Independent Banker - September 2017 - 57

SPECIAL SPOTLIGHT
ASK THE
EXPERTS
Robert E. Kafafian
President & CEO
The Kafafian Group, Inc.
Incentives-Why Not Profitability?
Align your incentives with your strategy.
Is total-company profitability in line with employee
incentives, and does that motivate behavior?
Kafafian: For certain executives, it could be. For most, we
would need to further break down the bank into the profitability
of lines of business, organizational units, branches,
products, officers and customers. For example, including
whole-bank profitability in the senior lender's incentive system
should be effective for his or her role as an executive of
the bank. Of course, much of that is beyond his or her direct
control. To align incentives with bank strategy, the senior
lender is more likely to be motivated by absolute dollars,
ratios and trends within the lending function. This is more
directly within their control.
Why don't banks do this?
Kafafian: Some do, but a very large portion of community
banks don't do profitability measurement. The main reasons
are lack of resources and fundamental disinterest. Profitability
reporting is a specialty that requires certain skills and a
software solution to execute successfully, and many banks
lack the desire or resources. TKG's profitability outsourcing
service was built around giving community financial institutions
the resources to do profitability reporting on an outsourced
basis at a reasonable cost.
Why should banks do profitability reporting?
Kafafian: As mentioned before, aligned incentives. Imagine
a branch manager being accountable for deposit spreads,
pre-tax profits and the trends for each, instead of number of
accounts opened or deposit growth. Would that branch manager
call for rate exceptions for a high-dollar CD customer,
or call on the small business down the street? Deposits and
account growth would tend to favor the CD customer. Spread
and profitability would definitely favor the small business
down the street.
0.5%
Period 1
Period 2
Period 3
Period 4
0.0
Commercial
Pre-Tax Profit
Branches
Mortgage
2.5%
2.0%
1.5%
1.0%
Secondarily, banking is a more difficult business than it was
20 years ago. Bankers can no longer afford to carry many,
if any, unprofitable lines of business, or offer unprofitable
products. Those wasted resources must be redirected into the
bank for a sustainable future-into, for example, emerging
technologies, high-quality staff and communities. To improve
or eliminate unprofitable lines of business and/or products,
a bank must measure and manage. TKG has an affordable
outsourced performance measurement solution for community
banks to assist with this process.
90 Highland Ave., Ste. 201, Bethlehem, PA 18017
____________________
973-299-0300 ext. 106 | rkafafian@kafafiangroup.com | kafafiangroup.com
http://www.qmags.com/clickthrough.asp?url=www.kafafiangroup.com&id=20343&adid=P57A1
Independent Banker - September 2017

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