Can You Explain Your Incentive Pay Plan to Your Staff?
This is the year when bank shareholders started saying "enough" to gigantic CEO pay packages and giving a stinging thumbs-down to certain banks. Paul Hodgson, a senior research associate at GMI Ratings, sums up this year's early proxy-season pay trends and offers insights into what's ahead.
Pay for bank CEOs increased a median 16% in 2011 among a group of 160 banks. Growth was particularly brisk at institutions with less than $20 billion of assets, where CEO compensation measured 2% of total payroll expenses, a far higher level than at larger banks.
After experiencing resounding rejections of their executive compensation plans in "Say on Pay" votes in 2011, four community banks Umpqua, Lakeland Financial, The First of Long Island and Chemical Financial got busy implementing innovating pay policies.
While having dinner with a couple of old banker friends recently, our conversation turned to a consistent challenge many management teams face. It started when one friend shared that he was recently in a meeting in which his bank's "revised" incentive plan for branch managers and frontline employees was being explained.
"Well, around the time we got to where we were calculating what percentage we were going to multiply by another number that took about 3 steps to figure out separately… I kinda checked out," he said.
He's supposed to take the calculus equations his compensation folks are giving him and make it understandable to his team. He chuckled, "I'm not all that sure that the guy who explained it to us really understands it all that well. He didn't seem pleased with our questions."
His next statement struck a nerve: "I frankly think we do more harm than good sometimes. An incentive program that confuses people actually makes things worse."
I commiserated and added that I have had dozens of conversations over the years with managers about something that flabbergasts me. Incentive payout times are often times of discontent.
I'm not talking about incentive or bonus payments to senior managers. Those are another animal altogether. I’m referring to the (usually) sales incentives given to frontline managers and customer-facing employees.
"How often have we seen a person being paid his performance incentive discouraged or mad because it's not what he expected (hoped) it would be?" I often ask. And the truth of the matter is that he doesn't really know what it will be until it shows up (minus taxes) in his check.
It really does amaze me at how widespread those experiences are. You would think that the periods in which folks may be getting a little more money in their paychecks would be times of smiles and high-fives. That's too often not the case.
And honestly, some management teams bring this on themselves. My favorite example, and one that many bank veterans have seen through the years, is when a company abruptly changes an incentive plan when it sees that payouts are higher than they intended. Apparently, they've put in a plan in which they can "sell themselves broke."
Sure, I've also seen instances in which banks realize after a program begins that certain goals and thresholds may be too steep and have stepped in to adjust them. Incentive plans that are obviously out-of-reach do not motivate. In fact, they demotivate if frontline folks believe them to be detached from reality.
That said, overly-lenient incentive plans fail to motivate as well. Employees quickly begin thinking of those plans as part of the regular pay they get for simply showing up every day. And while we all appreciate folks who show up every day, we’re probably not looking to pay incentive bonuses for it.
Through the years, I've also been involved in many conversations about whether or not sales incentive programs work at all. Some managers explain that they simply haven’t seen the kind of performance and profitability increases they'd like out of their programs.
When drilling down a bit, I've usually found that their problems fall into some pretty common areas. For many, the programs are just too complicated or poorly explained. If a frontline employee cannot easily explain what he can be paid extra for, he's unlikely to be especially motivated about it.
Other times, management simply doesn't incent for the things it truly wants. Sometimes, I question if they are all that sure of what they want themselves.
A term like "quality account" is used ad nauseum. But if clear and easily understood identifiers of how that is defined aren't provided, our frontline folks can be excused for their confusion and frustration.
Beyond that, folks tend to be more engaged when it is clearly (and frequently) explained to them why certain customers, accounts, services, etc. are being focused upon. When folks have a greater understanding of the actual nuts and bolts of branch profitability (or whatever department they work in) and how their incentive plans support their companies’ and their own personal interests, programs tend to work.
More and more banks are realizing that, in an increasingly commoditized industry, the banks with the best sales cultures will, more than ever, be at a competitive advantage. Strategically aligned and clearly understood incentive programs are almost always a driving factor in creating and supporting those cultures.
Could your frontline teams easily explain their incentive plan to, say, a new employee? Whether your job is designing plans or simply explaining them, I’d suggest that you have great incentive to find out.
Dave Martin is an executive vice president and chief training consultant at NCBS, a SunTrust Banks Inc. subsidiary that offers consulting, training, design and construction services for retail banking programs. He can be reached at Dave.Martin@ncbs.com