Comment: Incentive Programs Can Have More Risk than Reward

A letter I recently received brought up the sensitive question of referral fees for community bank employees.

Aaron L. Groff Jr., president of $366 million-asset Ephrata National Bank in Pennsylvania, said it was considering a partnership with a nonbank provider of financial services. The arrangement would enable Ephrata to offer investment and financial planning services.

The problem, Mr. Groff wrote, was that the would-be partner believed "that in order to encourage our staff to assist in marketing these products, we need to pay bank employees $10 for suggesting that a customer visit or make an appointment with the financial planner.

"If we pay referral fees for these products," Mr. Groff wrote, "why wouldn't we also pay fees for attracting CDs or any deposit product? And since loans generate all the income, shouldn't we pay an incentive to the loan officer who booked the loan?"

Clearly, this is a dilemma.

Mr. Groff concluded that he would rather pay employees a going-rate salary than a below-average salary laden with incentives.

"I believe we can train our employees to recommend and sell our products if we teach them how to listen effectively to our customers," he wrote. "Therefore it becomes part of their job description for which I pay them a salary."

My first reaction is to agree with Mr. Groff. It does seem unfair to reward some employees for doing their job. It is also bad for morale to leave the others feeling that their sales successes are considered just routine, and not worthy of extra payments.

Incentive programs can be detrimental to the entire bank. Many have reported that tellers who get bonuses for pushing a new product spend so much time with each customer that traffic backs up in the lobby.

Other banks report that when they offer incentives for annuities or other new savings plans, employees talk customers into closing out their CDs and putting the funds into these new products. The result: The bank loses a permanent deposit for a one-time fee from the annuity provider.

As for rewarding loan officers for placing new loans on the book, this is like buying a deck chair on the Titanic. It is easy to make a loan; the job is to get your money back on time and with interest.

How many banks have paid rewards to hotshot loan officers who leave long before the bank finds out that it has a sour credit on the books?

What suggestions can I make?

First, with regard to loans: Withhold the reward for two years or so until it is clear that the loan was worthwhile.

As for other products, we all know that incentives work - for those who get them. So why not offer incentives to teams, or even to the whole bank. This way everyone is motivated, and jealousy doesn't fester.

What about the employees who don't pull their weight? Quite simply, it is up to a bank's top management to separate the wheat from the chaff.

That's my first take on this wonderful letter. But I would love to know how your bank handles such issues. As always, the best response will make its writer president for a day of our Schmidlap National Bank.