KPMG Survey Finds Banking Industry Increases use of Incentive Compensation

Business Wire, Jan 5, 1995

NEW YORK--(BUSINESS WIRE)--Jan. 5, 1995--Across the board, the banking industry is relying more on incentives as a large part of an employee's compensation package.

In fact, KPMG's Survey of Special Incentives in Financial Institutions found that incentive rewards are no longer just for top officers, but are an effective way of rewarding all levels of employees.

"Eligibility or incentive awards has increased in recent years and has generally been pushed further down into the organization," said Vicki Elliott, KPMG senior manager. On average, more than three-quarters of all incumbents surveyed were eligible to participate in some type of incentive plan. Even at the most junior levels (for example at the customer service representative and teller positions) eligibility for incentives approaches 60 percent of incumbents.

Bank incentive compensation has also changed dramatically, from the traditional year-end or Christmas bonus, to become a significant piece of total compensation. At the top officer level, incentive payments made in 1994 for 1993 performance averaged 43 percent of base salary. For middle managers, incentive payments approached 20 percent of salary.

And in looking toward the future, target incentives for 1994 performance are higher than the targets set for 1993 in the majority of cases, pointing to an increased reliance on tying compensation to performance. The survey also found that financial institutions are moving away from a purely discretionary approach to award determination or a combination of discretion and other measures, to a more formula-driven or goal achievement approach. This is especially true at the top officer level.

The survey examined incentive compensation and salary practices at 37 major U.S. banks covering all regions of the country. Included were approximately 50,000 incumbents in 53 positions across five different lines of business: retail banking, middle market commercial lending, corporate banking, private banking and personal trust and investment sales.

The study covered four principal areas of incentive practice -- plan design features, performance measures, plan effectiveness, and incentive and total cash compensation levels.

In examining the compensation philosophy in the lines of business, the survey found that the positioning of cash compensation against the market varies across lines of business. Private banking and corporate banking appear to be most aggressive, positioning total cash compensation (i.e., base salary plus incentive awards) above the 60th percentile in a significant number of cases.

While top officers in each of the lines of business are typically incented through a corporate management incentive plan, functional or line of business plans are most prevalent for incumbents at the middle management level and below. The survey went on to find that the organizational performance impact on incentive award funding varies somewhat across lines of business.

"For example, team-based plans are most prevalent in retail banking, whereas private banking and personal trust areas have the highest amount of individual-based plans," said KPMG Partner Rose Marie Orens. The impact of organizational level performance on award payouts generally follows the pattern set for award funding.

The areas of performance tracked for incentive award determination are typically line of business specific. Retail banking places the highest emphasis on product sales while corporate banking awards are driven mainly by profitability.

While business unit performance varied by line of business, 1993 was a very good year for the banks in the survey. Overall, more than 85 percent of respondents reported performance as meeting or exceeding expectations.

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Note to Editors: KPMG Peat Marwick LLP is the U.S. practice of KPMG, The Global Leader among professional services firms. Worldwide, KPMG has more than 6,000 partners as well as 67,000 professionals serving clients through 1,100 offices in 837 cities in 134 countries.

In the United States, KPMG partners and professionals deliver a wide range of value-added assurance, tax, international and performance improvement services to clients doing business in the following markets: financial services; manufacturing, retailing, and distribution; health care and life sciences; information, communications, and entertainment; and public services.

CONTACT: KPMG Peat Marwick LLP

Debra Weiss, 213/955-8992