Variable Pay Programs That Work
Cornerstone Credit Union League
Austin, TX
April 10, 2015
By
Brett Christensen, Owner
CU Lending Advice, LLC
[email protected]
www.culendingadvice.com
800-219-9733
Important Disclaimers
Brett has no ___________________________ on this
subject.
I do not believe there is a _____________ variable pay
program. Every program will have pros and cons.
We are all adults with varying opinions. There are many ways
to design variable pay programs, so we can certainly
____________________________.
It is hard to win a debate with the guy that has the
________________.
There is tremendous value in keeping your variable pay plans
______________.
2
Food-for-Thought Questions for Your
Current Variable Pay Plans
1.
In one word, what is the overall financial objective for senior
management?
2.
And what is the fastest way to achieve this objective?
3.
What good is loan growth if it doesn’t increase your ROA?
4.
How can senior management get paid on loan growth and not
have your delinquency and loss ratios included in your bonus?
5.
What impact do employees below the senior management level
really have on your big-picture financial ratios like ROA, net
worth, operational expense ratio, etc.?
6.
What two things do you need from your middle management
team?
7.
Is your job in management to be fair to all Member Service
Reps or is your job in management to get results?
8.
Why do you care if an auto refinance is a result of the
member asking for it or the employee cross-selling it?
3
Lessons I Have Learned From 23
Years of Working with Credit Unions
1.
Most employees working at credit unions that are asked to sell
are not great at it and many prefer the service work.
2.
Salespeople are motivated financially.
3.
Motivated salespeople can achieve phenomenal results.
4.
The business world knows that salespeople are compensated very
different than non-sales positions.
5.
Successful salespeople can make great money.
6.
A salesperson’s base pay does not need to increase every year.
7.
A large amount of variable pay should correspond to impressive
production numbers.
8.
All employees at a credit union do not need to be on a variable
pay plan.
9.
In order to be effective, your variable pay plan must be simple,
meaningful and obtainable.
4
Two Basic Approaches To Employee
Compensation at Credit Unions
Philosophy #1:
“It is hard to find good, cheap help!”
• I’ve seen great employees leave a credit union for 25¢ to $1.00
more per-hour down the street.
• If wages are below competitor averages, turnover will be higher
than the industry average.
• Average or below average salaries will result in the most
talented employees at the credit union looking for jobs
elsewhere.
• An undeniable truth of HR management – “You get what you pay
for.”
Philosophy #2:
“Fewer, more competent, more
highly paid employees.”
• I have seen one outstanding employee easily do the work of two
or three average employees.
• Higher employee morale.
• Reduced turnover.
• Above-market wages allow the credit union to hire and retain
talent instead of losing talent.
• The last time I checked, nobody in the organization is earning
stock for their hard work.
5
A Matter of Perspective & Timing
Non-Management Employees:
• I suggest that you pay these employees monthly. Variable
pay should be earned for improving the performance of
their day-to-day jobs.
Middle Management:
• I suggest that you half of their variable pay be tied to the
same financial metrics as the senior management bonus plan
and pay them this bonus money annually.
• I suggest the other half of their variable pay be a
percentage of their employees’ incentive pay and that you
pay them this bonus quarterly.
Senior Management:
• I suggest that you pay senior management annually according
to several of the most important financial metrics of the
credit union.
6
Mistakes to Avoid
• Paying all employees an annual bonus paid on the overall,
big-picture financial numbers.
• Designing a plan that has very low payout potential.
• Implementing a group incentive plan when there are
non-performers on the team.
• Using a point system to make the plan more complicated
than it needs to be.
• Adding a rich incentive plan on top of an already
healthy base pay.
• Combining variable pay with underwriting authority.
• Paying front-line employees quarterly or annually.
• Deciding that a variable pay plan is more trouble than it
is worth and cancelling the program.
7
Sales Jobs at a Credit Union
1.
New Accounts
2. Deposit Acquisition
3. Consumer Loan Origination
4. Mortgage Loan Origination
5. Member Business Loan Origination
6. Collections
7. Business Development
8. Outbound Sales Calls
The employees working in these positions should be on a low
base pay + significant variable pay potential compensation
plan to motivate and reward them.
8
$200 Million Credit Union
In the Southeast
Three dedicated sales reps on a low base pay + high
commission compensation plan:
Name
Funded Consumer
Loans – Feb 2014
GAP
Sales
Monthly
Commission
Good
$900,000
29
$2,400
Better
$1.9 million
60
$4,700
Best
$3.0 million
143
$
Total:
$5.8 million
232
“We started offering extended warranties in mid-April
and in May our three sales reps sold 121. And notably,
Best sold ____!!”
- CEO
9
How to End the Whining About
Aggressive Incentive Pay
For Dedicated Sales Positions:
• Low & Equal Base Pay
• No Increases in Base Pay at the Annual Review
• A No-Cap Variable Pay Incentive Program
Or, as my good friend Michelle recently told me,
“__ ___ _____ __ ____!”
In All Other Departments:
• Base Pays According to the Position’s Market Range
• Annual Increases at Annual Review Time Based on Job
Performance
• Minimal Variable Pay
10
Proposed Bonus Plan For Senior Management
January 1, 2016
Maximum Bonus Potential
50% of Annual Salary
25% of Annual Salary
10% of Annual Salary
CEO:
VPs:
Middle Managers:
Bonus
Weight
Goal
1.
ROA
Required
Ratio For
50% Payout
Required
Ratio For
75% Payout
Required
Ratio For
100% Payout
30%
1.00%
1.20%
1.40%
2. Net Worth
20%
10.5%
11.00%
11.50%
3. Loan Growth
15%
4.0%
6.0%
8.0%
4. Misery Index
15%
1.60%
1.40%
1.20%
3.40%
3.20%
3.00%
5. Operational Exp. 20%
To Avg. Assets
Notes:
1. The Misery Index is calculated by adding together the 60-day delinquency ratio and the net
charge-off ratio.
2. Financial ratios that come in worse than the 50% payout level will earn zero towards the yearend senior management bonus.
3. Financial ratios that come in better than the 100% payout level will still be paid out at the 100%
level (i.e. it is the maximum).
4. Ratios that fall in between the above payout levels will be rounded up to the next higher payout
level.
5. Every effort will be made to pay management by February 1st of the New Year for their
accomplishments of the prior year.
6. In order to receive this end-of-year bonus, the senior manager must be employed for at least
nine months of the year and they must be employed on December 31st of the bonus year.
11
A Word of Advice…
“Share your profits with all of your associates
(employees) and treat them as partners. In turn, they will
treat you as a partner and together you will all perform
beyond your wildest expectations.”
Sam Walton
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