Designing Compensation That Impacts Business Growth

In today’s strong economy and tight labor market, HR experts said it is more important than ever for credit unions to maintain a well-structured incentive program that may attract and retain talented employees, especially for those who sell loans.

However, other HR experts pointed out incentive programs work only in the short term, and what really motivates people is more complex – and should prompt leaders to simply ask employees what truly motivates them.

Judy Clark, founder and owner of HR Answers Inc. in Tigard, Ore., said the vast majority of sales professionals have never read a sales book, and never had sales training or any type of formal development of their sales skills.

“One of the things I think is true about financial institutions, as with many organizations, is they don’t really explain what [job] performance is, manage [job] performance, monitor it, or train and develop folks once they are in the job,” Clark said. “If you put in a really sophisticated, sleek incentive program, but you don’t teach your people how to win at that, and you don’t teach what constitutes good marketing and relationship development, then the incentive program will fail simply because people don’t know how to win with that program.”

A strong education and training initiative can go a long way to help loan officers improve their productivity. But financial institutions have also been focusing on incenting their employees to be mindful of the quality of loans, which essentially includes assessing the risks and the likelihood that it will be repaid.

One way to ensure employees are paying close attention to loan quality is to include a “clawback” provision in an incentive program, though Clark acknowledged not many credit unions use it at this time.

The clawback mechanism is triggered once a loan is placed into collections. When that occurs, the incentive that was paid to the loan officer is clawed back by the credit union.

Clark said this should compel loan officers to pay more attention to the creditworthiness of loan applicants and other factors before making important lending decisions that will inevitably affect the credit union.

“You don’t want somebody to suffer who has made 30 loans when they have established a lending relationship with 30 [members],” Clark said. “You just want them to be aware of the fact that if they are overselling and not thoroughly qualifying the credit history of somebody, they’re going to have that [incentive] money for a very short period of time.”

A clawback provision may also help reduce the risk of loan fraud.

One of the most common failings of incentives plans is when they are not monitored to ensure they do not create undesired results or poor sales practices, Paul Dorf, managing director of Compensation Resources in Upper Saddle River, N.J., said.

“Theoretically, compensation incentive programs shouldn’t have a cap, but you have to have some way of restricting the payouts they’re based on because people will go crazy and do things that are unethical or very dangerous, which we’ve seen in many cases,” Dorf said.

It’s also important to make sure your incentive program cannot be gamed.

“I think the Wells Fargo situation was something that people paid attention to and led them to take a close look at their own incentive program,” Clark said. “And one of the things we talk about with credit unions or any financial institution or organization that has an incentive plan is that you don’t have a good plan unless you’ve asked somebody on your staff to game it. How would they beat this incentive plan or get around it to make more money?”

Clark advised organizations to ask trusted staff members to find those vulnerabilities and take the appropriate steps to address them if any issues surface.

Credit unions may also want to include sunset provisions on specific incentives.

“It’s my recommendation that your incentives be tweaked or altered every 24 months because that takes away the sense of entitlement and [shows] employees [they] have to earn by doing something different than before, so that it doesn’t just become, ‘I can do what I usually do and I just get more money,’” Clark explained.

While organizations award bonuses, in Dorf’s experience he has found they are not as effective as well-structured incentive plans. Many of the smaller cooperatives seem to use bonuses in place of incentive plans, but he has found bonus payments seem to be based on the credit union’s hierarchy and how long people have been there rather than on what they have achieved.

“We’ve been working to move them slowly but surely to incentives, which say if you do X we’ll pay you Y,” he said. “We’re hoping more and more of them will buy into that concept.”

Clark also does not think recognition rewards such as “employee of the month” work very well because they can turn into a popularity contest that may turn off other high-performing employees.

Although money is the preferred incentive for the vast majority of staff members, Clark has found some employees do want other types of incentives such as more paid time off and all-expense paid trips that include spending money. If you offer a choice of incentives, employees have the ability to choose what’s personally meaningful to them, she said.

HR expert Dr. Craig Nathanson of Petaluma, Calif., who is also an educator, author, speaker and coach for mid-life adults, said he believes incentives can work, but only in the short term and for people who don’t really enjoy their work.

In fact, recent studies have only confirmed the findings from research conducted years ago that incentives in the workplace are counterproductive, according to Alfie Kohn, a social scientist who has written extensively about incentives and other rewards.

Nonetheless, many companies use incentive programs because they are easy to implement, measure and produce.

“Do this and you will be rewarded, or do that and you will be punished,” Nathanson said. “People are much more complex.”

In his view, the best way to ensure people are at their best at work is to align their abilities and interests. He advised organizations to make people development a higher priority than profit.

“When people feel like their lives mean something to those they work for, productivity will soar to all-time highs and, of course, will be followed by profit,” he said.

He also recommends companies give employees full autonomy in their work and encourage collaboration instead of competition.

In response to the question of what really motivates people in the workplace, Nathanson said, “This is a complex question and one that is unique and different for each person. The best way to understand another person’s motivation is to ask them: ‘What motivates you and why?’”

Managers should be open to listening to and enabling more of this at work for motivation to increase. But most importantly, there is a difference between motivating and enabling motivation. According to Nathanson, enabling motivation means teaching. Managers teach people how to motivate themselves and do meaningful work.

“Understanding this difference will enable people and organizations to thrive and work better together, which can only help the bottom line,” he said.