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In a competitive financial marketplace, banks are turning to incentive compensation management (ICM) solutions for competitive advantage. While the value of motivating employees is indisputable, bankers increasingly recognize the value of going beyond improvised morale building tactics to deploying a structured incentive compensation system.
However, making the case to senior bank executives of the need to deploy a sales compensation management solution can be challenging. The following list—derived from Aite Group report Automating incentive plan management: Less Excel, higher productivity, better outcomes—offers a range of data-rich insights into some of the key incentive compensation issues facing banks, and the ways in which bankers are deploying sales performance management technologies to meet these challenges.
- Rules complexity
Incentive compensation plans can be complex—no doubt about it. Often they incorporate a range of variables, including revenue generated, types of products sold and seniority. And the more complex the incentive plan, the harder it can be to manage and execute, especially when a bank relies on Excel spreadsheets in doing so. For example, in some studies, as many as 88 percent of spreadsheets studied suffered from at least one error. Only imagine, then, the erosion of trust that could occur if your sales professionals detect errors that affect their compensation.
- Data distrust
Sales professionals are great go-getters, famed for their willingness to go the extra mile to achieve their desired outcome. Accordingly, when data distrust strikes, they take matters into their own hands, keeping track of their own compensation data. But when they do so, they risk killing the very productivity on which they rely. The more complex a plan is, the more likely employees are to maintain these productivity-draining shadow accounting systems, and the more compensation department productivity will be diverted to corrections and inquiries. As one compensation manager explains:
“Accuracy of payments and the underlying justifications is critical because participant plan distrust can be elastic. If there are even a few errors, your compensation team will get a disproportionate volume of inquiries and questions. These now consume a lot less of the compensation department’s time.”
To help prevent the onset of data distrust, banks should automate incentive compensation plans. For example, one plan manager for a large bank has described the benefits of IBM Incentive Compensation Management as follows:
“We estimate that before Cognos ICM, two-thirds of participants both maintained their own shadow compensation-tracking systems and dedicated about two to three hours to them per week. Because they can now access and check all the payment data in Cognos ICM’s participant-facing capabilities, shadow accounting and double checking is probably down to less than 30 minutes per pay period.”
- Plan proliferation and conflicts
Banks often struggle to manage a proliferation of incentive plans as different lines of business, products and other similar factors prompt creation of ever more incentive plans. Even regional banks may see dozens of individual compensation plans—and large tier-one banks may see hundreds.
“Although a given line of business may have a simple set of desired outcomes to build into a given plan, its bank’s culture, strategy, and regulatory demands can each add objectives that are complicating at best and conflicting at worst.”
- Regulatory mandates
Today, banks can find incentive compensation challenging amid the ever-increasing number of strict regulatory requirements. New regulations impacting employee compensation and incentives include the Federal Reserve Guidelines on Incentive Compensation and the Dodd–Frank Wall Street Reform and Consumer Protection Act. These regulations require that a bank designs its incentive plan to ensure that its compensation is not excessive, does not promote the sale to consumers of risky financial assets, and does not promote the booking of risky exposures onto the bank’s balance sheet. These regulations also require banks to govern, monitor, audit, and report on their incentive plans with a higher level of detail than ever before.
- Plan evaluation
Developing and executing an incentive compensation plan requires a great deal of time and energy and significant resource expenditure. Unfortunately, many banks enjoy little insight into the effectiveness of such programs, often because they lack understanding of what metrics they can use as indicators of success. Without hard numbers to back return on investment, many banks resort to intuition or gut feelings to determine how well a program is working.
- Programming costs
Banks also must decide what technology to use for managing incentive compensation plans. When banks create their own incentive compensation plans in tools such as Excel or Access, IT departments often become involved. In such a situation, IT personnel’s limited knowledge of the intricacies of incentive compensation can become a hindrance to the entire effort—something exacerbated by the relatively high costs of hiring and maintaining IT professionals.
Advanced sales performance management technologies offer banks a solution to many of these challenges. In this report of the impressive results banks have attained by implementing IBM Incentive Compensation Management solutions, we can see the clear and present advantages of these technologies. As one banker in the report notes, IBM SPM solutions delivered significant cost savings: “Independence from consultants is a big benefit.
My department now builds plans with in-house nontechnical staff, who cost about $55,000 a year, compared to external developers who cost $80,000 a year.” Case studies at other banks have demonstrated how incentive compensation management (ICM) solutions from IBM have addressed other above-noted challenges, including helping “cut its processing time from two weeks to two days, even with nearly 25 million compensable transactions every month. Another saw a 90 percent reduction in error rates.”
Learn more about IBM SPM