Integra Bank Corp. chairman, chief executive, and president Michael T. Vea credits his company’s turnaround in part to an incentive program that gives employees bonuses for bringing in quality loans.
Last year the Evansville, Ind., company paid out $3.5 million in employee bonuses through the program, which Mr. Vea established in 2001 after Integra suffered credit-quality and balance-sheet troubles.
The success of the program is evident in Integra’s performance, he said. In 2005 the $2.7 billion-asset company reported a return on equity of 11.49%; in 2001 it was 3.81%.
“If you look at our turnaround story, I think that is an important component,” Mr. Vea said.
A new study by Crowe Chizek LLC, an Indianapolis accounting and consulting firm, shows that Integra’s experience is not unique.
Crowe Chizek studied 598 financial institutions late last year and found that the five-year average return on equity was 10.3% for those offering incentive compensation, compared with 7.4% for those that do not. Last year banks offering incentive compensation had an average ROE of 10.8%, and those that did not had an average ROE of 6.8%.
Stephen P. Wolff, a senior manager in Crowe’s human resources consulting group, said well-designed plans encourage employees to make more loans, bring in more deposits, or provide better customers service to benefit the institution. “The carrot on the stick works.”
The plans that work best set clear, attainable goals and are simple to explain, Mr. Wolff said. The plan should also encourage employees to bring in more loans or cut costs in ways that improve the bank’s bottom line measurably, he said.
Richard M Rieser Jr., the president and CEO of First Oak Brook Bancshares Inc. in Illinois, said settling on a compensation plan has taken a long time for the $2.2 billion-asset company. One of its earliest experiments in incentive plans took place 15 years ago, when it offered commercial lenders a bonus on the deposits they brought in but not on loans, he said.
First Oak Brook found that its lenders were more interested in bringing in deposits than making loans, Mr. Rieser said. “We incented the low-risk activity and discouraged the high-risk activity.”
This year the company adopted a program that is more balanced, because it measures employees’ performance in their main business area, such as commercial lending, and adds a smaller incentive for helping bring in other types of business, like deposits, Mr. Rieser said.
First Oak Brook will evaluate the program at yearend and will probably make further changes, he said.
Stephen Lange Ranzini, the president and CEO of the $64.4 million-asset University Bancorp Inc. of Ann Arbor, Mich., said starting an incentive plan is not hard, but the trick is creating the right one.
University’s employees did not respond to the stock options and employee stock ownership plans that had been in place for over 10 years, because the rewards were too far off in the future, Mr. Ranzini said.
“It just hits you as a manager what kind of incentive it is, if they don’t get it. They can’t use it today to make a mortgage payment on their house,” he said.
This year University let its employee stock ownership plan expire. Now employees can earn $5 for every customer they persuade to sign up for online bill payment, for example. Also, commercial lenders receive a bonus if they exceed loan quotas, and employees in each division will be rewarded if the company hits its ROE targets.
Not all bankers are convinced that pay for performance plans are worth the added costs, but even holdouts like the $720 million-asset IBT Bancorp Inc. of Mount Pleasant, Mich., are establishing incentive plans because of competitive pressures. Dennis P. Angner, IBT’s president and CEO, said it is difficult to hire quality employees without offering some sort of pay-for-performance bonus.
“There is a recognition that certainly for the employees who come from other financial institutions, it is part of their world now,” he said.
At the beginning of the year IBT started a plan in which employees can earn a bonus of 6.5% of their salary if the company meets earnings goals. Employees can also get a 3.5% bonus for meeting individual performance goals.
“The idea is to get people to understand how the things they do impact the bottom line,” Mr. Angner said.
