Community banks need to reward employees for good performance, not for making it through another year at the bank.

That's the message of Coy D. Lewis, a Houston-based bank consultant. Speaking at the Independent Community Bankers of America's annual convention last week, Mr. Lewis urged more banks to discard their traditional pay policies and adopt incentive-based programs. According to Mr. Lewis, base salary increases and bonuses should be given only to employees who demonstrate performance that's "above average or exceptional."

Many small banks, he says, still approve pay raises and bonuses for poor or mediocre workers out of a sense of benevolence. Such workers might leave the bank on their own if they didn't get these automatic wage increases. The problem is that banks end up keeping the hangers-on, he said.

Though incentives make sense, another consultant warns that they must be tailored to reward prudent banking behavior. J. Michael Woody, a bank consultant based in Edmond, Olka., said that rewarding lenders for bringing in volume, without regard to asset quality, can lead to disaster.

Still, he says, the worst situation is having no incentive plan at all. "That's where employees pretend to work and the bosses pretend they're paying them well," he said.

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