Incentive pay everybody gets is no incentive at all. Some CEOs now balk at bucks for all, and pay performers only, our roundtable reveals.
By Steve Cocheo, executive editor,
CONCLUSION OF A TWO-PART ABA BANKING JOURNAL ROUNDTABLE
“What? No annual surprise bonus?”
Facing tighter times, community bankers debate who should get the bank’s incentive bucks—and why
Bankers taking part in this roundtable are members of ABA’s America’s Community Bankers Council.
|Frank L. Carson III
President and CEO
Mulvane State Bank
$80 million-assets, 38 FTE
President and CEO
New Washington State Bank
New Washington, Ind.
$212 million-assets, 87 FTE
Stephen J. Goodenow
Bank Midwest, Minnesota Iowa, NA
$450 million-assets, 160 FTE
President and CEO
First National Bank
$170 million-assets, 65 FTEs
President and CEO
Merchants & Farmers Bank & Trust Co.
$200 million-assets, 80 FTE
Robert R. Jones III
President and CEO
$470 million-assets, 180 FTE
John A. Klebba
President and CEO
$220 million-assets, 65 FTE
George R. Marx
President and CEO
Copiah Bank, N.A.
$130 million-assets, 61 FTE
George Marx found that he’d inherited a questionable compensation policy when he became CEO of his bank.
About 12 years ago, he says, the bank had a really good year.
“So our board saw fit to give everybody a bonus,” for that excellent performance, says Marx, who has been with Hazlehurst, Miss.’s Copiah Bank, N.A., for more than 30 years.
But what started out as an unusual payment to mark great results, became something that celebrated getting to the end of another year.
“It got to be where everybody expected it every year, regardless of performance,” says Marx. The banker decided that it was time for reality to settle back in. And so, when he became CEO eight years ago, he put a stop to the institutionalized bonus payments. He wanted bonuses to go to the real producers, those who truly made a difference, who really went above and beyond.
“I’m a firm believer in the 80%-20% rule,” says Marx. “I think 20% of our folks account for 80% of our profits, and I just don’t believe in giving the underperformers a bonus.”
So Marx took control.
“I have a discretionary account that I call ‘performance pay’,” says Marx. “I take $20,000 to $30,000 a year, and divvy it out to either officers or key employees who have been recommended to me by their supervisors for doing an extraordinary job. Nobody knows how the final decisions are made except myself. And it’s worked really well.”
This is what Marx does for the true stars, the people who go above and beyond. He spoke about this discretionary program during a roundtable about human resources issues in which eight members of the ABA America’s Community Bankers Council met with ABA Banking Journal. (Part I, concerning the challenges of the multigenerational office, appeared in the May 2008 issue. The previous instalment can be viewed on www.ababj.com by clicking on “Digital Magazine” in the home-page toolbar. Once there, click on “Archives,” in the new page’s toolbar, to get to the May issue, if that issue does not appear.)
Marx says the bank has long been a big believer in profit-sharing plans, and annually pays out 5% or 6% of after-tax earnings to all employees. One year the bank even sold a bond to pay for profit-sharing.
Copiah Bank’s board has also distributed shares in the company to a handful of bank officers hired in the last few years.
“That was the only way that we could get them to come aboard,” says Marx. “It was a way to give them an incentive pay program, through ownership.”
Mixed views on performance pay
The idea of paying people in a way to improve performance by giving them a stake of some kind has been around for decades in banking.
In some parts of the financial services business, right now, incentive pay has a black mark against it. Many, for example, blame commissioned mortgage brokers for the subprime mortgage crunch. Even before that, incentive pay for lenders has long been somewhat suspect.
“Incentives can be great, but they are very dangerous,” says Alabama banker Robert Jones. “You’re going to get whatever you incent for, because there is what I call ‘The Law of Unintended Con-sequences’.”
Also, he points out, “It can cause a culture shift because people lose sight of the team.” In addition, such programs can pit producers against support staff.
And employees can game such programs, too.
“We’ve tried them all at one time or another,” says Ohio banker Blair Hillyer. “I won’t say any of them have worked very well. We’ve had some underhanded tricks. Tellers began competing against each other. Some would stockpile their friends, to all come in at the last minute.”
As a result, Hillyer says, “we’ve gone to bankwide goals. This year everybody got 6% of their salaries. A couple of times they’ve received as much as 15%.”
Members of the roundtable offered as many approaches to performance pay as there were members of the roundtable.
Mulvane State Bank’s Frank Carson, for instance, has used an informal approach at his family-owned bank. “I’ve got two guys who are tremendous producers,” he explains, “so I just kind of figured things out on my own, what I’m comfortable with, and paid them pretty good bonuses the last two years.”
As his bank and its staff continues to evolve, however, Carson has already been reworking his approach. Officers will be receiving equal credit for loans and deposits that they bring in. At the same time, Carson has been developing a referral fee program, “because, as soon as possible, I really want everybody at the bank to have an opportunity to increase their income.”
Referrals pop up
Referrals also loom large for Pat Glotzbach, from Indiana’s New Washington State Bank. He brought in an outside trainer/consultant who worked with the bank’s officers. They in turn worked with the bank’s staff to encourage referrals. Then, the bank put in incentives for referrals. For instance, employees receive $50 for every mortgage referral that results in a closed loan.
New Washington State makes a festive occasion out of banking on Fridays and Saturdays, which helps generate referrals.
“We pop popcorn and we give out Cokes,”Glotzbach says. He assigns people to work the crowds coming in on those days. He says it’s not unusual for some of the bank’s employees to make five or six paid referrals a month. “We’ve paid them $10,000, $12,000, but we’ve received the incentive pay back many times,” Glotzbach says.
On the other hand, while Glotzbach likes this type of incentive, he doesn’t go for others in the residential lending field, one of his bank’s mainstays. For instance, charging points beyond the bank’s minimum may garner incentive pay for some lenders, but Glotzbach doesn’t favor that approach for his people.
Steve Goodenow’s Bank Midwest, Minnesota Iowa, N.A., uses another consultant’s program which sets up performance indicators for multiple employee levels. What Goodenow likes is that the “Stakeholders” program, from Mike Higgins & Associates, www.mhastakeholders.com, sets up goals by job function as well as whole-bank performance. In addition, “you can’t, as an individual, just show up and get your bonus. If you’re not performing, you’re not going to get a bonus. There’s no entitlement.”
Goodenow says employees know which job tiers carry this or that level of shares in the overall incentive pay scheme, and that this provides encouragement to those who want to make more money. They understand that they must advance into those categories that carry higher bonus percentages.
“If there is a position posted that’s a ‘Tier 2,’ someone below that tier knows it will be a better position for them,” says Goodenow. “On the other hand, if someone wants to just come to work and stay in the Tier 1 position, that’s great, too, because we need those people as well.”
Thinking outside the calendar
The typical bank compensation plan has an annual focus, but some banks have found that this no longer fits well with their current reality.
For instance, Alabama’s Robert Jones says his United Bank has been in expansion mode, and the costs of that have tended to obscure some performance achievements.
“We’ve always operated on an annual plan and our incentives were tied to those annual objectives,” says Jones. “This year, we’ve taken a two-year approach, because we knew that our expansion strategy was going to depress earnings.”
So, according to the game plan, “we’re paying incentives based on a lower threshold than we would typically see,” says Jones, “but we’re accruing a supplemental payment based on the full two-year performance, which is after the new operations are open to customers.”
Jones acknowledges that there is a gamble here. If incentives are the “carrot,” after all, the carrot ideally ought to be close enough to remain on the carrot-seeker’s mind. Jones says the bank is trying to “keep the focus” by issuing relevant measures to employees in the short-term.
Merchants & Farmers Bank & Trust Co., Leesville, La., has been undergoing a similar expansion, says Ken Hughes.
“We’ve been visiting with our board about our annual executive bonus grid,” says Hughes, “and we’ve been making a case for using a lower threshold this year.”
In the case of Hughes’ team, a dozen executives are on the bonus grid, and they are all working toward a team goal.
Hughes doesn’t want the expansion costs to cut the productivity of the executive incentive plan. It’s meant far too much to the bank.
The formula behind the program consists of 65% based on net income for each year, with additional portions allocated to new loan production and to the bank’s efficiency ratio.
The bank started its program about six years ago.
“At the time, we were netting about $1.2 million a year, and now we’re netting over $2.6 million a year,” says Hughes. “We pay the executive group about $350,000 in total bonuses.”
Hughes says there was no change in the team. The plan made the difference.
“They had no incentive to give us new ideas or to try anything new,” says Hughes. “If they did, and it worked, their bonus, under our old plan, didn’t rise. On the other hand, if their new effort flopped, it might have gotten them fired.”
With incentive pay in place, however, “the same 12 people are now primarily responsible for doubling our earnings over the last six years.”
Sticking with the traditional
“I guess, philosophically, we’re in another boat,” says Legends Bank’s John Klebba. “Our board has never bought into what I would call a modern sense of incentives. However, we do have a profit-sharing contribution, and it is distributed on the basis of a percentage of salary.”
Harking back to Robert Jones’ warning about “unintended consequences,” Klebba notes that this was always his father’s concern about putting in an incentive scheme that rewarded lending and other activity by volume.
“He worried that those consequences would rear up and bite you unless you really had a plan that was fail-proof,” says Klebba. “And I don’t think anybody’s ever come up with a plan like that.”
Klebba acknowledges that there is no differentiation, then, between producers and those who don’t produce. However, he says, there’s more than one way to address that.
“I sit down with every employee in December. Beforehand, they have filled out a questionnaire and we go through it line by line,” says Klebba. “What I tell them is, ‘Your raise depends upon your performance.’ And that’s the incentive we have.”
Klebba’s commitment to this process becomes evident when one considers that he has 65 full-time equivalent employees. “It takes most of my December to do these employee sit downs,” Klebba explains. BJ
Tips from the roundtable
Supervisory post challenges. One of the supposed “givens” of American corporate life is that everyone wants to move up, and should, to be successful.
“Often, you’ll take someone who’s an excellent employee, and you’ll decide to make them a supervisor,” says United Bank’s Robert Jones. “And that can be a failed strategy, if they don’t have the right characteristics to supervise people.”
To help screen out such cases, Jones has recently been using a tool called the Omnia Profile. This is a personality profiling tool from The Omnia Group, Inc., Tampa, Fla., www.omniagroup.com.
“We’ve been using Omnia for a number of years for senior positions,” says Jones. However, increasingly candidates for supervisory posts have not been satisfactory, so the bank began using the tool for those positions. The tool uses psychometrics.
Each test costs roughly $100, so Jones says the bank generally has the relevant department head and the head of human resources screen candidates and conduct the first rounds of interviews. Then the most promising candidates take the Omnia test. Jones reads the tool’s evaluations prior to meeting the candidates.
“I get a little better feel of who the person is,” Jones says.
Younger employees want inclusion. New Washington State’s Pat Glotzbach says one key difference he’s noticed between older, more traditional bank employees and new generations is the desire for inclusion of the latter. While older employees are content to stay back home, newer ones crave learning opportunities. They want to be taken along when managers go to business conferences and similar events. “They want you to show them that they’re part of the scene,” Glotzbach says. “And with them, education is the key, it really is.”
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