Pay Your Bankers Like Your Shareholders

In a recent conversation with a bank executive, they lamented that the bank had a fairly flat year, yet they were signing off on significant incentive payouts. Too often, bankers bring in a new commercial relationship: large loan with a skinny margin, promises to move deposits over and fees waived to sweeten the deal. Then, six months after closing, the deposits never materialize and covenants aren’t enforced. The banker was paid a large incentive on a deal that doesn’t generate any shareholder return. This misalignment led to the bank’s desire to move to a profitability-based incentive plan.

Traditionally, bank incentive programs have been built around production. Production was easy to measure, easy to track and easy to communicate. Unfortunately, production and profitability don’t always correlate, and with margin compression, an unpredictable rate environment and competition for deposits, banks can no longer afford the gap between the two. A production-based incentive plan tells bankers to just open more accounts. But the guardrails like rate sheets and approval process you may be relying on often get compromised in the final push to win a deal. Getting the incentive plan right is a journey, not a destination. But it starts with a single decision — to begin.

Step 1: Evaluate Your Current Plan
Before making any changes, review your current performance plan at both the banker level and the top of the house. How does the payout align with how the bank is performing? What sorts of behavior does it encourage and are those behaviors you want? Equally important, what are bankers’ perceptions of the current plan? Is it comprehensible and connected to their job responsibilities?

Step 2: Define Your Strategy
Incentive redesign isn’t only a question of compensation; it should also be a question of strategy. What are your organizational objectives? What do you want the bank to look like in three years? Identify the key levers and evaluate your performance on those. These levers may include deposit mix, relationship depth, loan spreads, fee income and more. Ask yourself, what kind of banker behavior do I need to move these levers? With these answers in mind, you are ready to explore incentive plans that are aligned to the strategic objectives and the desired financial performance of the bank.

Step 3: Design for Where You Are and Where You Want To Be
There is a Goldilocks moment at this stage. While you don’t want to make wholesale changes overnight, you also must avoid becoming paralyzed by the pursuit of a perfect plan. Draft a few alternatives, model out the quantitative impact to understand the financial benefits and challenges of each. At the same time, don’t ignore the qualitative impacts: banker perceptions, bank culture, as well as retention and attraction of talent.

Once you have an idea of where you want to go, the change can still be gradual. You may begin by incorporating a few new metrics: low interest deposit balance growth and risk-adjusted revenue growth. Later you may add in operating account percent and marginal risk-adjusted return on capital (RAROC) or return on equity.

This is also the stage where goal setting deserves serious attention — the tension between growth goals and absolute targets, between mature and growth portfolios, between production and book of business performance — these are real conversations that require banker buy-in to get right.

The right plan is what is right for your bank at this moment based on your specific strategic objectives.

Step 4: Simple Design, Transparent Tracking, Clear Communication
This final stage is often neglected when, in truth, it should receive the most thought and care. The best designed incentive plan can fall apart if bankers find it arbitrary or hard to comprehend. If you can’t explain the plan in under 10 minutes, it’s too complicated. If the metrics are new to the bankers, what is your plan to educate them? Can you provide exposure to the program before it is being used to pay out incentive? Can you provide continual, transparent, banker-level reporting on their progress? The rollout of the incentive plan must get as much attention as the design itself.

Banks that make this shift don’t just improve profitability, they improve how their teams think about banking. Bankers develop a profitability focus from the first meeting with a client and look to get the right deal done. Exception requests are reduced, bankers fight harder to bring over deposits and they understand the role of fees.

In short, bankers start thinking like shareholders.