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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