Incentive Compensation Needed More Than Ever
To be clear, I am not talking about discretionary bonus pay. That is money wasted by managers who do not know what to expect of their business or their employees. I am talking about a promise to pay a specific amount for a specific outcome, and the promise is made in advance of the performance period. You know, the kind of incentive you used with your kids, or your parents used with you. “Son, please give up the girl, sell the motorcycle, go back to school…..” Sometimes an incentive can be a stick, but often a carrot is more effective.
When the economy and the effects of the bursting of the latest bubble are threatening your company, management teams need focus, and properly designed incentives create focus. It’s not that good people need to be bribed. Rather, when an incentive is properly designed it communicates a powerful message of what is expected from employees. It focuses the team on exactly what you need. Let’s face it, there is little less effective than a talented group of people all pulling in opposing directions. When times get tough, the tough get going….but you better make sure they are going in the right direction.
One bank CEO told me recently, “I need the Incentive Plan now more than ever,” as he strategized how to reduce loan losses, raise capital and improve liquidity. This team has a new set of metrics based on that strategy and a significant upside opportunity if they achieve the turnaround. The shareholders and management team will win or lose together and there is no question what it will be worth.
It is true that incentive pay, if large enough to create the focus that is needed, can be dangerous. You will get what you pay for, so you better make sure you want it. I have seen companies driven over cliffs with poorly designed incentives. In financial services, care must be taken to incent asset quality, risk management, controlled liquidity and interest sensitivity risk…..not just growth.
As the economy stumbles along through a slow recovery, unusual opportunities will become available. Will your team be ready and focused?
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