My position allows me the opportunity to interact with many different credit unions throughout multiple states. On several occasions, I have been asked my thoughts about how to structure a bonus or incentive plan for front-line staff and lenders. I also have been able to learn which bonus programs work well and which have characteristics that are absolute failures. It is valuable to identify those failures first in order to avoid those errors when creating a successful bonus program.
If you have a plan that totally changes every couple of months, you may end up with a bonus program failure. One bank where I worked would literally changed the entire program every quarter, yet they based bonuses on annual measurements. The program became a joke as none of the front line people took it seriously and it caused some to go to a place that was not so volatile in its decisions.
If you have a program that is more complicated than a Rube Goldberg machine, you may have a bonus program failure. I have seen CUs that have spent incredible amounts of HR time to track and manage bonus programs that are more complex than most Federal regulations. I have also seen management spend hours on end every month to explain to front line staff how their performance is or is not measuring up. If you cannot explain how your employee is performing compared to the program thresholds within 10 minutes, your program is too complex.
If you have a program based upon what everyone else in your market does, you may have a bonus program failure. Any bonus program needs to start with a definition of your sales culture, your institutions goals, and your CUs current position. The bank or CU down the street is different than you, so the plans should be different. One way this principal is handled correctly was at a bank I worked for that determined they needed more deposits to eliminate the higher cost of borrowing funds from the bank holding company. So, one year, they actually gave bonuses on increases in deposit accounts. One place it is not working is with an institution that desperately wants good loans to increase the yield over alternative investments. Yet, they have no program in place to reward good lenders.
If you have a plan based upon activity rather than real accomplishment, you may have a bonus program failure. Another program I took part in had a sales call threshold component. And, yet another one had a threshold of a certain number of loans, not dollar volume, but number. Neither of these are beneficial as they encourage behaviors to gain bonuses that may not be in the best interest of the CU. If you have to incent front line people to make calls when their position inherently requires them to do so, you have the wrong people. If you reward someone who makes twenty $10K loans for cars and avoid giving a bonus to the employee who does a single $1MM loan with a higher margin, there is a problem.
If you have a program where either the employer or employee thinks they are getting screwed, you may have a bonus program failure. If management thinks they are not getting more out of the employees’ accomplishments from the bonus program than they are paying out, that could be the sign of a problem. On the other hand, if you have high employee turnover due to the bonus program, and if you have an attitude of leaders of “how much more can we get out of them and not have to pay them,” you have a problem. Leaders who have that attitude and distrust for their people are manipulators. Any great accomplishments of their CU will be reached in spite of them, instead of because of them.
If you have a program for one department that is in opposition to the overall goals of the CUs or negative impacts another department, you may have a bonus program failure. One bank had a big push for treasury management services and decided to incent front line staff for setting up TM appointments. This resulted the TM department seeing a lot of people, with over 90% not being a good fit for their products. The additional work also prohibited TM from taking care of their existing customer base adequately.
If you have a program that the front line has figured out how to “game the system”, you may have a bonus program failure. One bank had a program to pay commission on sales of credit life and GAP coverage. The payment was made early after month end, while customers had a 60 day window to cancel coverage if they wanted and receive a full refund. Some front line people would add on the product to get the commission, only to have the customer cancel it after the commission was paid.
So if these are signs of problems, what factors are indications of successful programs? One CU started with defining their desired relationship-based sales culture, complete with goals of what they wanted to accomplish. They created a two tier bonus system with incentives split between individual and team performance. They took out any minimum thresholds on any categories which showed the employees, “If we win as an institution, we want you to win a little as well.” They reduced bonuses for poor loans and sloppy work.
The results? Staff turnover dropped down substantially. The CU also became one of the fastest growing institutions in the entire state. Members noticed the new attitude among the employees and encouraged their friends to join.
A good bonus program can help identify and reward the actions and results you want for your shop. Poor ones will lead a company to grind through employees, encourage strife between departments, and cause a company to preform beneath its potential. Where is your CU at?