To maintain a competitive advantage over peers, two areas of strategic focus we have seen increase include enhancing the customer experience and attracting and retaining the right talent. Specifically, many banks are focused on digital transformation and technological efficiencies as well as human capital management to attract the right talent, including diverse talent, to be able to achieve the strategic priorities.
Companies are clearly emphasizing the importance of these two strategic priorities, but how you measure success is challenging. And, do you incentivize management based on progress? The goal for boards is to have executives focus on objectives that will ultimately drive performance and long-term shareholder value.
Some organizations are beginning to align incentive-based compensation with these strategic priorities; however, objective measurement of progress or success may often require a subjective judgement.
Customer experience and engagement: The banking industry runs on relationships and maintaining these connections, which is shifting as customer demand for new and faster technology evolves. While ensuring customer security is still important, the focus once on customer service has now shifted to the customer experience. To measure this, we often see a portion of the total incentive tied to customer engagement, typically measured through surveys, customer retention, or strategic technological or digital initiatives.
Two examples of companies that utilize customer-centric metrics include American Express and Unum Group. Both weight customer experience and satisfaction as standalone metrics in the annual incentive plan. Citigroup uses a scorecard to assess top management performance and compensation, 30 percent of which is tied to non-financial objectives.
Digital Transformation: The changes in the banking industry have increased the demand for tech talent to implement digital strategies, particularly those involved in improving the customer experience. Banks need to decide whether they will rely on internal talent and resources to develop proprietary new technologies, or if they will go outside the industry to find talent. In recruiting this talent, financial services firms find themselves in competition with tech companies that can provide significant equity opportunities and may have less-traditional work arrangements.
Financial services companies must be creative in attracting this talent with perks like open offices, flexible work arrangements and separate pay structures for niche talent. Goldman Sachs’ dress code, and JP Morgan Chase & Co.’s relocation of its tech team to a more modern, open-floor office are examples.
Diversity and Inclusion: Driving some of these strategic priorities are talent issues that have been a hot topic in the boardroom. Studies have shown a diverse workforce provides for more diverse thinking, and a better performing organization. We are seeing some organizations incorporate improvements in diversity and inclusion in their incentive plan metrics:
- Prudential Financial: Performance shares include a diversity and inclusion modifier (+/- 10 pp). Executives at the senior vice president level and above will be subject to a performance objective to improve the representation of diverse persons among senior management through 2020.
- Citigroup: 18-member operating committee will be measured on the progress of raising the percentages of women and African Americans in management positions by 2021.
- American Express: Has had talent retention and diversity representation goals as part of the annual incentive plan since 2013.
- Old National Bancorp: Has included diversity and inclusion targets in the annual incentive plan as a negative modifier since 2016.
The use of a modifier for Prudential Financial and Old National Bancorp may be due to the amount of influence an executive may have over the goal. Regardless of the weighting, inclusion of these metrics is a signal about the importance of the issue.
When boards are considering which strategic metrics to incentivize executives, the focus should be on management’s priorities, such as innovation, security, employee satisfaction or employee diversity. The key is attracting, hiring and retaining the right people who will align with the company’s strategic priorities. That is what differentiates one company from the next and those with a competitive edge.