Strategies: Why Doesn't My Pay Program Work? (Community Banking)

Probably because you're paying people, including the CEO, for the wrong things You can't run today's business with yesterday's compensation methods. Yet today we have a hodgepodge of traditional methods rooted in the industrial age that not only fail to address the needs of a service economy, but that pit owners, managers, and employees against each other. Community banks' compensation systems should create a feeling of ownership among all employees. In many organizations, pension, profit sharing, and traditional annual bonuses have become entitlements. Employee stock-ownership plans are one of many programs that pretend to equate to ownership, while actually not providing direction or information on how each employee can contribute to results. Right strategy, wrong carrot Before I became a consultant, I was asked to become president of a community bank that had nearly failed. The board, the majority stockholders, and I agreed that the four most important influences on being competitive--investment in people, facilities, product development, and information systems-had been ignored for three years. This had to be remedied by investing in all four. And then the board proposed to pay me not to do that! Here's how. My compensation included a generous base salary and an even more generous bonus. However, the bonus was based on maximizing annual profit. That, of course, means keeping costs down, and not making essential investments, thus sacrificing the long term. This was not the first time I had encountered such contradictions. Early in my career, I was in industrial sales. One day I realized I was spending as much time with support staff in our plants as I was with customers. Later, when I became regional sales manager, I continued to spend much time with support people. Why? Because they made the sales force successful. Yet, despite the support staff's indispensable role, these employees did not participate in any reward program related to performance. They may have received profit sharing or a Christmas bonus, but nothing about them ties compensation to performance in their minds. Every successful business team in every field, including banking, has two sets of equally important players: promise makers and promise keepers. Both, along with management and owners, are stakeholders in the business. As suggested by the term "stakeholders," performance compensation should tie all employees to a reward pool distributed according to the contribution each team and individual makes toward success. Second, performance criteria must focus on a strategy to achieve not just short-term profitability, but long-term shareholder value and viability of the company. Making such programs happen may be complex and require computer work, but the intent and logic couldn't be clearer. Maximizing long-term value The first, most important step is to resolve the gap between organizational priorities and traditional compensation. An organization can effectively pursue only one of four master strategies: maximize profit, maximize growth, balance profit with growth, or position the company to acquire, merge, or sell. Maximizing profit and maximizing growth are both short term. An organization cannot follow a strategy to maximize profit too long without driving away all customers. A growth-maximizing strategy is also very short term, because the bank will not create or maintain enough earnings to continue serving the expanded base. The strategy to merge or sell is typically the shorterst term of all. Most traditional compensation, in the form of management bonuses, profit-sharing programs, and pension plans, are designed around the short-term master strategy to maximize annual profit. At the same time, the sales force and sometimes other customer contact people are rewarded for sales, sales referral, or other growth goals. …