A CEO of a community bank recently asked us an important question: “why should I pay my lenders any incentive to do their jobs, they already make a good salary?” We hear this question often from different management teams. We believe that part of every lender’s compensation should be variable and that incentive pay should be based on strategic priorities for that specific bank.
We recently blogged about the experience at two banks (HERE). We highlighted that both banks demonstrated suboptimal performance (for different reasons) and that the compensation plans for their lenders may be one of the causes for their depressed return. To build on that post, we will now go deeper into solutions and discuss the building blocks for successful compensation plans.
We recently talked to two banks about their loan strategies and actual performance. Both management teams were not satisfied with their lending performance year-to-date, and both were looking to alter the banks performance for the remainder of the year.
If you want to change the face of your bank, one of the fastest ways to do it is by changing the compensation structure.
Falling energy prices have been front and center in the headlines lately, which is a good thing for retail-oriented banks. Experienced retail bankers understand that consumers often react to lower energy prices by treating it as a windfall and increasing their savings rate. Statistically, the correlation over the last 5 years is that energy prices explain approximately 68% of the savings rate – a correlation that is exceedingly predictive. The question is, what is your bank doing to take advantage of this trend?
It is an age old tradition in banking that management firsts asks the business lines for their budgets and then takes those budgetary estimates and turns them into revenue and/or profit targets for the sake of compensation. While having sales goals is better than not having goals, basing the goals off budget hurts the budgetary process and results in sub-optimal sales incentive response to drive behavior. Let’s look at what happens.
It was the day after Christmas in 1919 when the Boston Red Sox transferred George Herman Ruth to the NY Yankees for the princely sum of $25,000. While this might have started the 86-year Curse of the Bambino for the Sox, the Yankees leveraged the Babe to their advantage. In the contract, in addition to the Babe’s $5,000 salary, the team inserted the language to pay Ruth $50 for each home run. It was a simple sentence that changed the whole game of baseball.