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Carrots and sticks: reining in the "rogue lender" and other performance management challenges

It takes commitment to effectively evaluate and correct performance

Carrots and sticks: reining in the "rogue lender" and other performance management challenges
We know a community banker who is currently looking for a job because he had to sell the bank after widespread deterioration in the loan portfolio due to a “rogue” lender. While this may be an extreme case, the damage that one employee can do may seriously affect the bottom line. Community banks, because of their smaller size, are particularly vulnerable to the actions of just one or two employees.

The rogue lender challenge brings up a wider one: How do you effectively manage performance to ensure profitability without incentivizing risk?

And it’s not just lenders’ behavior managers must worry about. Consider a customer service representative who consistently makes paperwork errors in opening accounts. Or a branch manager who inadvertently reveals confidential information. Both can harm the bank’s reputation in the community. In fiercely competitive times, no bank cannot afford sub-par performers.

There are some basic principles of performance management that apply to all bank employees. However, too often managers focusing on short-term results ignore these principles, or at best assume that “HR is taking care of it.” This month’s blog addresses those basic principles, and also takes a look at how incentive pay, often called “pay for performance” plays into the mix.
Performance appraisal--not just an annual event
Most banks conduct performance appraisals--also called performance evaluations or reviews--annually. HR hounds the manager until he fills out the required form, rating his subordinates on a simple three- or five-point scale. The manager then meets with the employee to go over the form. The meeting may last ten minutes, and ends with the employee probably no wiser than before on his strengths and weaknesses, or how he can improve his performance. The manager sighs with relief. He can check that task off until next year.

Performance appraisal should be a continuous process. It is the pre-requisite for performance improvement, also, ideally, a continuous process. The primary function of any banker with supervisory responsibility is to facilitate good performance from his subordinates.

The most important tool in performance appraisal is an accurate, complete, and up-to-date job description. The creation of the job description is a shared responsibility between the manager and the incumbent in the position being described. HR can help, for example, by providing a template or a checklist of questions the job description should answer, but only those two--the manager and the employee--know what the job functions really are and what constitutes successful performance of those job functions.

Once the job description has been created, it should serve as a constant measuring stick. Whether in regular coaching sessions or ad hoc discussions, the manager and the employee should revisit the various areas of the job description:

Does the employee need some additional training in one of the skills identified as essential to the job?

Has an organizational change added another task not reflected in the job description?
Feedback--it doesn’t go without saying
Giving meaningful feedback is a skill that can be acquired through practice. Good managers make a point of setting aside time every week with each employee to comment on how they are doing.

More is required than “You’re doing fine!” Give specific examples of behaviors that you like and would like to see more of, and ones you don’t. Start with the positive before turning to the negative. Give the employee an opportunity to respond, and ask for suggestions on how you can help the employee overcome weaknesses. 

Many studies have shown that recognition--verbal pats on the back for good work--is a better motivator of performance than money. Recognition should be public, for example, in a staff meeting, rather than behind closed doors, and remember to pass it up the chain of command too: Managers should tell their bosses about their subordinates’ achievements--if for no other reason than it reflects well on the manager.
Other bloggers on “rogue” lenders
This is one of three blogs touching on “rogue” lenders, prompted by a regulatory white paper that noted their impact on banks during the crisis. We asked three bloggers to address this challenge. You can also read:

“How to tell the rogue from the ‘rogue’ lender,” by Ed O’Leary 

“Why do banks really fail?” by Jeff Gerrish

We welcome your comments in any of these blogs’ comment sections. 
SMART goal setting
While performance appraisal should be an informal continuous process, there are occasions when a more formal approach is necessary. If an employee’s performance has become a problem, he or she needs a Performance Improvement Plan (PIP). This is not a punitive action: its object is to retain the employee, not to build a case for firing him. A PIP is a collaborative effort between the manager and the employee. Both need to devote serious attention to it.

A PIP is essentially a goal-setting exercise. In order for the PIP to be effective, the goals set in it must be “SMART.”
• Specific
• Measurable
• Achievable
• Relevant
• Timed

An example of a SMART goal for an employee with problem attendance would be: On-time arrival, no early departure, no late return from lunch, as documented by computer log-on records, and monitored weekly by the manager, for a two month period.

The PIP may contain several SMART goals. At the end of the PIP goal period, the manager and employee will meet to discuss progress. If the goal has not been met, the PIP may be extended, and the goal adjusted if necessary.
Figuring in incentive compensation arrangements
Reckless lending was widely blamed for the financial crisis. The focus of attention has been on the huge bonuses paid to traders and others in large banking organizations. This led, last year, to the Federal Reserve and other regulators issuing joint guidance on incentive compensation arrangements. While the problem may have been incentives to risk-taking at the large companies, the joint guidance applies to all banks that are now required to review their incentive compensation process, and be prepared to defend it during regular bank examinations.

The regulatory guidance is “principles-based.” In other words, it is more general and aspirational than objective and quantitative. However, it does give useful pointers on how pay and performance--long-term, successful performance--might be linked.

The regulators’ three principles governing incentive compensation arrangements are:

They should not encourage excessive risk-taking.

They should be compatible with effective internal controls.

They should be actively overseen by the Board of Directors.

There are any number of objective measures for the award of incentive pay. Among them are net operating income; growth in net operating income; growth in consolidated total revenue, loans, and/or deposits; stock price; overhead ratios; loan quality; and customer satisfaction scores.

The emphasis should be on long-term (one year or longer) results, and the maintenance of growth and improvements over multiple years. All types of risk should be factored in, including credit risk, reputational risk, compliance risk, and strategic risk. The form of payment should favor equity and options over cash, and the  deferral of payment until long-term results are known. A “clawback” provision--the return of incentives if performance proves illusory--is essential.
Building a carrot culture
Wouldn’t it be nice if we didn’t need sticks to move the donkey up the mountain?
If the judicious use of carrots ensured excellent performance?

It’s not impossible, although it does require a significant effort on every manager’s part. Continuous appraisal, coupled with honest and specific feedback, represents part of the successful approach. Those, and a balance of long-term monetary incentives with more immediate public verbal recognition.

And all this underpinned by SMART goal-setting to correct wavering performance.

Quite a change from the yearly paperwork farce that passes for performance management at many banks.

It comes down to the culture. And this brings us back to the “rogue” lender.

Responsibility for that “rogue” lender who provoked the fire sale is shared by every manager up the chain in the bank who was “too busy” to monitor their reports’ performance, and to take the time to counsel or recognize them for it.

It is shared by those who would rather fire a problem performer than take the time to work with them to correct deficiencies, and by those who incentivize volume over quality, short-term over long-term.  

Not all performance problems can be solved by the performance management principles I’ve set out here. But ignoring them leaves only the “stick” of discipline and, ultimately, discharge.

Those sticks make up an expensive solution at best, and one that may expose the bank to ruinous litigation.

Disclaimer: This article does not provide, nor is it intended to substitute for, professional legal advice.
Marian Exall

Marian Exall ( is an employment lawyer and HR professional with more than 25 years' experience advising banks and other employers on compliance issues. She is a principal and co-founder of Employment Law Compliance, Inc. which provides HR compliance solutions to banks exclusively through the American Bankers Association. She is a frequent speaker and writer on human resources compliance in the banking industry, on association briefings and webinars, and at national and state bankers' association conferences. For more information on this or other employment compliance topics, please call Employment Law Compliance at 866-801-6302 or go to

Marian also writes fiction. Her latest novel is a mystery called A Slippery Slope. For more information and to order, go to

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