May 06 2019

Incentive Pay: Research and Guidance for Credit Unions

Is incentive or variable pay worthwhile for credit unions? The short answer: it depends. Small-scale programs, when carefully managed, may help attract and retain talent for certain positions. But incentive pay is costly to implement and can have unintended consequences. In the long run, offering incentives to attract and retain high-level talent is often not the best option.

Report Number 477

Executive Summary

Credit union executives often ask: Are credit unions losing talent by not offering big bank bonuses or tech industry perks? Or are such incentives likely to do more harm than good? What are the benefits, costs, and risks of variable pay incentive systems? 

Compensation is a critical management tool used to align the interests and actions of leadership, managers, and staff with the goals and performance of the organization. Performance-related incentives are typically designed to create value for the organization by motivating behavior that advances organizational strategy and results in desirable organizational outcomes. More specifically, incentives are seen as a key way that individual contributors can be motivated to take responsibility for their relative contributions to the success of the organization—and be rewarded for those contributions. Incentive pay is thus increasingly used to recruit and retain talent, especially in competitive labor markets. 

The bottom line for credit unions is that incentive pay may be a useful attraction and retention lever for certain positions—if incentives, performance goals, and business strategy are carefully coordinated, measured, and evaluated. Yet much of the research indicates that incentives frequently do not work as intended. Incentive systems are costly to implement, and it is difficult to calibrate incentives with strategy and performance. Indeed, incentive or variable pay systems can demotivate workers and promote risk-taking activities that can destroy, rather than add, value.

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