Incentives Urged for Improving Productivity; Commercial Banks Need New Tools for Getting Loan Officers to Do More with Less

By Faber, Michael A. | American Banker, October 26, 1984 | Go to article overview

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.

* Banks should award incentives on the basis of a small, manageable number of officer objectives. Incentive structures based on too many goals disipate officer productivity.

* Banks with incentive compensation programs should elevate the credit approval and review process to a major role. There is no better safeguard for loan quality than strict, active, and well-respected loan approval and review committees. Conversely, banks adopting incentives without upgrading the credit committee function risk bad debt.

* Banks should structure a broad incentive plan that will introduce the "incentive culture" to all members of the banking unit. Incentives that reward only truly outstanding -- top 5% -- performers have no impact on the average or slightly above average performers, who should receive at least nominal payouts and encouragement. Reorganization

As reported by a small number of banks, the use of either professional sales forces (composed of experienced salespeople who are not experienced lenders) or officer teams leads to improved productivity by middle-market lending units.

A full-time sales force is very successful in generating commercial business, the study found. The professional sales force, usually composed of former International Business Machines Corp., Burroughs Corp., NCR Corp., etc., salespeople, typically receives four to six months' training on the fundamentals of banking and credit, the selling cycle, and the organization and products of the bank.

Then, "they are banished to the streets with surprising results." Operating with minimal credit experience, no credit authority, and earning 100% commission, the sales force poses no risk to portfolio quality and little additional expense to the bank.

The study also found that organizing loan officers into three- and four-person teams helps to manage turnover and reduce individual administrative burdens. Many bankers cautioned, however, that these findings should not be generalized. Greater industry experience with alternative staff reorganization strategies is required. Some Suggestions

* Sonior bank managers should strive to improve and support the sales orientation of the bank. Beyond favoring the concept of selling, senior managers must hire professional salespeople, provide sales training, and actively engage in sales activities themselves.

* Banks should create the position of full-time sale manager in their wholesale banking units. At least one person should serve as a manager, devoid of account servicing tasks, to direct business development activities.

* Proper performance of sales and management tasks requires information on account and product profitability. Basic officer performance and customer profitability data should be available, even if it is based on estimates and is tracked manually.

* Increasingly over the years, banks have forced responsibility for a variety of new tasks onto the credit officer. This has reduced the effectiveness of the credit force overall. Banks should reorganize the lending function in order to support the few most profitable tasks.

Leading consultants and experienced bankers are unanimous in one judgment; the era of secure, comfortable employment in banking must end. Many banks report adopting aggressive programs "to filter out the dead weight." Clearly, banks should fire chronically poor performers.

Bank management also can be found replacing skilled relationship managers with skilled salespeople. This development is a direct result of the increasing competition and decreasing margins caused by deregulation. Banks must develop new business from both existing and new customers. This adaptation places greater reliance on firing and subsequent hiring, rather than retraining, and will result in small staffs of select superstars, replacing today's larger lending staffs.

* Banks should hire sales-oriented individuals rather than retrain old relationship-oriented officers to sell. Consultants argue, "one cannot teach old officers to grow new stripes."

* Banks should hire individuals according to a new set of criteria suitable to a deregulated environment. New hirees should have sales skills, be selfmotivated, and be persistent.

* Banks should hire top-quality people from other banks and other industries to fill a variety of sales, management, and staff positions. Banks should refrain from using an "old-boy" network, hiring and promoting individuals from within the bank.

* Banks should instill a competitive spirit in their officers. They should constantly and forcefully distinguish and reward good performers and create an environment where the pursuit of excellence is de rigeur.

* Banks should develop alternative career ladders for their most profitable, sales-oriented credit officers. Profitable lenders should not be forced into management positions.

Although the tools mentioned above are effective in improving the productivity of the commercial credit force, the most crucial element to bank success is a clear goal-setting process. The vast majority of bankers and consultants agree that managers must establish and communicate realistic individual goals that are closely matched to the bank's overall goals. Bank managers must also provide regular, objective, and forceful feedback of individual officer performance. To do so:

* Senior management should extend greater effort to match bank-wide goals to individual officer goals. Typically, bank goals are too ambitious for the sales plan. As a result, the strategic plan fails to have any true relevance to divisional or officer goal-setting and performance.

* Senior unit and department managers should communicate only three or four priority objectives for their officers. Individuals required to do "a little bit of everything" often are performing inefficiently.

* Senior unit and department managers should send forceful and consistent signals regarding performance expectations. Goals count and officers should treat them seriously or risk jeopardizing promotions and careers.

* Objective and automatic rewards and penalties are more effective in influencing performance than a a discretionary review process.

Corporate banking has undergone profound changes since the 1970s, when geographic expansion and a scramble for market share dominated industry strategy. With profitability, even survival, as the major concern of corporate bankers in the 1980s, industry emphasis has shifted toward improving unit and individual productivity and efficiency. This overhaul of the banking mindset will not come easily.

Many banks already employ a host of useful management tools that will usher them into more streamlined and profitable operations. They have increased individual productivity, and hence, the bottom line. The use of incentive compensation; reorganization of officers into lending teams; hiring of

professional salespeople for new business development; and more liberal use of dismissals are only a few of the management strategies now being employed successfully.

If bank managers are faced with the necessity of having to "do more with less," then they should at least insure that their officers and staff do the most they can.

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