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BirdsEye View

building a successful incentive program in the wake of the wells fargo scandal

We spend millions of dollars each year giving our employees and executives incentives for sales, overall performance, efficiencies… And yet, many of the dollars do not bear a strong return on the investment.  I've been asked recently to identify the underpinnings of a solid incentive plan.  In fact, the topic never gets off the "hot" list.  Below are my thoughts regarding the appropriate principles to utilize as you structure your incentives.  Even in the wake of the Wells Fargo fiasco, incentives are important to motivate front-line employees.  Instead of discontinuing them altogether, structure your incentive plans in such a way as to not incentivize bad behaviors, however.

Simple

Our incentives are too complex.  We refuse to exclude even minor elements and dilute incentives by including too many parameters, each of which stands for a few hundred dollars of incentives and, therefore, is marginalized.  We also want to make absolutely sure that no one will get paid inappropriately, so we bind the plan with countless rules.  As a result, the plan becomes so complex that folks don't know EXCATLY what they have to do to earn a SPECIFIC amount of money.  In such situations, incentives cease to be motivational; instead, they become after-the-fact recognition.

Controllable

Incentives that include components not under the employee's control are not only ineffective in motivating behavior, they are DE-motivating.  I know you want your employees to be mindful of all aspects of bank performance, but if they can't control occupancy expense, holding company overhead etc., why saddle them with that item?  It seems arbitrary to the employee and typically does not inspire attention or improved performance.

Focused

Many incentive plans have too many elements to them.  Management doesn't want to detract attention from too many performance indicators, and, consequently, detracts attention from ALL, since employees do not believe they can succeed on so many fronts.  Further, too many items end up with 5-10% of the total incentive dollars at stake, and so they get marginalized.  You'd be better served by focusing on what really matters and allocating meaningful dollars against each of these 3-4 key indicators.  It's management's responsibility to figure out what those indicators are.  Often, a solid leading indicator can ensure the accomplishment of several lagging indicators, which facilitates both employee engagement and shareholder returns.  For example, if you goal the number of "quads" (sales of 4+ products to a single household) sold per banker, you will inevitably get meaningful growth in your debit cards and other simple retail products.  Therefore, you don't have to goal debit card sales; the quad goal will take care of that.  Last, product-agnostic incentives are consistent with “doing the right thing” for customers, an important principal for all community banks, and especially so after Wells Fargo.

Trackable

All incentivized employees must be able to check at any moment in time where they are relative to goal and to being "in the money".  There is huge motivational value in this very knowledge, since employees can then manage their own activities toward achieving the goal and the incentive associated with it. 

Stable

Changing incentive plans and goals too often distracts the sales force.  Inconsistent direction takes the wind out of the people's sails, as they run with all their might in one direction, and then cut mid-stride to change course.  Zig-zagging isn't as effective as a straight line.  Change is inevitable and necessary, but if it occurs too often, it dilutes the power of incentives and casts doubt upon management's judgment.

Well-funded

Everyone acknowledges that incentives are powerful, but funding them is an eternal challenge.  I believe it's better not to pay incentives than to pay puny amounts that won't make a difference in the employee's pocketbook.  So, especially in today's world, where do you find the money to adequately fund incentive plans?  I recommend a simple formula that has worked for me:  out of every $1 that the shareholder makes, take 7 cents and allocate them toward incentives.  This way, the shareholders are assured a fair distribution of the profits generated by the employees, and so are the employees themselves.  Plus, your CFO will be less concerned about over-paying.

A rock in many a CFO's shoe, though, is paying multiple times for each sale.  In theory, one can squander the entire profit from a sale by paying the teller, banker, commercial banker and possibly the cash management rep for the very same referral and sale.  Using the formula above eliminates this concern, and also facilitates de-layering of incentive plans, something most of us do routinely.

A few other comments bear mentioning:
  • Put in place programs to reduce abuses.  If you put significant dollars on the table, you'll get abuses unless you do something about it.  It's inevitable.  Don't get disheartened; preempt abuse by saving your potential abusers from themselves.  Have sales force managers keep a close eye on their best performers to seek stress points and misbehaviors.  Perform random audits and build consequences for inappropriate behaviors.  Be careful not to set goals so high and employment contingent on high goal achievement to avoid bad behaviors  by your lesser performers just so they can keep their jobs.  And compensate people only for products USED, not simply products sold. It's easier to raise incentives than to reduce them.  So, if in doubt, pay less and keep your powder dry.
  • Recognition is often as important as money, if not more.  Just because you have a rich incentive plan it doesn't mean that recognition becomes irrelevant.  On the contrary, the more you engage your sales forces, the more their craving for recognition grows.
  • AND, MOST IMPORTANTLY – ONLY PAY ON ACTIVELY USED PRODUCTS.  ACTIVITY CAN BE DEFINED EITHER AS A MINIMUM BALANCE THAT IS HIGH ENOUGH TO SHOW CUSTOMER INTENT TO LEAVE THE MONEY IN THE ACCOUNT, OR A NUMBER OF TRANSACTIONS THAT ACHIEVE THE SAME GOAL.  Defining what is an active product for every single one of your products and services that is included in the incentive program is an essential step to ensure that behind-the-scenes abuses do not take place.
Of course, each company will have to structure its incentive program to uniquely fit its own goals. Following the above suggestions can help guide you to create a program that gets the results you need.
 
Last, culture is the ultimate key to success of any organization, and incentives that are inconsistent with a nurturing and strong culture will not be effective.  A strong corporate culture will reduce the likelihood of misbehavior and increase the effectiveness of incentives that support the underlying culture.  Make sure you ask your team to do what’s right, and use incentives to recognize the best and brightest amongst them.