Developing Incentives Based on Balanced Scorecards

Dennis Graham, Schneider Sales Management
October 10, 2004

Over the past few years we've seen CUs join the trend booming throughout U.S. businesses to build balanced scorecards to measure their effectiveness. Balanced scorecards measure the financial perspectives - ROA, net income, loan growth, etc. While these are traditional measures of success, they are also lagging indicators of performance because they relate to what has happened in the past. A balanced scorecard also allows the measurement of leading indicators - the operations, member, and employee perspectives-that measure more global aspects of performance, and which should lead to future revenue impact. (For a full discussion of how to build balanced scorecards, please refer to the paper published by the CUNA OpSS Council "The Sales Implications of Indexed Balanced Scorecards in Credit Unions.")

Once developed, the overall scorecard is used by the board to judge the performance of the credit union and the management team. Often the board authorizes bonus opportunity based on performance targets outlined in the scorecard. If the credit union meets or exceeds 100% performance as measured by the scorecard, a bonus pool is shared by the management team (and often with the employees as well).

All incentives can, and should be, linked directly to the credit union and work unit scorecard.

Consider the following scenario:

Almost all credit unions have a formal budget process. Many now have the ability to budget income and expense by work unit. As part of the budget process they establish a total revenue target composed of common income streams - interest income, fees, etc.

Assume a branch manager has a revenue target of $100,000 in fee income for the year. This is composed of loan fees, credit life premium revenue, traveler's check fees, etc. Obviously there would be other targets in the scorecard, but for simplicity let's assume this is the only target.

Instead of establishing dollar incentive values for each revenue type, a target bonus level is established for achieving the overall revenue target. In this example, the manager might receive a bonus of $1000 if 100% of the target is reached. For each $1000 in revenue over the original target, the manager might receive 10%, or $100, in additional incentive. The assistant manager, teller supervisor, MSRs, and tellers can similarly participate.

The benefits of such incentives are:

· There is no pressure to sell a specific product. The staff can sell the products that are best suited for the member. · Branch employees see exactly how their performance ties into the success of the credit union. · Employees are held accountable for achieving specific, measurable results. · As a management team, you now have the whole company pulling toward the achievement of the credit union goals. · Incentives can be paid monthly, quarterly, or annually. Normally the MSR and teller incentives are paid monthly, with the management team paid quarterly or annually, and measurement is simple.

The steps necessary to make this work are:

1. Develop a scorecard and performance target for the credit union.
2. Develop the scorecard and performance targets for each work unit.
3. Establish the measurements for the targets.
4. Establish the bonus targets by job group.
5. Communicate the program.
6. Kick it off, and be ready to make modifications.

Generally it takes a credit union 12 to 18 months to develop the systems, test them, and work out all the bugs. But the benefits are worth it!

Dennis Graham National Sales Manager Schneider Sales Management 314-409-4798 dgraham@schneidersales.com