Steve Nelson is a one-time coworker (reared in the securities industry, unleashed on banking) and long-time mentor/friend. Several years ago, in a rare corporate moment I will never forget, I saw him stand up at a bank management/board strategic planning session and announce that we weren’t even remotely serious about building an entrepreneurial sales culture unless we could answer two questions:
1. If a commissioned salesperson earned more – fair and square – than the CEO in a year, would we celebrate? Or panic and change the incentive plan?
2. If a salesperson came to us and said he/she had a deal that would make the bank $3 million, but at the cost of a $1 million commission to that salesperson, would we say yes or no?
After a deafening silence, we moved on to other subjects. I never did hear the answers. (Postscript: Steve was later told that he was “not politically savvy.”)
This, combined with my partner Steve Williams’ previous article on the deposit crunch, got me thinking about branch incentive plans.
To begin with, what do CEOs want most from their branches? Low cost deposits, by a mile (and second, loans). Therefore, what should be the biggest focus in a plan? Low cost deposits, by a mile. So, to get them, here’s my:
1. Take the amount of checking account growth in a year and pay the branch 1.5% of it. .75% goes to the branch manager, .75% to the other branch employees, split based on salary bases and performance evaluation. (OK, maybe you use average 30-day balances to get around the potential for December 31 account stuffing.) This means a manager gets $7,500 for every $1 million in net growth, in one lump sum, paid at the end of year. (Hey, if nothing else, November and December attrition will be less of a problem.)
2. An additional .25% is paid to the commercial loan officer if the customer is a commercial borrower.
3. No ceiling, ever. Ask yourselves – is it worth $20,000 to get $1 million in demand money? If so, isn’t it worth $200,000 to get $10 million? What do you spend on advertising already?
3. Stop paying incentives for CD growth. What determines if CDs grow is ALCO pricing, and we all know it. Control it there.
4. None of this applies for totally free checking. You already made it free and advertised it. What’s to sell?
Two more ancillary issues:
So what do you get? Well, you have to pay 1.5% for the deposits in the first year, but year two and beyond are gravy. You also keep all the fees.
Can this plan be “gamed” by employees who can always figure out how to beat a plan? Well, they might be able to maneuver year-end balances at the end of the first year, but that’s it. The second year will equalize the first.
By the way, I don’t suggest that this is the only incentive plan in branches, just one that I think stands well on its own. Added bonus – the tracking effort is pretty easy.
Too drastic? Unrealistically simple? Too weird? Well, I could plead guilty on all three. But remember – these are weird times, the deposit problem is getting drastic, and simple solutions work.
And if a branch manager makes more than the CEO? Muy Gonzo!-tr