Employee incentive compensation programs are becoming a hot item at banks.
But an increasing number of consultants say it's difficult, at best, to tell whether such plans actually contribute to an improvement in earnings and share prices.
They point out that bank earnings and stock prices typically move as a result of broad economic trends such as interest rates or loan demand, rather than from the efforts of bankers. Setting meaningful performance benchmarks, they added, can be very hard.
"In a world where Alan Greenspan is having a great day with interest rates and the stock market is going up and up, there's really a sort of feeling of windfall about these programs," said David Berry, a banking analyst with Keefe, Bruyette & Woods.
"You could have mediocre performance and people could still make a lot of money."
Andre Cappon, president of the CBM Group, a New York-based bank consulting group, agreed. "There are a lot of senior bankers out there who haven't done much except sit back and happily watch the Dow Jones climb higher," he said.
Regardless of whether incentive compensation actually improves performance, such programs, particularly in the form of stock options, are spreading at banks.
According to a recent study by KPMG Peat Marwick, pay increases for chief executives at large banks are growing faster than at other types of financial firms. And a rising portion of the pay is coming from incentives.
One such program, for senior management at Citicorp, grants 300 top executives the right to buy the bank's shares at $63 if the average daily stock price hits $100 or more for 20 out of 30 consecutive trading days. But the plan kicked in far faster than expected and will likely require the bank to take a $35 million charge in the fourth quarter to cover costs.
As a result, analysts said there is a need to set a "smarter benchmark."
Instead of just linking incentive awards to an improvement in share prices, Mr. Cappon suggested awards be linked to more stringent criteria. He proposed that bankers be rewarded only if their institution outperformed either a general rise in share prices or the average increase among their peer group.
Regardless of how incentive programs are constituted, few banks feel they can afford to ignore them.
Diane Lerner, a senior consultant in the compensation practice at Watson Wyatt & Co. in New York, pointed out that most plans are spurred by a need to "keep up with the market."
Incentive compensation, especially deferred compensation, helps retain staff that might otherwise be tempted to jump to other banks.
"What you're really doing is tying golden handcuffs," said James E. McKinney, a consultant on senior executive compensation with Hirschfeld, Stern, Moyer & Ross Inc.
Certainly, many banks have gotten on the bandwagon.
In January, 1994, Chase Manhattan Corp. was one of the first to introduce an across-the-board stock option incentive program for all employees. Chemical Banking Corp., which has since merged with Chase, and NationsBank Corp. soon followed suit. More recently, Bank of Boston Corp. and BankAmerica Corp. have put in place programs that allow employees to buy a specified number of shares if the bank's stock reaches a specific strike price. Last week, BankAmerica said it would grant stock options to 85,000 employees allowing them to buy 50 to 90 shares twice a year over the next three years, depending on their salaries.
"We're seeing a very substantial broadening of short-term and long-term incentives throughout the organization, all in an attempt to get some alignment that what's good for the company is good for all of its employees and not just senior management," said R. David Simmons, a compensation expert at Towers Perrin in Atlanta.
However some analysts continue to maintain that what incentive programs really need are more specific targets.
"What you'd really like to do is isolate relative performance, according to some index; then you would not be rewarding people for things that are clearly external to them than but for their actual decisions," said Mr. Berry.
Another drawback to incentive programs, is that any company that issues stock to meet its incentive obligations runs the risk of diluting dividends, assuming the issues are large enough to have an impact.
Incentives can also prompt the wrong kind of behavior and encourage staff to handle operations in a way that is clearly not in the best long- term interest of the bank they work for.
"It can incent the wrong kind of behavior and have people wind up doing things that are counter to customer interest and, ultimately, bad for business," Watson Wyatt's Ms. Lerner said.
Cash bonus plans can be especially insidious. Bonuses at banks in the late 1970s and early 1980s were frequently linked to loan volume churned out by credit officers who threw caution to the winds, helping trigger two major banking crises - the Third World debt crisis and one in real estate.
More recently, consultants said, operators handling telephone banking services who are rewarded based on the number of calls they handle often cut callers off as fast as possible, even though they may need additional assistance.
The ultimate dilemma, Ms. Lerner pointed out, is that more often than not, there really aren't any controls in place to monitor whether or not the productivity and efficiency targets are being met.
"Ultimately you have to have a sort of leap of faith that doing this will result in higher performance and is worth the payoff," she said.
