The chief executive officer of a major midwestern bank turned off the lights as we left his office.
Later I asked an associate why the CEO bothers to turn off the lights himself. The answer: "You would too if you and your family owned 55% of the bank's stock."
I thought of this incident as I pondered what community banks could do to become more efficient in today's highly competitive environment. I think the best idea is to make all employees feel as committed to the profitability of their organization as this CEO was.
The most obvious way to achieve that depth of commitment is through stock purchase plans and stock options for employees who have worked at the bank a certain number of years.
Options have recently gotten a bad name because of the roller coaster ride that stocks, especially technology stocks, have taken.
At first, employees who were given options as part of their compensation packages thought they would become millionaires as the stock soared in value. Many of them exercised the options and then kept the stock, either for tax purposes or in the hope that the shares would rise even further.
The problem, of course, is that if you exercise your options but don't sell the stock immediately, the price can drop dramatically.
When the market plummeted, these option holders had the worst of both worlds. They owned stock whose value was well below what they had paid for it, but they owed taxes based on the paper profit realized when they exercised their options. Some people had to declare bankruptcy, and for many, "option" became a dirty word.
Then why should options still be part of a community bank's compensation package?
First, if the options are treated correctly - as a way to give employees a stake in the bank that they will maintain permanently - they can help lock in employee loyalty and help fight turnover. During the dot-com boom, options were used as a speculative vehicle rather than a way to make employees feel part of the ownership team.
Grant Thornton LLP's most recent survey of community bank executives said 42% of community banks offer options. "Ironically, these incentives are less widespread" among smaller community banks, "where people are a bigger factor in the customer service equation" than at larger banks, the survey said.
A comparison of last year's Grant Thornton survey with the latest one, however, shows that options are gaining acceptance. Last year 42% of the bankers surveyed said that options dilute value for current shareholders, but this year only 18% felt that way.
In addition the proportion of survey respondents who said that options cannot help attract and retain employees dropped from 25% to 9%, and the share of those who said they were concerned about options' hurting bank valuation dropped from 10% to 4%.
However, the proportion of bankers who felt that options are an administrative burden rose, from 13% to 18%.
The survey also suggested that banks that are not stock-owned or want to limit the number of shareholders use "phantom stock": cash compensation based on the stock's value at that time.
There is, of course, the problem that options and phantom stock are related only to the stock's market value rather than the bank's actual performance. And as we well know, a bank can perform well or even superbly for long periods , while its stock stays in the doldrums or even drops.
But this possibility should not by itself persuade bank executives to avoid options. The employees who get them often are gain a sense of ownership and care enough to do things like turn off the lights when they leave their offices.
Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.
