I have spent most of my business life in compliance, as observer, participant, advisor, rulemaker, and even confidante—for decades. For compliance officers, this is the best—and worst—of times.
Plus side: Their banks suddenly appreciate them.
Traditionally, most chief compliance officers (CCOs) have toiled in relative obscurity, getting the job done without necessarily sitting at the table where the bank’s leaders tackle top strategic priorities. Today, however, rising regulatory risks and costs pose a top strategic challenge for the whole industry, causing bank boards and CEOs to value their compliance executives as never before.
Negative side: The compliance profession faces a crisis that has three drivers.
Three challenges remaking the function
Let’s take a closer look at the nature of the crisis.
1. The job has become literally impossible to do, if the job is defined as successfully avoiding the risk of serious regulatory problems.
Bankers face both an unmanageable spike in the volume of regulatory work and, even more importantly, a profound and unfinished shift in supervisory standards, especially relating to subjective expectations on UDAAP and “fairness.”
These have left even the best CCOs unable yet to discern and deliver exactly what regulators expect.
And, compounding today’s battles, regulators are calling in old sins.
The present difficulties are exacerbated by agencies’ current enforcement focus on banks’ past activities—actions taken years ago when regulatory standards, or at least priorities, were different.
No matter how good a CCO is, no one can undo the past.
So, it is common today to hear highly accomplished CCOs say that their jobs simply cannot be done adequately right now, by anyone.
These two factors—daunting new challenges and immutable past problems—are overwhelming CCOs in banks of all sizes. Anecdotal evidence indicates high levels of turnover fueled by fatigue and burnout, as well as involuntary reassignments and departures.
The erosion of the talent pool coincides with a second driver of crisis in the compliance profession.
2. Banks are massively expanding compliance staffing.
Escalating risks have sparked a hiring frenzy, with vacancies vastly outnumbering qualified candidates. Industry conferences and schools are experiencing record attendance, but expertise cannot be manufactured overnight.
As a result, banks are raiding each other’s talent pools while simultaneously competing with regulators, law firms, consulting firms, and nonbanks (especially those facing first-time federal supervision by the Consumer Financial Protection Bureau). One result is a musical-chairs phenomenon with rising pay (more on that below), long vacancies, further work overload for remaining staff, and high churn and instability.
3. Today’s experts tend to have skills that, while more indispensable than ever, are nevertheless inadequate for the new environment.
As discussed below, most CCOs are in their roles due to subject matter expertise, leaving many with critical skill gaps in relation to new challenges.
Given these conflicting factors—needing to reward and retain talented CCOs despite realizing they probably can’t actually protect the bank from regulatory problems:
• How should the industry design their compensation?
• How should their performance be measured?
• For what should they be rewarded?
I’ve given this deep thought. Here are three key suggestions:
Incentivize achievement of major strategic goals
Banks know how to compensate other kinds of executives for achieving critical strategic goals, such as executing a merger integration or a new product rollout.
For compliance leaders, however, this kind of incentive pay is nearly nonexistent.
And yet, the most important thing almost every CCO must do today is lead a strategic shift from a tactical, rules-driven compliance program to a new proactive, principles-driven, bank-wide risk management system, especially with respect to UDAAP and “fairness.”
Such a shift is the only way to minimize both risk and cost, and it is dauntingly difficult. Challenges abound, but perhaps the biggest is that the CCO cannot achieve this goal without persuading the bank’s executives and board to change their own thinking and behaviors.
The difference between management and leadership is that leaders get people to follow them who don’t have to do so. Success in executing this transformation should be CCOs’ top performance goal.
Measuring that success is difficult. But banks can use a combination of subjective and objective metrics, just as they do with other strategic incentives.
Other executives can be asked to rate how well the goal has been met. Performance goals can call out concrete critical components like building a robust complaint system or a better early screening process for new products.
The bank can also measure factors like improved examination results or reduction of key types of complaints.
Incentivize acquisition, retention, and development of talent
The compliance talent crisis described above is changing the performance standards needed for CCOs themselves, because any bank with a multi-person compliance department needs a CCO who can build a new kind of team.
The compliance profession grew up over decades with an overwhelming focus on one factor: subject matter expertise.
Today’s compliance stars are people who excel at and enjoy understanding regulatory rules. Again, this knowledge today is more valuable than ever before—but it’s insufficient.
Beyond leadership skills, compliance staffs increasingly need deep knowledge of the business lines, operations, change-management, project management, IT, data analysis, process mapping, process improvement, LEAN principles, and many other nontraditional fields.
Banks should direct and incentivize their CCOs to build this new, diversified kind of team through restructuring, retraining, hiring, and/or reassigning staff to meet the challenge. They should also reward CCOs for retaining skilled personnel in today’s competitive talent contest.
One impact of all this change is that compensation is rising above the levels that prevailed when compliance work was less mission-critical and the needed skills were less scarce. Like it or not, there is a good chance today that someone else will pay your CCO more—possibly much more—than you do.
Good compliance officers are being lured away for compensation sometimes half-again greater than current pay, or even double. Some large banks have hired whole teams from other institutions. Compliance professionals talk of receiving calls from headhunters every week.
Some are even accepting time-limited assignments on large bank enforcement projects that offer very high pay, for a year or two of work. Many are leveraging this unique moment to leap to higher pay grades.
Accordingly, banks with strong CCOs should consider adjusting their pay to market rates if needed. And banks trying to fill vacancies may need to raise the compensation offered.
Looking ahead to a new balance
Two final thought:
First, these trends are affecting all types of regulatory work, specifically including Bank Secrecy Act officers.
Second, CCOs can only manage today’s regulatory risks through enhanced collaboration with business line leaders. Those executives, too, need new compensation standards that incentivize “regulatory excellence” along with core business goals.