In the rapidly evolving financial services landscape, nontraditional banking institutions, also known as challenger banks (e.g., neobanks, digital banks, nonbank lenders) are pioneering new pathways. Amid their innovation, these entities face a daunting task: setting effective executive compensation to attract and retain top-tier talent in a relatively new and quickly evolving landscape. This challenge involves navigating four distinct issues, each requiring a strategic and nuanced approach.
01
Many early-stage bank challengers feature unique ownership arrangements. These often involve a vocal majority owner or a small consortium of backers who are highly involved in day-to-day decisions through their appointed directors.
This setup can quickly lead to diverging interests between management and the board, especially concerning compensation philosophy. Management may focus on offering competitive pay to attract high-caliber talent, while the board might prioritize cost control and risk management — or simply not align with management’s outlook.
This tension, coupled with a lack of transparent communication and strategic alignment, complicates the creation of market-competitive compensation strategy.
02
The governance structures of these emerging bank challengers frequently are still developing, lacking the sophistication of established counterparts. This nascent stage can result in inadequate frameworks for delineating the roles and responsibilities of CEOs and boards regarding executive compensation. Consequently, unnecessary discussions, debates and iterations may ensue.
Developing strong governance structures from the onset — or evolving them as an organization matures — is essential to ensuring accountability and consistency in strategic decisions, including those related to executive pay.
03
Challenger banks operate in a dynamic and evolving talent ecosystem, competing not only with established financial institutions but also with technology firms and fintech startups. Each company must address several critical questions uniquely suited to their circumstances: Who truly constitutes their talent competition, and should the market for their executive talent be local, national, or global?
Disparate views between management and the board can lead to policy stalemates. Defining the right talent market requires a keen understanding of the business and geographic landscapes these institutions inhabit, coupled with fact-based and data-driven approach including talent-flow analytics, job-profile assessments, and in-depth stakeholder interviews. This is crucial in bridging the gap between stakeholders with polarizing views.
04
Even with ownership structures, governance frameworks and talent market strategies clarified, nontraditional banks face another hurdle: the scarcity of reliable compensation data for their desired market. This limitation is particularly notable for niche sub-sectors and regional roles, where standard benchmarks may not apply.
Given this constraint, institutions need to think creatively and explore alternative data sources. This might involve examining cross-industry compensation models, dissecting compensation packages to understand value drivers, and seeking expertise beyond traditional data sources to craft competitive and aligned compensation strategies.
Emerging nontraditional banking institutions must address these four critical challenges to develop effective compensation strategies, especially as it relates to executive talent. By understanding and reconciling unique ownership dynamics, evolving governance models, defining talent markets clearly, and innovating beyond standard compensation data sources, these companies can craft a compensation framework that attracts and retains top talent while staying true to their strategic vision. Through careful navigation of these complexities, challenger banks can position themselves for sustainable growth and success in the competitive financial arena.
