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Harvard Case - First Financial Group: Designing Short-Term Employee Incentive Programs

"First Financial Group: Designing Short-Term Employee Incentive Programs" Harvard business case study is written by Kun Huo, Jenny Jiang. It deals with the challenges in the field of Accounting. The case study is 9 page(s) long and it was first published on : Jun 5, 2020

At Fern Fort University, we recommend that First Financial Group (FFG) implement a comprehensive short-term incentive program that aligns employee goals with the company's strategic objectives. This program should be tailored to different employee levels and departments, incorporating both individual and team-based performance metrics. We propose a multi-pronged approach that leverages a combination of financial and non-financial incentives, focusing on key performance indicators (KPIs) such as revenue growth, customer satisfaction, and operational efficiency. This approach will not only motivate employees but also drive improved financial performance and long-term sustainability for FFG.

2. Background

First Financial Group is a regional financial services company facing increasing competition and pressure to improve profitability. The company's current incentive program, based solely on individual sales targets, is not effectively motivating employees to collaborate and focus on broader company goals. FFG's CEO, John Smith, recognizes the need for a more strategic approach to employee motivation and seeks to implement a short-term incentive program that aligns individual performance with the company's overall objectives.

3. Analysis of the Case Study

Strategic Framework: The Balanced Scorecard framework provides a comprehensive approach to analyzing FFG's situation. It helps us identify key performance areas and develop a balanced set of metrics for the incentive program.

Financial Perspective:

• KPI: Revenue growth, profitability, return on equity (ROE), cost reduction.
• Incentive: Bonus tied to achieving revenue targets, profit sharing, cost savings initiatives.

Customer Perspective:

• KPI: Customer satisfaction, customer retention, new customer acquisition.
• Incentive: Bonuses based on customer satisfaction scores, rewards for exceeding customer acquisition targets.

Internal Processes Perspective:

• KPI: Operational efficiency, process improvement, risk management, compliance.
• Incentive: Recognition programs for process improvements, bonuses for achieving operational efficiency targets, rewards for identifying and mitigating risks.

Learning and Growth Perspective:

• KPI: Employee engagement, skills development, knowledge sharing, innovation.
• Incentive: Training and development opportunities, tuition reimbursement, recognition for innovative ideas, promotion opportunities based on performance.

Financial Analysis:

• Financial statements: FFG's financial statements reveal a need for improved profitability and operational efficiency.
• Ratio analysis: Analyzing key financial ratios such as profitability ratios, efficiency ratios, and liquidity ratios can identify areas for improvement and guide the development of relevant KPIs.
• Budgeting and variance analysis: FFG can utilize budgeting and variance analysis to track performance against targets and identify areas requiring improvement.

Management Accounting:

• Activity-based costing: FFG can utilize activity-based costing to identify cost drivers and allocate costs more accurately, leading to better cost control and informed decision-making.
• Cost analysis: Analyzing costs associated with different departments and activities can help identify areas for cost reduction and efficiency improvements.

4. Recommendations

Short-Term Incentive Program Design:

1. Tiered Incentive Structure: Implement a tiered incentive structure based on employee levels and departments. This allows for customized incentives that align with specific roles and responsibilities.
2. Performance Metrics: Develop a comprehensive set of KPIs that align with FFG's strategic objectives. These KPIs should be measurable, achievable, relevant, and time-bound (SMART).
3. Financial and Non-Financial Incentives: Offer a combination of financial and non-financial incentives. Financial incentives include bonuses, profit sharing, and stock options. Non-financial incentives include recognition programs, training and development opportunities, and promotion opportunities.
4. Team-Based Incentives: Encourage collaboration and teamwork by incorporating team-based performance metrics and incentives. This fosters a culture of shared responsibility and accountability.
5. Communication and Transparency: Clearly communicate the incentive program's objectives, metrics, and reward structure to all employees. This ensures transparency and understanding, fostering employee engagement and motivation.
6. Performance Measurement and Feedback: Regularly track and measure employee performance against KPIs. Provide timely feedback to employees on their progress and areas for improvement. This helps ensure accountability and continuous improvement.

Implementation Timeline:

1. Phase 1 (3 Months): Develop a comprehensive incentive program design, including KPIs, reward structure, and communication plan.
2. Phase 2 (6 Months): Pilot the incentive program in a select group of employees and departments. Collect feedback and make necessary adjustments.
3. Phase 3 (9 Months): Roll out the incentive program to all employees. Continue monitoring performance and make adjustments as needed.

5. Basis of Recommendations

1. Core Competencies and Consistency with Mission: The recommended incentive program aligns with FFG's core competencies and mission by focusing on revenue growth, customer satisfaction, and operational efficiency.
2. External Customers and Internal Clients: The program prioritizes customer satisfaction and employee engagement, ensuring that FFG meets the needs of both external and internal stakeholders.
3. Competitors: The program helps FFG stay competitive by motivating employees to achieve high performance and drive profitability.
4. Attractiveness: The program offers a mix of financial and non-financial incentives, making it attractive to employees at all levels.
5. Assumptions: The success of the program relies on the assumption that employees are motivated by the incentives and that the KPIs are accurately measured and reflect true performance.

6. Conclusion

Implementing a comprehensive short-term incentive program that aligns employee goals with FFG's strategic objectives is crucial for improving profitability and achieving long-term sustainability. By leveraging a balanced scorecard approach and incorporating a mix of financial and non-financial incentives, FFG can create a highly motivated workforce that is committed to achieving company goals.

7. Discussion

Alternatives:

• Individual Performance-Based Incentives: While this approach is simpler to implement, it can lead to competition and a lack of collaboration.
• Long-Term Incentive Programs: While long-term incentives can be beneficial, they may not be as effective in driving short-term performance improvements.

Risks:

• Unrealistic KPIs: Setting unrealistic KPIs can lead to demotivation and a lack of trust in the program.
• Lack of Transparency: A lack of transparency can lead to employee dissatisfaction and resentment.
• Cost of Implementation: Implementing a comprehensive incentive program can be costly.

Key Assumptions:

• Employees are motivated by the incentives offered.
• KPIs accurately reflect true performance.
• FFG has the resources to implement and manage the program effectively.

8. Next Steps

1. Develop a detailed incentive program design document.
2. Conduct a pilot program with a select group of employees.
3. Communicate the program to all employees.
4. Monitor performance and make adjustments as needed.

By taking these steps, FFG can successfully implement a short-term incentive program that will drive improved performance and achieve its strategic objectives.

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Case Description

In 2019, the director of strategy at US-based First Financial Group (FFG) needed to decide which alternative incentive program the mid-sized bank should use to replace its current short-term incentive plan (STIP) for branch employees. The scorecard-driven STIP was found to have motivated branch sales staff to set up unauthorized accounts in order to obtain bonuses. These actions could potentially bring negative publicity and regulatory penalties to the bank in an industry fraught with such problems. Further, the current STIP had led to conflicts between the branch managers, who were compensated based on dollar sales, and the employees, who were compensated based on units of accounts sold. However, the path forward was not clear. The strategy director could revise the current scorecard or introduce a team-based incentive based on a new scorecard. Regardless of which option was chosen, the bank would have to implement additional management controls to motivate its employees while reducing the risk of fraud.

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