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Picking The Right Incentives
BY DAVID CICHELLI
Incentive compensation programs for frontline personnel should align with three unique company factors: customer vision, coverage model and workforce philosophy.
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When designing their employee incentive programs, companies often try to do too much. Using several different pay models to reward a laundry list of behaviors creates confusion. A consultant from the Alexander Group advises banks to define their customer vision, coverage model and workforce philosophy before selecting an incentive plan. While all incentive plans can be effective, proper context is critical.
The need to properly incent frontline employees is well understood in the banking industry. No matter how robust the institution’s technology infrastructure and Web interface, somewhere along the way one or more bank employees will be instrumental in shaping a customer’s perception of the institution. These contact points — typically in the branch or call center — provide opportunity to meet a need, sell a product or solve a problem.
If performed well, this interaction can translate into customer retention and cross-sells. But if performed poorly, it can harm customer relationships and encourage attrition. For that reason, institutions have devoted a lot of thought to rewarding the right actions and outcomes.
Unfortunately, judging from current practice in the industry, a good idea has gotten out of control. The complexity and diversity of incentive plans are often overwhelming. Each plan has its own bells, whistles and foghorns. Contributing to this din are vendors promoting expensive solutions, middle managers defending their practices and fads du jour crowding-out critical thinking. It’s time to get back to basics.
For an incentive plan to be effective, it must have alignment, or agreement, with three company-defined factors: customer vision, coverage model and workforce philosophy. A customer vision defines how the bank segments its customers. A coverage model specifies the structure of the bank’s field organization. And workforce philosophy articulates management’s view on how to manage employee efforts. Each of these three factors has a directional influence on which type of incentive arrangement to use.
Reduce Complexity
“Let’s reward the right behaviors”is an honest starting point for selecting an effective incentive compensation plan. This simple idea has the benefit of clarity: reward employees for accomplishing the right goals. In other words, ensure that frontline employee actions are in alignment with your customer contact objectives. To accomplish this, the formula is easy: Define the objectives, tie pay to accomplishing those objectives and, voila, you have the ingredients for success: performance aligned with objectives rewarded by incentive payments for success.
The theory is great but the execution often falls short because institutions struggle to get alignment among the “three masters” of incentive compensation. The result is failed incentive plans, which typically suffer from being too complex, illogical and difficult to administer. Consider this hypothetical example.
Roger, the newly appointed head of retail performance management for a large regional bank, has recently completed an inventory of programs designed to improve branch front-line performance. In addition to training initiatives, recruiting models and new technologies, the list includes a mystery shopper program, net promoter index, operations scorecard, a referral bonus program, branch team awards, a personal development program, new account initiative and endless promotional contests. Waiting in the wings are a whole slew of great ideas including a cross-sell outreach program, a customer life-cycle management model and an employee engagement survey coupled with an off-site managers’ boot-camp.
As part of his program inventory efforts, Roger interviews a cross section of branch managers, one of whom observes: “We just run the plays they send in from the side-lines. They don’t make much sense and often get in the way of each other but what choice do we have?” Roger takes heed and entitles his report, “Retail Productivity Improvement: Death by 1000 Programs.”
But there is a solution to the problem: put a moratorium on all new programs and re-confirm the strategic focus of the branch system. Then place all field programs under a “sunset” clause that requires re-approval within the context of the bank’s new stream-lined market charter. The intent is to reduce the number, confusion, and complexity of all of these field initiatives.
Another example comes from Victoria, the vice president for a bank’s incentive compensation program. This large bank has many business units with unique customer sets and products. Each business unit has its own independent sales leadership, sales operations specialists and Human Resources function. The development of incentive plans is currently a local business unit’s responsibility.
However, internal audit has conducted a review of all the bank’s incentive plans and has found there are over 310 unique cash incentive plans, some paying excessively high amounts, some too complex to understand, others requiring substantial administrative support and a small number creating legal issues for the bank. Victoria’s boss directs her to “clean-up this incentive plan mess” as Victoria thinks, “Easier said than done.”
Each business unit has a distinct set of customer contact jobs. The mortgage group’s jobs differ substantially from the securities unit’s jobs and both differ again from the retail bank’s jobs. Each business unit has carefully developed its incentive plans to meet its own needs. How can one approach fix all these issues?
Victoria concludes the problem is not the sheer number of incentive plans, but rather their degree of effectiveness. Her solution is to form a committee of business unit specialists to create an incentive compensation “design guide” for use by local management. This guide specifies the application of bank incentive compensation policies such as target compensation (60th percentile of the market), degree of risk in pay plays (determined by degree of persuasion in the job), number of performance measures (no more than three) and many other “design criteria,” such as formula type use, sales crediting, quotas, measurement and pay periods and assessment.
To get the ball rolling, Victoria provides an annual training session for all design stakeholders. Now, internal audit’s new incentive compensation evaluation criteria center on adoption of the bank’s incentive compensation policies. The lesson: sales leaders need to work within a corporate policy framework.
As these examples attest, complexity and confusion is rampant in the current environment for incentive and compensation plans. But there is a way out of the logjam, which is to focus plans around three elements: customer vision, coverage model and workforce complexity.
Customer Vision
When it comes to customer vision, three different views about customers will dramatically alter a bank’s use of incentives. Does the bank view its customers as a series of opportunities, members of a segment or as customers for life? These different customer visions will affect which incentive plans will work and which will not.
The first view sees customers as a series of contact opportunities. Each contact offers a fresh opportunity to solve a customer’s issue or sell products. At-risk sales incentives are ideally suited for this type of strategy (“A Primer on Incentives”).
The second view sees customers as members of segments that have similar needs. A combination of products and marketing efforts will trigger customer contact inquiries that provide opportunities to promote segment-specific package solutions. Add-on incentive plans measuring close rates and cross-sell work best for this customer approach.
And when a bank sees its customers as lifelong clients, contact programs cater to customers as they move through life-defining stages. Under this view, customer life-cycle management is anticipatory, personal and continuous. 2x Cap plans can reward customer managers for growth of assets under management and life-cycle portfolio relationships.
Incentive plans need to be tailored to ensure alignment between the relevant vision and customer contact behaviors. The simple rule: first pick your customer vision and then select your incentive plan.
A hypothetical example would be Hannah, a senior vice president of member services mulling over her credit union’s purchase of the “Incentivisor,” a front-line Web-based selling tool. The CEO is sold on the idea, but Hannah is not so sure. The idea that the front-line personnel would pitch products to customers based on incented pop-up cross-sell messages “does not seem like the type of approach we want to take with our customers,” she thinks. Those customers usually come in looking for a specific product such as a loan, certificate of deposit or savings account. Hannah’s customer service representatives (CSRs) have also been complaining that customers don’t appreciate being “sold” at the teller window.
However, Hannah’s challenge remains: how to increase members’ use of the credit union’s growing list of products and services. She concludes that the issue is not selling per se; it’s customer education. “Customers just don’t know what we have to offer” she muses. Instead of turning her CSRs into sales agents, she decides to extend their service “footprint.” Now, the customer profile tracks if the customer has been asked, accepted or rejected a “desk-side conversation.” CSRs are trained to ask customers if they would like such an interview. If the answer is yes, the CSR refers the customer to the financial service representative (FSR) for scheduling purposes and the FSR follows up. The CSR gets a modest referral incentive for each documented meeting.
Coverage Model
A coverage model specifies the structure of the bank’s configuration of employee roles and duties. These choices dramatically shape job definitions and performance metrics. There are three types of coverage models: branch, banker and buyer.
The branch model employs classic job types, including customer service/teller personnel, platform sellers and product specialists. Each role is ideally suited for optimizing customer contact opportunities. Job-specific incentive plans are best suited for this type of role specialization.
The banker model provides focused resources within a branch: premier banker, financial advisor, specialists and consumer banker. Incentive plans reward for segment progress on assets, fees, service and retention.
And the buyer model normally creates dedicated locations for consumers, high-net-worth individuals and business banking. Both high-net-worth and business banking is normally by appointment only. Each buyer model team gets its own incentive compensation program.
Coverage models provide the definition of job types. Define the jobs, and then select the incentive plans.
Workforce Philosophy
Often overlooked, a management team’s workforce philosophy has a major impact on the selection of incentive plans. Select the right incentive plan to support these beliefs about how to best manage employees. In terms of workforce philosophy, there are eight prevalent models:
1 The Results Model rewards individuals for the accomplishment of established goals. Little emphasis is placed on means and methods; results define success. This is the most common management model and is the basis for most merit, sales incentive and management incentive plans. Sales plans in this realm feature a 3x Un-Cap model.
2 The Agent Model creates a partnership with income producers, such as mortgage originators, to share the results. Use this model to manage customer contact professionals who have portable clientele. Full commission plans are used to reward these income producers.
3 The Customer-centric Model builds a strong culture around meeting and serving customer needs. Rewards are linked to customer service, loyalty or referral measures. Use add-on plans to reward customer service incentives at the group level.
4 The Institutional Pride Model indoctrinates employees into the proud history of the company and its founders’ credo. The focus is on loyalty, shared beliefs and culture-driven management. Pay programs and promotions reward institution-compatible contributions and longevity. Gain-sharing plans should be employed for this management model.
5 The Execution Excellence Model measures and rewards inputs. “Get the details right and the big stuff will take care of itself” sums up this approach. Often tied to work-group performance, add-on scorecard plans provide an excellent method to reward execution excellence. Six Sigma proponents and operations effectiveness professionals provide the necessary measurement standards to reward pre-scribed actions. Add-on plans should be used for work groups or individuals in this management model.
6 The Team Imperative Model taps into the power of group management. Work groups, collaborative decision-making and collective evaluation such as 360 feedback form the basis of team management in this model. Add-on team incentive plans for achieving results or complying with prescribed standards can be used for rewards.
7 The Shareholder Value Creation Model seeks to align employees’ actions with the interests of shareholders. Balance sheet management — keeping employees informed of how their actions affect shareholders — provides the basis of performance management under this model. Pay is tied to shareholder value creation using a 2x Cap plan.
8 The Celebrated Workforce Model strives to create an employee-centric work environment. Generous pay and benefits are the hallmarks of this approach, with liberal lifestyle programs to support employee engagement. Use having “fun” with high “engagement” as key indicators of success. Gain-sharing plans support this type of work environment. As an example of workforce philosophy in action, consider Robert, head of the trust department of a New York-based bank that has recently been acquired by a consumer-focused bank in the Midwest. Robert is asked to explain the high pay levels of his trust advisors to his new corporate parent. “Well,” Robert begins, “these are big hitters who have contacts with families of substantial wealth. Each of our advisors has had a career serving this market either as a lawyer, accountant, or securities broker.”
Robert can see his explanation falling flat. The acquiring bank is known for its “One Family — Great Experience” model, which uses mass-reach marketing to drive opportunities into the branch. The acquiring bank plans to bring this “system” to all units in the acquired bank, including the trust department — and doesn’t use commission plans.
Overcoming his reservations, Robert recognizes that the acquiring bank may have a good idea for mass-marketing trust services. So he divides the trust function into two channels: high-touch and mass-reach. Each channel is distinct from the other with different branding, collateral, sales and service support. Robert obtains approval to continue with the full commission model for the “high-touch” channel but will use a bonus formula for the mass-reach market.
The lesson Robert learns is that no workforce philosophy model is necessarily wrong or right. The appropriate strategy is to pick one philosophy and use incentives compatible with that philosophy.
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