Generally bank incentive programs reward team members for the achievement of bank-wide financial results. However, important goals which actually build value, such as customer retention, operational improvements and talent management, are often overlooked. Strategy-based compensation marries a bank’s compensation programs with its business strategy, rewarding team players for performance which results in the achievement of strategic objectives. A helpful tool in designing a program that works is a strategic road map, which clearly identifies activities and players needed to achieve results and create value for your organization.
Creating Your Strategic Road Map
The foundation of strategy-based compensation is an understanding at all levels of the organization as to which activities are required to achieve the stated objectives. A road map to execution will identify the focal points—financial/capital requirements, customer consideration, technology needs and the alignment of talent—as well as the value drivers to push success. Laying out your strategy demonstrates team placement and individual responsibilities within the broad scheme. The illustration below is a hypothetical strategic map for a community bank. Efforts in talent management, operation process, and customer satisfaction ultimately drive the desired financial outcome: growth in income and shareholder value.
Incentive Design Considerations
Among banks, executive incentive plans typically measure bank-wide performance across three buckets:
- Balance sheet goals (e.g. growth in loans and deposits);
- Earnings (e.g. return on assets and/or equity); and
- Portfolio quality (e.g. regulatory ratings, non-performing assets, and/or net charge-offs).
As demonstrated in the strategic map above, these financial metrics are outcome-based and generally reflect the results of efforts. Limiting the overall focus of incentive plans to financial objectives potentially limits the program’s ability to reward and motivate the actions required to realize the success of the business strategy. Forward-looking organizations support differentiating their incentive programs beyond the typical financial focus.
From an executive perspective, incentive plans can incorporate value-driving performance metrics such as:
- Growth in deposits from new accounts;
- Expansion of lending activities specifically tied to new markets;
- Identification of acquisitions;
- Increases in operating efficiencies, new technology platforms;
- Demonstration of robust succession planning efforts beyond; and
- Customer satisfaction and usage.
Below the executive level, team members should be rewarded for areas within the strategic map that they can directly impact. For example, branch managers or operation officers are instrumental in increasing efficiencies and improving customer experiences. However, these individuals have limited line of sight and impact on loan growth or capital requirements. Linkage of incentives to particular elements of the strategy map drives towards the stated strategic outcome.
Equally as important in the incentive design process is setting performance goals. Designing an incentive plan to drive performance beyond the day-to-day requires setting goals with sufficient stretch to push superior market performance. Testing where your target performance goals sit relative to your bank’s and your peers’ past performance, as well as market expectations, demonstrates the rigor of your goals. For example, from a financial perspective, is the achievement of your loan growth target a walk in the park or a more difficult and dramatic home run?
In addition, setting performance goals requires an understanding of the timelines for execution. The strategic map should illustrate the milestones required to execute your objectives and your short- and long-term incentive programs should align accordingly. For example, entry into a new market may require the identification of a branch to acquire or new construction, as well as staffing. The time frame required to complete these activities and their successful deployment is likely to vary and may not be easily compartmentalized in a typical incentive plan performance period of one or three years. The most successful incentive program designs will demonstrate a level of flexibility.
Driving Performance Beyond the Day-to-Day
Incentive programs are powerful tools when designed properly. The program’s design should dovetail with your business objectives, timeframes, and lines of sight among participants. Further, these programs should be frequently monitored, reviewed, and revised as appropriate to ensure they support your bank’s evolving strategic objectives, thereby driving performance beyond the day-to-day.