Incentive Programs Becoming Increasingly Sophisticated

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Credit unions need to pay increasing attention to rewards that will attract and retain qualified staff, according to three large credit unions that participated in a colloquium sponsored by the Filene Research Institute, Madison, Wis., and the University of California-Berkeley here.

The presentations by the three credit union executives- Gary Oakland, CEO, Boeing Employees Credit Union, John Tippets, CEO, American Airlines Credit Union, and Barbara Davis, Executive vice president, Public Service Credit Union-are being included in a new monograph from Filene entitled, "Three Innovative Searches for Better Incentive Programs."

According to Oakland, Boeing Employees Credit Union's incentive plan encourages senior managers to focus on member value, and the long-term strategic direction of credit union services. The plan measures return to members as a comparison value between credit union rates and fees, and those of other market leading financial institutions in the community. BECU's board has voted to match a 5% payout each year, and the plan is vested over a period of four years. As return to member grows, the value of the plan shares increases as well. After four years, plan participants can receive a taxable cash payout, or rollover their shares into a KEYSOP.

At the Texas-based American Airlines FCU, Tippetts said its measurement metrics are tied to the performance of two peer groups of credit unions that are leaders in providing member service. The program, based on independent benchmarks, is called Team Award Pay. It focuses on the following six components: average dividend (high); average loan yield (low); growth in loans outstanding per employee (high); delinquency and charge-off ratio (low); member satisfaction survey; and NCUA Camel rating (which serves as an accelerator/decelerator in the calculation).

In addition to the peer group financial measurements, AAFCU also measures its performance through an ongoing member satisfaction survey. Each quarter, 400 members are surveyed. Members typically score the credit union in a range of between 80% to 90% of potential. The final factor in AAFCU's incentive measurement program is its NCUA examination. By maintaining the highest CAMEL rating, an accelerator component is added to the incentive program payout. If the ranking drops by a grade, the incentive remains unchanged. For any lower rating, a decelerator lowers the incentive payoff.

Public Service Credit Union's incentive program focuses on individual incentives rather than on team rewards. The credit union offers two different compensation programs to its employees, one based on incentive pay, the other on merit pay. Employees can choose to be in either of these two programs.

According to Davis, the key to the Public Service Credit Union program is its ability to continuously track individual employee performance online, making the plan simple to measure. With its automated system, the credit union's mainframe creates a spreadsheet that indicates what it's paying for each product and service, and how much it is paying to each employee.

After putting its incentive program in place, PSCU has achieved a 70% increase in volume per employee. The credit union tracks each service that employees offer to our members, and pays its employees for each service purchased by members. If a member has a loan with another lender and the employee convinces the member to move the loan to the credit union, the employee receives an incentive reward.

In its analysis, the Filene Research Institute said that most organizations today focus on aligning incentives and mission, and empowering front-line people with more autonomy and discretion. "Participants in an incentive system can contribute ideas on how to design it and how to change it," Filene said.

The latest Filene report follows an earlier study entitled, "Financial Incentives to Motivate Credit Union Managers and Staff," which presented the views of three experts in the field of incentive compensation: Edward Lawler, University of Southern California; Edward Deci, University of Rochester; and Patricia Zingheim, Schuster-Zingheim and Associates.

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