Part 2: Escape from Alcatraz

(AKA Breaking Free from Ineffective ICM Processes)

In my initial blog in this series, I provided foundational and background information about The Good, the Bad, and the Ugly of Incentive Compensation Management (ICM) programs in financial institutions.

As discussed in the first blog, ICM programs are a critical component for driving successful growth. Ensuring that customer-facing associates are incented to support institutional goals aligns their behavior with desired outcomes, and, ideally, provides them with a reward system that helps maintain a high level of career satisfaction. Achieving these goals is at the heart of a unified approach to ICM and enterprise performance management (EPM) processes.

In keeping with the Clint Eastwood theme, let’s explore how your institution can “Escape from Alcatraz,” breaking out from your existing ICM processes to help achieve your goals. In this blog, I will review some of the traditional constraints associated with ICM, then identify and describe the advantages of a holistic approach to ICM and EPM processes.


Traditional Challenges in Managing Incentive Compensation Processes

Incentive compensation management has often been tied to loan and deposit volumes, and metrics associated with volume growth, such as number of referrals or number of accounts opened. While growing assets and customers are common objectives for most financial institutions, as discussed in the first blog, not all growth is good. So why are many financial institutions still incenting their loan officers, branch managers, and frontline personnel solely based on growth? Often it comes down to the inability to establish and track incentive programs using other metrics. Data limitations, tool restrictions, or the time, effort, and cost necessary to manage more elaborate programs are often barriers to enhancing incentive programs.


Data Limitations

When incentive compensation plans are based on new production, the number of new accounts, balance growth, and/or overall institution earnings, sourcing the data is relatively easy. All of these data elements are available from core loan and deposit application systems, the general ledger system, and the institution’s quarterly and annual financial statements.

To tie incentives to metrics that better align with overall institutional goals, finance professionals must have access to more data from different sources. These data elements include (but are not limited to) profitability and net interest margin at the account, customer, relationship, officer, product, and branch/department levels; referrals for new accounts; credit quality metrics and trends; and customer service levels. Getting timely access to quality data across all of these areas can be challenging and time consuming.


Tool Restrictions

Many financial institutions use Microsoft® Excel® to track and manage incentive compensation programs. Excel is a powerful and flexible tool, but it has limitations with data management, automation, and version control that contribute to challenges in the ICM process, including:

  • Insufficient access to timely and quality data needed to support more sophisticated ICM programs
  • Inability to calculate and disseminate incentive compensation results for hundreds, if not thousands of payees
  • Ineffective support for dispute resolutions

Third-party vendor solutions pose challenges as well, including:

  • Lack of flexibility to create all the rules needed to support diverse incentive programs
  • Inability to easily link incentive programs with the bank or credit union’s planning, budgeting, and profitability processes


Time, Effort, and Cost Barriers

Given the data and tool challenges, the process of setting up, tracking, and managing the incentive compensation process for a large volume of payees can be challenging, time consuming, and costly. Without a tool to help automate the data management process, ensure data quality prior to calculations, perform calculations, provide a framework for dispute resolution, and ultimately create and disseminate reports and payroll information, incentive compensation management often is a protracted, manual process, even for relatively simple incentive compensation programs.


The Benefits of Incorporating ICM into Enterprise Performance Management

To ensure your incentive programs are providing their optimal value, leaders need to clearly define and communicate incentive plan objectives, targets, and results that are aligned with organizational goals in a consistent, transparent, and timely manner. This requires your institution to break free from the data, tool, and resource constraints mentioned above, and leverage the data and tools already available as part of your EPM processes.


Data Benefits of Integrating ICM into EPM

Incentive compensation programs that extend beyond traditional growth-related metrics require access to granular, timely, and high-quality data. The good news is that much of this data is already being used in another area of your organization to support EPM processes. Specifically, I am referring to processes and systems in place for planning, budgeting, and forecasting; funds transfer pricing; and risk-adjusted profitability measurement and analysis.

These processes typically require existing data (detailed below) that can be leveraged for ICM programs as well.

The ability to use the same platform and framework for ICM provides you with automated access to more data without having to replicate and reconcile the data, and ensures better quality and relevance to support enhanced and aligned incentive programs.


Leverage existing EPM data to support ICM processes:

  • GL level data
  • Individual loan/deposit account level data
  • Customer/member information from your customer information file system
  • Credit data
  • Budgeted financial targets
  • FTP and profitability results at the individual account level


Tool Benefits of Integrating ICM into EPM

Sophisticated incentive programs not only require access to more and better data, they also require advanced tools to help manage the ICM process more effectively, efficiently, and accurately.

The potential benefits of an integrated ICM and EPM solution include:

  • Improved data management: Many institutions have established their EPM solution as a single source of the truth for financial and management reporting across the organization. Adding incentive compensation results that can be reported on at the institution, department, plan, line-of-business, and individual levels further leverages the EPM as the go-to reporting framework, while at the same time providing direct access to the majority of data needed for incentive compensation purposes.
  • Additional consistency, accuracy and efficiency: Using your EPM solution provides the ability to automatically set new volume, portfolio growth, pricing, and profitability goals based on data and results already residing in the EPM database. For example, the budgeted amounts established as part of the budgeting process can automatically provide the production targets for ICM programs, which increases efficiency and provides consistency between these processes. Once expected payouts are established in the ICM process based on the targets and objectives, this information can automatically feed back into the salary planning process, providing a more accurate forecast for planning and budgeting. Similarly, profitability results calculated at the account level to support profitability analysis also can be used by the ICM process to calculate incentive compensation.


Time, Effort, and Cost Benefits of Integrating ICM into EPM

The time, effort, and cost to set up and manage a stand-alone ICM system to support incentive compensation programs can be overwhelming. In many cases, improvements to incentive programs are often not even attempted due to the complexity and cost of implementing the enhanced incentive programs. Leveraging the data and reporting frameworks available within your institution’s performance management solution(s) can significantly reduce these obstacles. Integrating incentive compensation processes into the EPM framework also can reduce upfront costs, while supporting desired ICM program improvements in a more efficient and accurate manner.



An integrated approach to managing ICM and EPM processes provides significant advantages and value for financial institutions. From a process and management standpoint, these benefits include increased efficiency, accuracy, transparency, and consistency among all of these processes. More importantly, this unified approach enables banks and credit unions to create and support incentive programs that are better aligned with institutional goals, while also providing appropriate incentives and information to employees.

In the final blog in our incentive compensation management series, Mark Hutchinson, Vice President and Director of Financial Planning and Analysis at STAR Financial Bank, will provide insights into why they decided to integrate ICM and EPM, and the value that STAR has achieved from this approach.

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