The Effect of Recent News on Bank Incentive Pay Plans

By now, you have heard the news of the employees of a large bank fraudulently opening millions of accounts and thousands of credit cards without customer’s consent. Thousands of employees have been terminated and the CEO is leaving the organization.

Here at HR Your Way, our expertise in Compensation Plan Design and Analysis gives us a unique perspective on this situation. There are several HR issues at play here – the incentive plan design, the plan administration and management, and the corporate culture.

As designed, the incentive plan seems to have driven the desired behavior – opening new accounts with existing customers. However, the plan likely should have had some safeguards built in, such as having the compensation not be paid until the account had been open for a specified amount of time and/or a “claw-back” provision. A claw back/charge back policy is one which takes back the commission paid if a client cancels within a certain timeframe or is considered to be a “no-start”. As you can see, the design of the plan needs to not only take into account motivating the desired behavior, but also ensuring that the behavior leads to the proper type of business for the company.

Clearly, the administration and management of the Bank’s plan was lacking oversight and internal controls. Too often, incentive plans are designed with the revenue goals in mind, while the mechanics of the administration and management of the plan are an afterthought. This can easily lead to the situation in which the Bank finds itself. Included in a holistic compensation plan design (especially an incentive plan) are the details of how the results will be tracked and how/when compensation will be paid. And, of course, oversight needs to be a part of this as well, especially in the financial services industry.

Finally, the impact of the culture of the organization must be taken into account during the plan design phase. The Bank at the center of this situation has long had a well known sales culture. While this is enviable if channeled in the right way, it can (and clearly did) lead to problems if employees feel extreme pressure to meet targets. What is apparent is that meeting goals was the top priority and led to no questions being asked as long as that top goal was being achieved. It is an easy trap to fall into if sales is the most important focus of the organization.

In the Bank’s case, since there was such a strong sales culture, all the more reason to ensure that both the design and administration of the plan needed to ensure that the right kind of business was being acquired. The effect of the situation in which this Bank finds itself is instructive for all financial institutions as new compensation plans are designed or as existing plans are reviewed periodically, as they should be.

If you need assistance with compensation plan design, review, analysis, market bench-marking, or administration, the HR professionals at HR Your Way have over 25 years of experience and have done a wide range of compensation projects for banks across the West.

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