The Exacting Science of Compensation

By Karen Epper Hoffman

Front-line focus on cross-selling and customer retention poses the question: what part of pay should be at risk?

|SYNOPSIS| Financial institutions have spent decades trying to build a sales culture. While there has been limited success, the issue of front-line compensation continues to vex. Banks believe that compensation is a significant driver of turnover. How much of employee compensation should be fixed and how much should be variable? Variable compensation is increasing overall, but bankers are careful to maintain some ceilings, particularly in jobs that aren’t pure sales. Disproportionately heavy incentives run the risk of alienating employees and customers. For help in rationalizing approaches, some banks turn to software. Drawing the best performance from the front-lines will require a thoughtful balance of pay and benefits.

Re-energized interest in improving the performance of the front lines, particularly the branch, inevitably leads to the study of compensation. Keeping employees — what many consider the financial institution’s greatest resource — happy and motivated has become one of banking’s most daunting challenges. It’s a topic that inevitably comes down to money.

What is appropriate compensation for front-line workers — the tellers and platform employees, and the branch managers who oversee them? In many cases, it involves putting more pay at risk — increasing the amount of compensation that can vary based on performance — for jobs that typically have commanded a straight salary. Through such “variable pay,” bankers hope to reward their best performers and combat the high turnover that costs them in training and customer service.

Compensation strategies are complex. Even within the ranks of the most successful retail organizations, methods for handling compensation run the gamut. All have varied approaches to which jobs should receive incentives, for what products and when, and how much of total compensation should be at risk. For help in standardizing their approach and to better gauge the effectiveness of what can often be dozens of complex and varied compensation programs, more banks are turning to software tools.

While approaches to incentives vary — along with the corporate objectives of the bank itself — there are some consistent themes in crafting and managing an efficient compensation program:

• On the whole, variable pay is increasing in virtually all jobs. Upward limits tend to be set on teller and other positions that are not primarily focused on selling.
• Mergers and changing management approaches have left many large banks with a snarled tangle of incentive plans that require streamlining and revamping.
• It’s become an increasingly regular practice to review sales data and pay bonuses and incentives more frequently. This gives executives more opportunity to catch inefficiencies or incentives that aren’t working while keeping those inducements to sell top-of-mind for employees throughout the year.

But, as has been said before, money isn’t everything. While providing payment that rewards good performance is important, bankers and consultants agree that it is only one key ingredient in a mix that should include good benefits, regular training and coaching, and career path opportunities.

COMPENSATION A STRATEGIC DRIVER

So much for the death knell that Internet enthusiasts were tolling for the bank branch just a few years ago. By now, most banks have embraced the notion — which some say they never eschewed — that branches are not going away. Indeed, the front lines are being generally acknowledged as both the bank’s best defense against losing valued customers and its best offense in building new revenues.

It follows, then, that keeping the people who staff these front lines in place and encouraged to sell is more critical than ever — and, experts point out, more of a challenge. According to “The Front Line Factor,” an October 2004 BAI research study (see Banking Strategies, November/December 2004), turnover in these customer-facing jobs is a major concern for all financial institutions. Turnover tends to increase costs in training replacements, diminish productivity and potentially damage customer satisfaction.

“If a customer walks in and sees a different face at that teller window every time, you’re more likely to lose that customer,” says Jean Angelelo, senior vice president for compensation and executive programs at Union Bank of California. At one point, the part-time tellers brought in to help cover peak hours at Union Bank were turning over by as much as 85% per year, Angelelo says.

More than half of the overall respondents to BAI’s survey said that front-line employee turnover represented “a significant or moderately significant challenge to meeting customer-focused objectives.” Turnover was of even greater concern for the largest banks — eight out of 10 banks with $100 billion in assets or more considered turnover at least moderately significant compared to less than half of banks with less than $5 billion.

Keeping employees on board is tough enough, but getting them to sell is yet another hurdle to clear. According to a July 2004 poll of 75 financial firm executives conducted by Towers Perrin, nearly three-quarters (74%) of respondents agreed that cross-selling was either an “extremely” or “very” important strategic priority for the company. But only 52% noted that their cross-selling success met expectations.

Just how much of a role does compensation play in retaining good employees and encouraging them to sell? It can be a significant factor in both, bankers say. That’s why compensation is increasingly capturing senior management’s attention.

Base compensation was cited as the major driver of turnover at six out of 10 banks BAI surveyed. Here again, larger banks believe it’s even more of a factor.

When it comes to using the proper incentives to persuade their people to cross-sell, bankers are critical of the job they’re doing: Respondents to the BAI survey in general rated themselves between “poor” and “average.”

Don Delves, president of the Chicago-based compensation consultancy, the Delves Group, says that as more banks move toward “pay for performance” metrics, “they’re inclined to spend more time trying to get it right.” He sees rewarding appropriate incentives like “steering a car” — paying the right amount for the right behavior will steer a bank toward its goals, whereas making hard turns one way or another or going off in the wrong direction may end them up in a proverbial ditch.

BALANCING FIXED AND VARIABLE

The market pressures driving retail financial institutions to compete against more sales-oriented competitors, such as brokerage houses, are forcing banks to break new ground by extending sales rewards to a wider swath of employees — but the success of those plans is believed to vary widely. Experts say banks are “all over the board” in terms of how much incentive they offer, to whom and based on what parameters.

One sure thing: Variable pay is becoming a bigger piece of the compensation pie. “My sense is that more banks are moving toward the idea of having variable compensation at the front lines,” says Kathleen Khirallah, a senior analyst for TowerGroup’s retail banking, who is based in Los Angeles, Calif. “Some banks want to have as much as 20% of compensation coming from variable pay.”

For 2005, financial firms have on average set aside about 5.8% of their compensation budget for variable pay among their non-exempt salaried jobs — this is where teller positions and other types of non-commission-centric branch jobs would typically fit, according to the annual salary survey conducted by WorldatWork, a Scottsdale, Ariz.-based non-profit group focused on compensation. This puts financial services among the top of all industries.

Jobs in health care, social services and public administration, by comparison, have the lowest proportion of variable pay. These are also industries that tend to be hard to fill with qualified applicants. Doug Grieser, compensation manager for WorldatWork, says the move toward “a pay-for-performance environment” has been a growing trend in the last five years.

The fostering of a performance-driven sales mentality even among employees who are not primarily responsible for selling has definitely been a priority for banks in a highly competitive market. Many banks see their compensation plan as a means to differentiate themselves from their rivals. Many community banks, Delves points out, “go out of their way not to be overly sales-focused, not to put too much pay at risk because they want to emphasize relationships.” Meanwhile, he says, “at the other extreme, you have some of the more acquisitive regional banks, which tend to focus on... more short-term performance. They’re just wanting to generate that next transaction.”

Then there’s Union Bank of California, based in San Francisco. With $50 billion in assets and 250 branches throughout California, Angelelo says her bank is “a lot smaller than Wells Fargo and Bank of America... but bigger than most everyone else [in their retail market].” Having to fend off community bank rivals on one side and top-of-the-market titans on the other has pressed Union Bank to change its incentive plans to emphasize “a real sales focus at the branches,” especially over the last five years.

While the bank tries to keep its base salaries for branch employees in step with the market, Union Bank weights a fairly significant portion of compensation toward variable pay. At least 7% of compensation or more is available for platform people, with more paid on more cross-sales on more lucrative products. As much as 35% of branch manager compensation is variable, depending on the branch and the bank’s specific goals (sevice versus sales) in a particular market. Anglelo stresses that incentives cannot be handled in isolation — at Union Bank the incentive program goes hand in glove with “lots of coaching and sales training.”

“There’s definitely a link between compensation and sales,” says Angelelo, “You can drive behavior by the way incentives are designed.”

John Sapp, compensation and benefits manager for Winston-Salem, N.C.-based BB&T Corp., says that the fast growth of the retail bank — now the country’s ninth largest with just over $100 billion in assets — is propelled largely by appropriately providing proper incentives to employees throughout the front lines. The bank continually is broadening its line of products, and “each year we look at how we want to provide incentives and which [products] we want to incent the most.”

While more banks are paying more incentives, typically for more positions, than in years past, the intricacies of how those bonuses are calculated and when they’re paid is still largely a matter of experimentation. According to the most recent research from Towers Perrin, 63% of financial service companies reward cross-selling — with 24% offering incentives to all employees. While about half (49%) tack on incentives to existing compensation, another 13% make it just part of existing pay; another 38% do some combination of the two.

One of the most important, and often misdirected, issues in determining the variable component of compensation is making sure that incentives line up with corporate goals. Another issue as banks drive rewards-based pay down to more positions that aren’t traditionally sales-focused is making sure that employees aren’t distracted from their primary responsibilities.

Ron Burke, a principal in the sales force rewards program at Towers Perrin, says that many banks have “ended up with pay programs that are not aligned with [the employees’] roles... they’re asking people to sell things who didn’t sign on to be salespeople.” While giving tellers an “atta-boy” for referring customers back to the mortgage or investment products side of the bank can be a useful tool, Burke says “that job is more or less at least 90 percent of the time focused on keeping the line moving and keeping the drawer balanced.”

“You don’t want to scare away customers by turning your tellers into used car salesmen,” says Greg Wynne, director of product marketing for financial services at Callidus, a San Jose, Calif. developer of compensation tools used by Wachovia Corp., Washington Mutual Inc., and U.S. Bancorp.

Angelelo says that “if you put too much focus on sales and not customer retention, you can be bringing people in the front door and driving them out the back.”

While uncapping incentives and rewards has helped to boost business for banks like Washington Mutual, experts urge caution. Darryl Demos, CEO of Demos Solutions, says banks need to be careful about putting too much emphasis —and too many dollars — behind incentives.

Bankers, he says, need to ask themselves “am I paying out too much for just order-taking... am I possibly paying out more in variable compensation than the market would demand?” By focusing too much on paying for transactions, banks can end up in a situation where sales are up, but revenue is not. Instead, Demos says, banks need to focus on net deposit dollar gain, which is “a tougher metric to move.”

On the other hand, Kyle Waters, executive vice president and chief consumer and business banking officer for Hibernia National Bank of New Orleans, La., says while “our tellers spend most of their time on good service,” the bank’s sales-oriented culture encourages everyone including tellers to think about selling. This is particularly true in Texas where the bank is looking to expand.

Waters says Hibernia tends to peg its employees’ base salaries “just a little bit under the market” but is more generous on the incentive side. “We want someone who’s a little more hungry,” even in the teller positions,Waters says,“as opposed to someone who’s just looking for a paycheck.”

Khirallah of TowerGroup says a growing trend is to tie performance-based incentives to team-based goals rather than individual performance alone. This takes the focus off hard selling and helps managers cultivate a stronger staff as a whole, rather than one or two top-performing stars. In general, he says that most companies tend not to exceed a 10% variable/90% fixed mix for positions that are not primarily keyed into selling.

STREAMLINING THE INCENTIVES

The prevailing attitude today favors streamlining the compensation process. For some bankers, this means rewarding more substantive incentives for a handful of lucrative or new products, rather than giving a little “spiff” for a wider range of cross-sells, which could confuse employees. Other bankers concede that their compensation matrix is complex, but believe that they have used software tools and clearer language to manage and communicate it to their staff.

Burke of Towers Perrin urges banks to stay focused on “a limited number of products. You can’t put 15 different things in the incentive bucket and expect it all to work... it’s better to allocate more weight to a relatively small number of measures.”

Demos says U.S. Bank has succeeded by simplifying. The bank set a reasonably low number of referrals that each teller was required to make every quarter — around 17 — and with every referral that resulted in a new transaction beyond that number, the teller got a bonus.

“You have to keep it simple,” Angelelo agrees. “If it’s too complicated, you might discourage people from selling.”

Another sure-fire way to strengthen the value of incentives, experts say, is just to pay them out more often. Rather than a yearly bonus for non-commission employees, many banks are paying out incentives on a regular, more frequent basis in order to keep that motivation front and center in the employee’s mind and in their check. Depending on the job, BB&T pays out its bonuses and commissions on a monthly or quarterly basis, according to Sapp.

Finally, and perhaps most important, it’s vital to make sure that incentive plans line up with the bank’s objectives— and that compensation analysts and business executives revisit them annually or even quarterly to ensure they’re actually working.

“Our experience with sales incentives has found that incentives that are linked to specific, quantifiable goals or quotas are far more effective at motivating behavior and driving results,” Burke of Towers Perrin said in a release about the company’s survey. “This observation was supported by survey respondents — those with cross-selling goals were substantially more satisfied that their cross-selling incentives were aligned with their strategy and driving the desired results.”

As compensation gets tied more directly to performance, and to the bank’s overall strategy, human resources takes on a more collaborative role in working with the various business lines to create compensation plans that match up with the goals of the individual units, and the bank oveall. “HR has become more of the business partner” with line managers, reports Delves.

BEYOND THE MONEY

Ultimately, experts say, incentives go only so far toward keeping good front-line people at the bank and making them want to sell. It’s vital to combine a solid compensation plan with good benefits — especially in this time of rising health care costs — and regular training and coaching to educate employees about the product lines. Providing a clear career path, especially beyond the relatively low-paying entry-level teller position, is absolutely necessary to give star players a reason to stick around.

Angelelo recalls that when Union Bank had an issue with its peak-time tellers turning over at a high rate, the bank realized that much of the problem was not solely about compensation. The problem: They were part-timers who did not qualify for benefits. As a result, the bank cut back on its use of those part-time tellers and began offering benefits so that turnover rapidly dropped to 30% among that population.

As Khirallah points out, it can often be the simple non-financial rewards a bank offers — a better quality of work environment, better products that employees truly want to sell, the ability to take ownership of a segment of their work space — that, in combination with incentives, keep employees motivated.

More than just money, she says, “there are intangibles that really can make life interesting for people on the front lines.”

Ms. Hoffman is a freelance writer based in Poulsbo, Wash.

Copyright © 2005 by Banking Strategies, published by BAI.

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