Incentives Urged for Improving Productivity; Commercial Banks Need New Tools for Getting Loan Officers to Do More with Less
Faber, Michael A., American Banker
In recent years, banks have become increasingly concerned about improving employee productivity. As a result of deregulation, senior bank managers are requiring unit managers to increase profits while holding costs stable. Essentially, deregulation has required banks to "do more with less."
In commercial lending, the drive to increase productivity is made more difficult by the growth in competition for qualified loan officers, by the emergence of many new marketplace competitors, and by the virtual lack of industry standards for loan officer performance.
In a study of 64 major banks' middle-market lending units, conducted by the Council on Financial Competition, senior bank officers repeatedly cited three causes for low productivity. First, loan officers fail to focus on profitable products and activities. Second, loan officers fail to actively seek new clients. Third, better loan officers are too easily pirated away by higher-paying competitors.
To counteract these problems, banks nationwide are adopting agrressive new management tools to increase the productivity of their commercial lending staffs. These tools include incentive compensation; reorganization of officers into lending teams; hiring of professional salespeople for new business development; and more liberal use of dismissals to weed out poor performers.
Although many successes have been cited by bankers who have implemented these more aggressive management reforms, a note of caution is deserved. Banks should analyze idiosyncratic management problems and marketplace characteristics before making radical changes.
The council's major findings and recommendations regarding each of these management tools are reported below. Under no circumstances are all recommendations appropriate to all banks. The list is intended to spur thought about the range of options involved in managing and motivating the commercial loan officer.
Presently, incentive compensation for lenders is unusual. Many bankers follow the age-old wisdom that incentives will place loan-quality considerations at risk. Although this attitude may be appropriate to a poorly structured "sell it and get paid for it" incentive plan, it ignores the variety of modern incentive approaches adopted, or soon to be adopted, by banks.
Multiyear payouts quality thresholds, and deductions for loan chargeoffs, example, can help guard against low-quality loans. More importantly, strengthened credit approval and review procedures are a required safeguard for loan quality.
Of 64 banks interviewed, 25% are planning to introduce incentive plans for loan officers. Virtually all U.S. banks will face a competitor paying incentive compensation within the next five years. Indeed, banks eventually will have to pay incentive compensation as a competitive necessity. The half-dozen banks reporting incentive plans in place up to 10 years report no problems with either loan quality or bank morale. Clearly, incentives are a useful management tool to measure and improve loan officer productivity. Recommendations
* Banks seeking to motivate individuals should offer incentive compensation. Money is the most direct and easily measured means by which to reward good performance.
* Banks should not wait to develop computer-based customer and product profitability systems before implementing an incentive compensation plan. Profitability system proxies and manual accounting, if carefully monitored, are sufficient.
* Banks should establish a sufficiently high level of variable reward -- 20% to 30% of base salary -- and adopt a totally objective and automatic reward structure to best achieve the desired productivity results.
* Banks should award incentives based upon product and account profitability as assurance that the individual is rewarded only for those activities that improve the bank's profitability. Incentives should not be awarded solely on the basis of the volume of activity, such as the number of cold calls. …