Building Balanced Incentive Scorecards

By Christie Summervill, CEO

www.balancedcomp.com

Who is BalancedComp?

• Expert Compensation Consulting and Cloud- based Automated Systems

• Exclusively for financial institutions

• As educators, advocates, and trusted advisors with advanced technology tools that support [clients], we collaborate to determine the company’s compensation philosophy and develop a practical process to audit against that standard.

Today’s Agenda

• The Rules of Motivation • Strategy Drives the Total Rewards Proposition • The Competition • Developing Performance Objectives • Developing Levels of Achievement and

Corresponding Payouts • CEO Scorecard • VP of Lending • Commercial Loan Officer

The Correct Pay Mix One doesn’t replace the other

– Base Pay • Competitive to the Market • Wage Compression • Hybrid Jobs • Hyperinflation of Titles • Salary Administration Structure

– Variable Pay • Short-term Incentives • Should everyone participate? • Let’s kill “fair”!

– Benefits

Salary Administration

Guidelines

• Philosophy must be clearly communicated • Set expectations that it will change

• The framework for the decision-making should be clarified:

• The surveys to be used • Use of a consultant

• To whom the consultant reports • Guidelines for selection • No conflict of interest

• Peer group definition • Goals of the compensation program • Risks and how they will be mitigated • Email me for a free draft policy. Christie@balancedcomp.com

Motivational Theory: Expectancy X

Instrumentality X Valence • Expectancy says specific behaviors, positive and

negative are selected based on the expected results. The belief that I am able to complete the actions. (My capability?)

• Instrumentality or Causality: The belief that if I complete certain actions then I will achieve the outcome. (Clear Path, Line of Sight)

• Valence: The value of the perceived outcome (What's in it for me?)

• Goal of Incentives: Motivate people to do something by showing them something desirable, indicating how straightforward it is to get it, and then supporting their self-belief that they can get there.

Pop Quiz: Which Part Of

Motivational Theory Is Violated: A. The ee doesn’t know how much of an incentive is on

the table? (Discretionary, end of year )

B. The ee doesn’t know what levels of performance must be accomplished in order to achieve a certain level of goal? (everyone in that job classification receives the same amount)

C. Their base or incentive pay levels are lower than peer?

D. It was decided to invest in a merger, which lowered capital and ROA and with it, destroyed the company incentive plan?

E. Completely based on corporate goals.

Remember the Rules of

Multiplication? If any part of a problem is a 0, the answer is 0.

Example: 3 x 2 x 0 = 0 0 X 3 X 2 = 0

Application: E X I X 0 = 0 0 X I X V = 0 E X 0 X V = 0

All three pieces have to be present for the plan to be motivational

Imagine Three Credit Unions • Community Chartered: To become a primary financial

institution in the market. Highly sales oriented.

• Service Oriented: Credit Union Self-described as Member & Employee Centric

• Community Development Financial Institution: To build wealth and create economic opportunity for underserved people and communities. Write grants to get funds to support start up businesses

Components of Incentive Planning?

Culture Philosophy History of

Compensation Practice

Market Trends

Ability to Pay

Goals and Weightings and Hurdles, Oh My!

Individual goals

• Corporate? • Department? Team goals

• Demonstrates priority and responsibility Goal Category weightings

• What level has to be hit for goal to kick in? Hurdles

• What goal has to be hit for the plan to begin paying out? Thresholds

• How far above market do you want incentives to have the opportunity to pay out?

Incentive award scale

CEO Incentive Scorecard Perf Level 1 2 3 4 5 6 7

Wt. % 100% -66% -33% 0% 33% 66% 100%

ROA 20 .37 .42 .47 .52 .57 .62 .67

Loan Growth 25 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

Del/Charge off ratio

10 1.45% 1.30% 1.15% 1.0% .85% .75% .60%

Capital Ratio 15 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5%

Net Membership Growth

10 400 600 800 1000 1200 1400 1600

Board Eval 20 1.5% 2.0 2.5 3.0 3.5 4.0 4.5

CEO Incentive Scorecard Wt. % Perf

Level Resulting

Achievement

ROA 20% 4 0% 0%

Loan Growth 25% 5 33% 8.25%

Del/Charge off ratio

10% 3 -50% -5.00%

Capital Ratio 15% 4 0% 0%

Net Membership Growth

10% 6 66% 6.60%

Board Eval 20% 7 100% 20.00%

29.85%

CEO Incentive Scorecard Current Salary

X Target Incentive

Potential Incentive

Achievement Level

Payout Amount

250,000.00 20% $50,000.00 29.85% $14927.50

How much was left on the table

$37000.00- $14927.50

= $22072.50

How much did the

delinquency goal cost?

5% * 37000.00 = $1850.00

Was the E X I X V?

Absolutely

HR’s Role? Critical

VP of Lending Incentive Scorecard Perf Level 1 2 3 4 5 6 7

Wt. % 100% -66% -33% 0% 33% 66% 100%

ROA 15 .37 .42 .47 .52 .57 .62 .67

Loan Growth 30 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

Del/Charge off ratio

20 1.45% 1.30% 1.15% 1.0% .85% .75% .60%

Mystery Shopper Score/ Internal Survey/ EE Survey

15 75% 79% 81% 85% 89% 93% 97%

Net Membership Growth

10 400 600 800 1000 1200 1400 1600

Performance Review

10 1.5% 2.0 2.5 3.0 3.5 4.0 4.5

VP of Lending Incentive Scorecard

Wt. % Perf Level

Resulting Achievement

ROA 15% 4 0% 0%

Loan Growth 35% 5 33% 11.55%

Del/Charge off ratio

15% 3 -50% -6.5%

Survey 15% 6 66% 9.99%

Net Membership Growth

10% 6 66% 6.60%

Performance Review

10% 5 33% 3.33%

24.97%

VP of Lending Incentive Scorecard Current Salary

X Target Incentive

Potential Incentive

Achievement Level

Payout Amount

175,000.00 15% $26250.00 24.97% $6554.63

How much was left on the table

$26250.00- $6554.63 = $19695.38

How much did the

delinquency goal cost?

6.50% * 37000.00 = $1706.25

Was the E X I X V?

Absolutely

How important

would HR be in helping

them achieve their goals?

Critical.

Trends in Business Loans

• 12.25% Cap

• $40B in annual Member Business Loans - June 2012 NCUA

• Average $223,000 business loan. Too small for many banks.

• Allows credit unions to diversify from fixed rate mortgages and long term investments. Giving them the ability to manage interest rate risk more prudently.

• These loans are a win for the credit union, to the community and to the member.

Business Loans at Credit Unions

In Millions Dec 2010 $37,181 Dec 2011 $39,129 March 2012 $39,715 June 2012 $40,175

Business Loan Officer vs. CLO

• The CLO typically has 2 – 5 years of prior Credit

Analyst experience.

• Banks have Credit Analyst doing the analysis. Keep the CLO out in the field.

• Banks typically have an experienced Commercial Loan Processor.

• The VP of Lending at a typical CU may not have this expertise and may not be the recipient of the incentive pay.

• NOT a Business Development Rep on Steroids.

Business Loan Officer vs. CLO

• Smaller Loans

• Less Complex

• Less Loan Authority

• Limit on size of Business Portfolio

• Work/Life Balance

BK Base & Incentive Pay for Commercial Lending Officer II

Asset Size Salary Incentive % Incentive

$50M - $100M NA NA NA

$100 - $299M $105,000 $7.6K – $11.6K 9.10%

$300M - $499M $94,500 $12.2K - $15K 14.20%

$500M - $699M $96,000 $12.5K – $16K 14.50%

$700M - $999M $97,500 $13.2K - $16.7K 15.33%

$1B - $2.9B $96,500 $13.2K - $16.7K 15.50%

Commercial Loan Officer Incentive Scorecard Perf Level 1 2 3 4 5 6 7

Wt. % 100% -66% -33% 0% 33% 66% 100%

ROA 5 .37 .42 .47 .52 .57 .62 .67

Loan Portfolio

30 $6.5M $7.0M $7.5M $8M $8.5M $9.5M $10M

Del/Charge off ratio on portfolio

15 1.45% 1.30% 1.15% 1.0% .85% .75% .60%

Avg. Referrals per month

15 < 1 <2 3 4 5 6 7

Interest Bearing Accounts

15 $4.0M $5.0M $5.5M $6M $6.5M $7.0M $6.5M

Performance Review

20 1.5% 2.0 2.5 3.0 3.5 4.0 4.5

VP of Lending Incentive Scorecard

Wt. % Perf Level

Resulting Achievement

ROA 5% 4 0% 0%

Loan Portfolio 30% 5 33% 9.99%

Del/Charge off ratio on portfolio

15% 6 66% 9.90%

Avg. Referrals per month

15% 5 33% 4.95%

Interest Bearing Accounts

15% 2 -66% -9.90%

Performance Review

20% 6 66% 13.20%

28.14%

VP of Lending Incentive Scorecard Current Salary

X Target Incentive

Potential Incentive

Achievement Level

Payout Amount

$97000.00 15% $14550 28.14% $4094.37

How much was left on the table

$14550.00- $4094.37= $10455.63

How much did the

deposit acct goal cost?

9.90% * 14550 = $1440.45

Was the E X I X V?

Absolutely

How important would HR

be in helping the CU achieve their goals?

Critical

Christie Summervill, CEO BalancedComp, LLC

We exist to help financial institutions develop a pay for performance process as a competitive advantage.

316-927-2668 Christie@balancedcomp.com