Publications & Resources
May/June 2009
Focus: People - Your Most Important Asset
Best Practices in Lender Incentive Programs
By Geri Forehand
It was November 2006 when I wrote an article for Western Independent Bankers on planning for succession in the lending function: “The only ‘fix’ for the lack of experienced lenders who have worked through a downturn in the economic cycle is unfortunately an actual economic downturn.” And here we are, just over 24 months later, in the midst of one of the most dramatic downturns our industry has seen in more than 20 years. Like it or not, our lenders are gaining that experience that they needed most.
In this cycle, though, some banks are still doing well – managing the shrinking margin, retaining their key employees, and maximizing profitability. One of the significant trends in those banks who are managing high performance is their recognizing that growing the bank’s human resources, particularly in the lending side of the bank, is as important as protection of the balance sheet.
The success of pay-for-performance is well documented. Employees will perform according to established standards of incentive, whether the incentive is in the form of cash, stock, benefits, or simply recognition. But have we as an industry incented the right behaviors?
Working Past
the Lending
Given the public perception of banks, and specifically lenders, a new term is
being floated around the mainstream press. Bankers apparently spent too much
time on a “lending spree” – and some of them were incented to do just
that. There is some truth to that statement. When bankers realized that their
lenders would perform better with incentives, both incentive pay and loans went
up.
Now, it is important for us as an industry to guide lender incentive pay toward different behavior, tying cash and other lender incentives not just to quantity, but also to loan quality, deposit generation, and relationship building.
Implement
Bankwide Performance Measure: Because Our Lenders Aren’t Just Lenders Anymore
Here’s the good news: We know that lenders will accomplish what we incent them
to do. The next step is to create the right matrix of goals and objectives for
your individual lending executives, from the CLO to each individual lender, that
will start righting the ship, both at your organization and in the industry at
large.
In an ideal world, the incentive compensation package for all lending executives should include measures related to bankwide goals and targets (see Table 1), including net interest income, provision for loan loss, non-interest income, credit risk, liquidity, interest rate sensitivity, economic risk, business development, and employee training.
Table 1: Bankwide Measures for Lender Incentive Packages
Obviously, the simpler you can make the formula, the easier it is to administer. The measures in Table 1 are comprehensive, so consider them each carefully in terms of your own organization, market, and staff, and go in realizing that you won’t use them all. But the bottom line: any incentive program should incorporate components that revolve around credit quality, margin and deposit generation.
Geri Forehand is a certified professional consultant to management and serves as Brintech’s director of strategic services. In his 30 years of financial services experience, he has worked both as a banker and a consultant to banks, focusing on strategic planning, executive compensation, and board and management assessment. He can be reached at 800-929-2746 or GForehand@Brintech.com.
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