Compensating Top Workout Officers

Short-Term Incentives Are Key for Transient Tasks

How do you compensate someone whose primary measure of success is eliminating the need for his or her own job?

For workout professionals, who most definitely fit this model, the answers are a good base salary, high annual bonus, and few or no stock options or other long-term incentives, according to a 1990 compensation survey.

Banks are structuring compensation packages for workout specialists in a way that recognizes their work's short-term nature.

Workout Officers' Big Bonuses

For example, the survey found that the top officer in a commercial loan workout department got more of his pay as a bonus than holders of other posts that were studied. On average, the annual bonus for the head of commercial loan workout was 34% of base pay.

The top officer in real estate loan workout got, on average, a bonus of 28% of base pay.

"These findings are not surprising," said Rose Marie Orens, a KPMG Peat Marwick partner who specializes in performance and compensation management consulting. New York-based Peat Marwick, an accounting and management consulting firm, did the study.

"You would expect workout people to get a higher bonus because of the nature of that business," said Ms. Orens. "Successful workout people shouldn't stay in the same job for very long; they're working themselves out of a job. So it has to be a highly incentive-driven pay structure."

A Question of Timing

Survey results regarding eligibility for long-term incentives like stock options support this point. Long-term incentive plans usually are intended to attract and retain executives and reward performance over a long period, typically three to five years.

Not surprisingly, the Peat Marwick study found that the top officers in commercial loan workout and real estate loan workout were unlikely to be eligible for long-term incentives.

"Long-term incentives are not viewed highly in workouts because the employees are not going to be around for the long term," said Ms. Orens. "But I also think there will be higher short-term incentives in the workout areas in the next year because banks are moving a lot of people in that area and trying to get them to work quicker."

On the other hand, eligibility for long-term incentives among top officers in middle-market lending or retail banking was high: 80% and 70%, respectively. Just 38% of top commercial loan workout officers were eligible for such incentives and 20% in real estate loan workout.

Higher '92 Retail Incentives?

"Middle-market lending and retail banking are the meat and potatoes of banking; it's where banks make their money. So it's key to get employee involvement," explained Ms. Orens. "I think we will see even higher incentives in the retail arena next year. It's one of the few areas that's making money for banks."

Peat Marwick predicts even greater use of stock options as incentives for executives in commercial lending or retail banking next year.

"Keep in mind that the banks are still experiencing a lot of pain," said Ms. Orens. "That's why I expect to see more stock incentives next year -- because stock is cheap, especially compared to cash, which cash-starved banks simply can't spare."

"Executive Compensation Practices in Financial Institutions Study," the 1990 Peat Marwick survey, examined special incentive plans used by 25 major banks in four functional areas: middle-market commercial lending, retail banking, commercial loan workout, and real estate loan workout.

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