How to Measure Lender Performance

January 4, 2017 Rollie Tillman

Last month, Rollie Tillman, PrecisionLender’s VP of Delivery and Client Success, came on the Purposeful Banker Podcast to discuss: How To Measure Lender Performance. You can click on that link to listen to the episode, but if you’d rather read about what Rollie had to say, we’ve taken some of his comments and distilled them into this blog post.

Performance measurement is a big priority for bankers across the country, especially in the wake of the Wells Fargo cross-selling scandal. We’ve found ourselves in many of these kinds of discussions because it’s top of mind for some of our clients.

Before we go further though, we should clarify that PrecisionLender is not a company that specializes in incentive plans. But given the needs of our clients, we’ve given the topic a fair amount of thought. We recognize that many of our clients are trying to measure, or even incentivize, outcomes of relationship managers in a manner that links directly to company performance and goals. Throughout this blog post we will share how to create, execute, and measure incentive plans that do not detract from the borrower/bank relationship.

First, Do No Harm

For years, banks have had plans in place for incentivizing relationship managers. Many of these plans come in the form of stack ranking the top producer in terms of volume, or fees collected. Others measured the greatest growth of new customers. But many of these approaches can have outcomes that are disconnected from what is meaningful for the Bank (or Financial Institution) – bottom line returns, balance of portfolio concentrations, appropriate risk adjusted returns, etc. Often incentive plans can result in all sorts of unintended consequences, making you feel like you’re putting a finger in the dam only to have another leak spring up somewhere else.

To combat this, we typically begin the “performance management discussion” with our clients based off of one simple notion: First, do no harm.

Above all else, do no harm to customers, to employees, to shareholders, and stay compliant with laws and regulations. There is a lot to be mindful of here – so anyone involved in design and management of an incentive system should keep a close eye on this concept. For every positive outcome that an incentive system might create, there are a multitude of unintended or undesired outcomes that have the potential to crop up. You must keep an eye on behaviors and their outcomes and make changes when necessary.

For example, a volume-based plan may result in longer terms, lower yield or in selling stuff to customers they didn’t want or need in the first place. This approach offends our “first, do no harm” litmus test.

Connecting Behaviors With Strategies

We’ve seen our clients have great success when using smarter systems that can connect the behaviors at the front of the bank with the analytics and strategy development at the back of the bank. Once a bank has this thread running through it from end to end, a natural next step is to leverage the data captured to form a feedback loop.

Our clients are typically using Risk Adjusted Net Income, or a return percentage target based on that income, which is good start in the direction of the first, do no harm” principle. By providing the customer options in terms of loan structure that meet their borrowing need, the relationship manager serves the customer and can also do this in such a way that improves the Risk Adjusted Return for the bank’s stakeholders. A win – win, if you will, for the customers and stakeholders.

With that approach, the focus of the conversation shifts towards enabling these positive outcomes. For example, our clients are now asking questions like:

“If my overall CRE book has a Return of 12%, and my goal as CFO is to increase that to 13% by year end, then I might need to set a Return target of 17% for all new RM production.”

The CFO may further say, “And now that I have the ability to analyze the total Risk Adjusted Return on the CRE book, and communicate an ROE Target to my RMs, I can begin to leverage the data from within my pricing tool to track and report against my organization’s progress towards these strategic goals.”

Incentivizing is much easier if your pricing tool enables a clear line of sight into the customer interaction with the relationship manager – the place where dollars are exchanged and value is created (or diminished) – and then links that event up to team, region, portfolio, and bank performance. This makes it possible to evaluate the impact of outcomes generated by relationship manager teams on the strategic goals and forecasts of the bank.

Finding the Right Metrics

When it comes to metrics, we’ve seen our clients focus on two lenses of success – new loan production and risk adjusted net income on that new loan production. A relationship manager might be expected to originate X million dollars in order to meet balance sheet growth goals and, on top of that, be expected to yield a 17% Risk Adjusted Return on all new production.

Banks really need both and each metric should be inextricable from the other. This creates focus for the relationship manager to achieve growth – but growth that reflects a desired rate, risk, structure, duration, etc.

With the dimensions of volume and Risk Adjusted Income, you can then begin to monitor, report, and – in some cases – design incentive systems to measure performance and reward team members.

We’ve seen banks struggle the most with data management when setting up an incentive plan. A bank needs to bring this data into a reporting and analytics environment that will enable the design and management of a Performance Tracking type data set. If the data isn’t readily available, some digging will be required.

The Work Never Stops

Once an incentive system is in place, there’s as much work to be done in implementation as there was in the design phase. There needs to be constant review and analysis to ensure the behaviors and results of relationship managers remain aligned with the company’s strategic direction and the needs of the organization. This is where you need strong controls and checkpoints to evaluate the “first, do no harm” principles. Are your customers better off for having done business with you? Are your stakeholders able to connect behavior and outcomes and keep them in alignment with strategic direction? Are the behaviors of relationships managers shifting toward self-serving incentive gaming?

Implementing a new incentive plan can be a big culture change, but really good relationship managers are likely to appreciate these approaches and will continue to be top performers. Generally speaking, people find satisfaction in knowing that what they are doing has a direct link to success of the organization.

 

 

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