By David Frankil, President, Burns-Fazzi, Brock and Associates
Dr. Jack Clark from Clark Research Associates presented the results of the 2014 NAFCU-BFB Executive Compensation and Benefits Survey at this summer’s NAFCU Annual Conference. There were many tidbits in the presentation, but one topic caught my eye – the wide variety of incentives that Boards have used to create bonus plans for top executives.
The topic of how incentives affect behavior is far from new – go back to freshman-year economics and Adam Smith –
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”
Adam Smith, An Inquiry into the Nature & Causes of the Wealth of Nations, Vol 1, March 9, 1776
Just as water finds its own level, economic activity naturally seeks its highest and most efficient use. That’s not to say that the greater good is subverted to individual self-interest, rather that well-designed compensation models effectively align individual incentives with desired outcomes that benefit the credit union, its members and top executives.
On that we can probably all agree – but what are the metrics and desired outcomes that will create optimal goal alignment? To use a baseball analogy, home runs are great – but rewarding players just based on home runs would result in tons of shortstops and second basemen batting .075 as they swung from the heels every time up at the plate. You’d have a hard time finding anyone who wanted to pitch too.