Pay-for-performance Plan Helps Shrink Bank’s Turnover

April 27, 2005
F irstMerit Bank, a 3,400-plus-employee corporation based in Akron, Ohio, usedto have a big problem with turnover among the operators in its check-proofingdepartment. A pay-for-performance plan has changed this low-glamour job into ahighly desirable assignment with practically zero turnover.

    Proof operators spend hour after hour at their keyboards typing the amount acustomer has written on a check into the bank’s computer system so that thefunds can be deducted from the customer’s account. Even bank executives admitthe work can be monotonous, but the job of proofing checks is vital in order toensure that the correct amount of money is moved from one account to another.The bank’s reputation and the customer’s satisfaction depend on it.

    The data entry job was considered mundane and the financial rewards were notparticularly attractive, yet from FirstMerit’s perspective, it was importantthat the job was done well and done quickly. Federal regulations penalize banksthat process checks too slowly.

    Executives knew that proof operators’ main complaint was that the pay levelwas not commensurate with the work. At the same time, management was loath tothrow more money at the department to reward what was perceived as a mediocrelevel of departmental performance.

    Instead, FirstMerit created a simple metrics-based pay-for-performancesystem. Proof operators would be evaluated based on two criteria: speed andaccuracy. The computer entry system itself would collect the data needed tocompile the metrics. Operators would be rewarded based on keystrokes per hour,provided that their work also achieved a high degree of accuracy.

    When the system went into effect, accuracy went up and turnover plummeted,according to Christopher J. Maurer, FirstMerit’s executive vice president forhuman resources. "We uncapped compensation," Maurer says. "If you are asuperstar, you can make a lot of money."

From "the pits to heaven"
    While the base rate for a proof operator is $9 per hour, one employee makesalmost $23 per hour, or about $45,000 on an annualized basis. That lead proofingoperator happens to enter 290 keystrokes per minute, which adds up to 17,400keystrokes per hour. Few employees can match that blistering pace, but plenty ofother operators make far above base pay: Nine employees pull in more than $20 anhour, while 13 make $15-$20. In all, 22 of 27 employees make more than $15 perhour. Operators are paid a certain hourly salary throughout a given month basedon their performance the previous month.

    The system hasn’t cost FirstMerit money. "We’re paying more (perperson), but to fewer people," Maurer explains. In 1994, FirstMerit had $5billion in assets. Through a series of acquisitions, the bank doubled its baseto $10 billion by 1998, and it has maintained a similar level since.

    Despite this growth, FirstMerit has managed to reduce the number of operatorsin its proofing department from 48 to 27 individuals over the same period. Eventhough fewer people are performing more work, Maurer says thepay-for-performance system has boosted morale. Dissatisfaction among checkproofing operators had been causing 100 percent departmental turnover every twoyears, but more recently the departure rate has decreased dramatically.

    In fact, FirstMerit hasn’t hired a proof operator for three years. "Thissection has gone from being the pits to becoming a heaven where people actuallywant to go to work," Maurer says.

    The big reduction in staffing occurred when the pay-for-performance systemwas first implemented. Some employees were unwilling or unable to rise to thedemands of the new system. Employees do have to meet a minimum level of 10,000keystrokes per hour. Employees who exceed the minimum are under no extrapressure to increase their speed. Maurer says the department includes severallong-term employees who do an acceptable job performing just a bit over theminimum keystroke level.

    A straight pedal-to-the-metal program that valued only speed could very wellresult in burnout and attrition, but FirstMerit has done well through itsnuanced program that makes space for loyalty, longevity and levity. Employees’speed is determined only by the time for which they are logged on to theirmachines. When they sign off to take breaks, their time away from theirkeyboards does not hurt their keystrokes-per-hour compensation rate.

Reward accuracy--or speed?
   The pay-for-performance system worked so well in the check proofing divisionthat FirstMerit has moved to extend the model throughout the bank. "The checkproofing department was really the poster child for the success of thispay-for-performance system," Maurer says. "We did this to focus on meetingthe company’s needs, and it ultimately translated into higher customersatisfaction, improved employee morale and reduced turnover."

    Maurer measures morale mainly by looking at turnover numbers. As for customerservice, FirstMerit uses a national polling company to ask customers aboutloyalty to the bank, whether a customer would refer friends and family,satisfaction with a customer’s visit and interactions with the bank’semployees. On a five-point scale, the bank scored a 4.77, which is in the topquintile of all banks the vendor surveys.

    Brian Dunn, president of McLagan Partners, the financial services consultingarm of Aon, isn’t surprised that FirstMerit saw such an improvement after itintroduced pay-for-performance systems. "I don’t think there is any questionthat an organization with effective management that is able to aligncompensation with management initiatives will be more successful," Dunn says."Compensation is the single most effective management tool we have at ourdisposal. It’s an effective communication device, because it tells people whatyou think is important."

    The real challenge for most corporations, Dunn says, is determining whatperformance should be financially rewarded. If an organization doesn’t knowwhether to reward accuracy or speed--or if it knows but can’t communicate itspriorities effectively to its workforce--then performance will suffer. On theother hand, says Dunn, "if you can get all three legs of the stool inalignment--what you say, what you measure and what you pay for--you can bepretty successful."

Trimming teller turnover
   Recently, FirstMerit tried extending its success with a pay-for-performancesystem into another high turnover employee category: bank tellers. The bank hadexperienced some problems with meeting employee compensation expectations, butagain Maurer didn’t want to just throw money at the problem and rewardmediocre performance without getting anything in return. FirstMerit took thelessons learned from its check proofing department and spent 15 to 18 monthsworking out a pay-for-performance plan that could be implemented into the tellerranks.

    Eventually, FirstMerit settled on a set of teller-specific metrics, includingan employee’s attendance on peak volume days, accuracy and whether theemployee makes appropriate customer referrals to personal banking advisers,investment consultants and other FirstMerit specialists.

    A teller who excels at all three metrics can earn an additional $1.57 perhour over her base pay. After piloting the program in the first six months of2004, FirstMerit rolled out the pay-for-performance teller model to 1,100employees systemwide on July 1, 2004.

    So far, results are encouraging. On average, tellers are earning $1.05/hrover their base rates, indicating they are performing well on at least some ofthe designated metrics. For the six months that the program was in place lastyear, 20 fewer tellers left than in the same period during 2003.

    This year, teller turnover has dropped considerably. In the first two monthsof 2005, only 46 tellers left, versus 96 tellers last year. If these numbershold through the year, 2005 could see an annual teller turnover rate of only32.7 percent, a significant improvement over 2004’s 50.1 percent annual pace.

    "We think we can get teller turnover down even further," Maurer says. "Webelieve some employees are just getting comfortable with how thepay-for-performance system works."

    FirstMerit continues to look for other places to implement metrics-basedpay-for-performance systems. Maurer says there are pockets ofpay-for-performance models at FirstMerit’s operations center, but that thoseprograms typically involve only a few employees each. The company has recentlybegun rewarding branch managers based on the profitability of their units.Compensation was previously linked to sales volumes at the branch, but the newsystem also rewards managers who keep error rates and overtime low.

    Maurer credits these pay-for-performance initiatives with helping FirstMeritto produce strong revenue figures, maintain its asset base and increaseefficiency within a difficult Northeastern Ohio economic climate. With ametrics-based pay-for-performance system that it developed in-house, FirstMerithas already improved morale and dramatically cut turnover with its checkproofing department and is well on its way to achieving similar results in themuch larger teller employee category.

    For a variety of initiatives, the Electronic Recruiting Exchange gave thebank its 2005 award for the "most innovative recruiting process ordepartmental structure."

Good management trumps all
   Though FirstMerit has benefited from reduced turnover since implementing itspay-for-performance systems, Mike Garelick, senior practice leader in bankingand financial services with Watson Wyatt, warns other firms against seeingpay-for-performance programs as silver bullets to whatever ails them.

    Garelick says the root cause of high turnover among frontline employees atmany banks can be traced to decisions on the part of those organizations to relyon a highly commoditized labor market with skills slightly above or on par withthe restaurant industry. "That commodity model doesn’t work very well forseveral reasons," Garelick says. "Usually the people who manage a commoditymodel have an authoritarian and punitive method of managing people. Suchpractices in turn create a very high-pressure environment for people who are notgetting paid a lot of money."

    Since there are lots of places that commoditized workers can go to get beatup for paltry pay, banks have trouble holding on to their workforces.

    Though improving pay can certainly give employees more of an incentive tostick around, Garelick says implementing pay-for-performance under the same oldmanagerial style could make matters even worse. The pay-for-performance systemrelies on a strategy of cherry-picking the best workers in the labor pool andinvesting in training and compensating them so that they want to stay within theorganization and produce good work.

    As these workers develop higher-level skills, they will become moreattractive to other employers, so unless they are being supervised by bettermanagers who can cultivate their talent, the best workers may actually be morelikely to leave than before. "If you try to put pay-for-performance andmetrics into a high-churn environment without changing the managerial andworkflow models, you will make things worse without solving the turnoverproblem," Garelick says.