Chief Investment Officer
Commercial Loan Automation
scorecards in banking
As the banking industry continues to adapt to the unprecedented pace of change, managing people is becoming increasingly more challenging. The old performance measurement criteria that the industry has traditionally used typically linked rewards strictly to financial results, most often ROE. However, given the complexity of our business and the importance of other quantitative and qualitative factors to the success of banks, simplistic financial yardsticks are no longer effective in channeling employees' energies in the direction each institution needs to take them.
The challenge facing most banking companies today is transitioning into a marketing organization, a retailer of financial services, and/or an effective execution machine of specific strategic initiatives. Implementation can only occur uniformly across the board when individual goals are set at every level. Goal attainment is an important motivational tool, and goals should include both leading (behavior) and lagging (financial) indicators. Without specific expectations employees waste their energies, directionless, without knowing whether they have achieved success or not.
The scorecard is a tool that is designed to fill this need among bank management to define success across dimensions and levels in such a way that if performance specifications on the scorecard are achieved, the Company as a whole will achieve or exceed its performance goals. We have often witnessed excellent performance measurement programs that failed to accomplish what they set out to do. I've seen banks where two thirds of the employees achieved their performance objectives, yet the Company's overall results are lackluster. Such incongruity is unacceptable in today's demanding environment. It is essential to mobilize every single resource toward the same direction.
Of the institutions that implemented scorecards, in our experience, those that were successful involved the following elements:
- Simplicity. Complex, cumbersome scorecards will be misunderstood by the employees and will not be an effective motivational tool. Every team member must be able to measure or receive reports on their performance against the scorecard elements frequently, so as to assess performance and apply any appropriate midcourse corrections.
- Specificity. Ambiguous goals not only fail to motivate but also contribute to confusion and misdirection. Specificity is essential to success, since vague objectives are easily dodged.
- Financial and non-financial goals. In order to meet today's marketing transformation challenge, goals such as sales per square foot, revenue per employee and other sales effectiveness measures are at least as important as the global financial goal at the individual performer level. In recognition of the value of human resources as the single most important production resource in every bank, quantitative objectives regarding productivity, motivation and retention at the senior levels should be integrated into the scorecard.
- Long- and short-term objectives. With the analysts' pressures, many companies succumb to quarter-by-quarter measurement, thereby shortchanging their strategy agenda. A good scorecard needs to address both short- and long-term performance at the executive level, assuring that the future is not mortgaged for the benefit of short-term earnings.
- Signaling what's important. A scorecard must have attached weights to each major performance category. The weights signal management's view of what's critical to success. That view changes over time and reflects the condition of the Company and where the opportunities lie. For example, a credit troubled company will put the highest weight on credit quality, as it is the first order of business to assure survival. As credit quality is repaired, its importance in the company's future subsides as it transitions into "business as usual" category. The weighting system is the tool to signal what's most important on today's agenda.
- Keep it short. Too many indicators confuse the issue. Scorecards with more than a handful of categories and a dozen indicators for performance dilute the message too much, since the weight attributed to each factor cannot be significant enough to motivate performance. In constructing scorecards management is compelled to prioritize in its own mind employee activities as well as its own measurement, thereby creating another benefit for scorecarding. what really counts.
- Link in to incentive compensation. One of banking's traditional woes is that the difference between the poorest performer and the best performer was insignificant. This characteristic must be eradicated from banks' compensation systems as they transform themselves into sales organization distributing financial services. That's why the scorecard must be tied into incentive compensation which provides meaningful differentiation among poor, average and superior performance.
There are many other important characteristics for scorecards. The key is to indicate across the company what's important and what's the strategic agenda. Using scorecards as a management tool focuses everyone's attention on the same goals and mobilizes the entire company to march forward as a cohesive marketing organization.