Bank Training International helps boost sales and differentiate your bank.

Focusing on the Products and Services That Drive Improved Results

Aligning The Bank’s Incentive Compensation Program

Too many incentive compensation programs reward the wrong activities, and in doing so, fail to maximize the profitability and longevity of each customer relationship. Well designed and executed incentive compensation programs keep staff focused on the business priorities and activities that drive bottom line results. Some important factors to consider when contemplating upgrading and aligning your incentive compensation programs are:

  • The expense of compensation and benefits represents about 50% of total non-interest expense. This percentage doesn’t vary much by asset size or peer group.
  • As a result, compensation and benefits expense represents half of the Bank’s efficiency ratio (efficiency ratio = non-interest expense as a % of net revenue).
  • Compensation and benefits expenses have been increasing faster than net revenue. In other words, a greater percentage of each net revenue dollar is being spent on compensation and benefits.
  • Incentive compensation (typically 3-6%) is the only portion of compensation and benefits expense that can be directly linked to the production of net revenue. Unfortunately, it’s typically linked to things that may or may not produce net revenue. These include loan production, new accounts, gross revenues, ROA, etc.

The Benefits of Upgrading Your Incentive Comp Programs

  • Net revenue is created by balancing growth (loans, deposits, non-interest income), pricing (interest rates, service fees), and quality (asset quality, service quality). Net earnings are created by productively generating more net revenue. Our program balances the tension among these four elements using a proprietary scorecard methodology.
  • The monthly reports turn data into strategic performance information. The performance information includes an assessment of current performance vs. expectations, an assessment of performance vs. budget, and the activities required to achieve higher levels of performance.
  • Armed with detailed performance information, employees are able to develop effective action plans to improve results (no more guessing or misguided intentions).
  • Incentive compensation is funded only when actual results exceed a base level of expectations.

As higher levels of performance are achieved, the amount of incentive compensation increases. However, the Bank’s compensation efficiency ratio improves (compensation expense as a percent of net revenue) since the incentive compensation is mathematically linked to gains in net revenue.

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