Bank employees who are eligible for incentive pay are more likely to get bigger paychecks if they can prove that their work fulfills strategic goals set by their companies.
According to the KPMG Peat Marwick 1992 survey of special incentives in financial institutions, banks are finally tying their compensation programs to their business strategy.
"That's certainly true for us," said Randy Mitchell, manager of compensation planning for Barnett Banks Inc., Jacksonville, Fla. "We are actively tying our incentive objectives to the objectives set out in our five-year strategic plan."
The Cutting Edge
Barnett and the 29 other bank holding companies that submitted data for the survey may well be on the cutting edge of a new trend that may redefine the way incentive programs are structured.
"Banks used to put in incentive plans for competitive reasons; namely, all the other banks had these plans," said Vicki J. Elliott, a Peat Marwick senior manager and consultant who oversaw the survey.
"But now, we're seeing more goal-setting and more formal programs that systematically tie in to business strategy."
For example, in the area of middle-market commercial lending, incentive pay is determined not only by product sales (loan balances outstanding, fee income, and interest income), but also by portfolio management and loan quality (delinquency levels, nonperforming loans, chargeoffs, credit rating system, and credit documentation).
"No one is being incented just for loan volume," said Ms. Elliott. "Banks are naturally much more interested in loan quality than they used to be."
"Our bank never pursued incentive plans for loan volume in the middle market," added Mr. Mitchell. "But now, especially after the problems of credit quality that many banks experienced in the 1980s, we have introduced incentive pay programs that incent middle-market employees for credit quality."
Incentive pay programs in the retail area also reflect a tie-in to business strategy.
"Banks are really working to try to measure and benchmark service quality to customers," said Ms. Elliott.
"They're doing this in three ways: getting direct customer feedback, through mystery shopper programs, and by measuring customer retention. Through their incentive pay programs, they're rewarding employees when they achieve these standard."
For many banks, this means determining incentive pay based on branch or individual performance, and not by corporate or regional performance.
"When you get down to the branch level, those employees are so far removed from thinking they can have an impact on corporate results," said Ms. Elliott.
"So it's not a very powerful motivator to have their incentive pay tied into corporate or even regional performance. It's much more palatable to have people be measured for those areas that they feel they can influence."
The study shows that more retail employees even at lower levels are receiving incentive pay as a reward for high-quality service.
Motivating the Tellers
Sunbanks, Inc. introduced an incentive pay program for tellers in its retail branches and has since seen improved service, higher transaction efficiency, and more referrals.
"Although we can't attribute the incentive pay program only to this success can say that our improvement did not occur before introducing this plan," said Ron Albright, vice president and compensation manager for the Orlando, Fla.-based bank holding company.
"We believe incentive pay ties performance to rewards and helps us increase our profitability."