says. "They're under a lot of stress to produce, so their expectations and the expectations of the organization have gone up as well. This restlessness in commercial banking is not new in American industry. But it isn't (a case of) once we restructure, streamline the back office, merge and become the Goliath, it'll go away. It's a sea change. If you make your organization more aggressive, efficient, and market-focused, this is one of the outcomes."
THE work counts
The consensus is that the job itself is paramount. Senior executives, accustomed to achievement and success, want to make an impact wherever they are. Consequently, employers must convince them of the commitment to follow through the business plan of which they will be a part. "Companies have to understand (whether) what they're asking someone to do is realistic...and the analytics that go into a business case. This requires thorough understanding of the players and what you're expecting the positioning or performance will be vis a vis what you're trying to compete against," says John L. Allen, managing partner in the financial services practice of Heidrick & Struggles.
making a mark
Sewell concurs. "We offer the opportunity to make a difference. With the industry in flux, we show them how they can directly influence Centura's success by joining us." He refers to recruiting a CEO from Legg Mason Wood Walker, based in Baltimore MD, for its broker-dealer subsidiary 18 months ago as an example. The bank wanted to offer securities to customers, a critical part of its plan to increase its fee-based revenue stream. An executive recruiter presented a list of six prospects; all were interested except for one. Sewell thought he was the best candidate, but the candidate was happy where he was. "We convinced him that he could make a difference, and he has made a big impact. He is the most experienced sales manager we have; we use him throughout the company."
At $137 billion-asset First Union Corp., the enticement is the opportunity to be a major player in the industry, according to Don R. Johnson, executive vice president in charge of human resources. "Look at our growth in the last 10 years (69 acquisitions, and assets risen from $8 billion). "We are innovative, creative, and fast paced. Our track record shows our vision and where we are headed. People get restless if they are not challenged, supported, and developed. We believe we can challenge, support, and develop them."
Just as banks are looking outside the ranks for talent, some top bankers get lured to burgeoning ancillary industries. Lots of niche businesses have cropped up in the last few years as banks outsource more elements of the business. Since these new firms are entrepreneurial, a lot of bankers and financial services executives joined firms like First Data and monoline credit card companies and made lots money in options, according to Platte of Russell Reynolds. The appeal is the smaller environment, which offers more control over their destiny and more control over the price of stock through their own performance. "Weekly, I get a call from a new entrepreneurial venture in financial services taking advantage of a sector not addressed," he says.
What must be addressed is the fact that banking and financial services are becoming fungible in wide-ranging ways. Consequently, effective management in what several people interviewed refer to as a single market requires a larger vision, not just in terms of a business plan, but also the calibre and source of seasoned expertise required to put it into action.