Cutting the Strings

By Lauri Giesen

When banks promote "local control" by giving more authority to branch managers or regional presidents, the rhetoric must be backed up by action.

For many veteran branch managers, life has come full circle — from autonomy to centralization and now back to more autonomy.

When these managers used to work for community or mid-size banks, they enjoyed the authority to set fees, approve credit, price products and market their local operations. Then, during the merger wave of the last decade, they found themselves working for big national or regional institutions that kept the reins of control tightly held at headquarters.

Now, some of those big organizations are rediscovering the virtues of local autonomy, including U.S. Bancorp, Wachovia Corp., National City Corp., First Horizon National Corp. and Zions Bancorp. In some cases, this means devolving authority all the way down to the branch level, replicating, in effect, the community bank model. In other cases, it involves putting a regional manager in control of a group of branches, typically in discrete rural or suburban markets.

Underlying this trend is the retail banking industry's renewed focus on organic growth after the merger wave of the 1990s. Since growth requires some form of proactive marketing and sales, institutions are looking for ways to energize the front-line troops in the branches, which local control seems to facilitate.

"Previously, we needed centralized authority so that we could get newly acquired units integrated before we moved on to our next acquisition," says Chuck Conley, human resources manager at Cleveland-based National City. "But now, we need an environment that allows decisions to be made closer to our customers."

Yet devolving decision-making authority does involve some delicate tradeoffs. And some of these changes go against the cultural grain at large banking organizations. Managers will need to weigh the pros and cons before committing themselves to a more decentralized model.

Consider efficiency. Large banks centralized in order to exert more control over far-flung branch networks and eliminate duplicative expenses. Moving authority back down the chain of command inevitably creates an additional layer of administration and increases the risk of managers straying from corporate policy. Banks that do employ a branch empowerment strategy say strong training and enforcement of certain pricing and policy guidelines are needed to keep managers within acceptable boundaries.

And then there are the cultural issues. Large banks have traditionally not elevated the branch manager to a prestige position; the road to advancement in these companies typically led through the corporate banking ranks. Providing branch or regional managers with more "authority" will not energize them much unless there's a commensurate boost in pay and prestige.

The bottom line is that empowering local managers may help improve performance, but only if the groundwork has been carefully laid in terms of credit controls, appropriate incentives and a receptive corporate culture.

Liberating Experience

Executives whose banks encourage local control say they've been successful at increasing market share and profitability with this model. At National City, for example, net income for retail banking operations grew by about 6% in 2003, compared to flat earnings in the several years prior to the shift toward local empowerment. At Charlotte-based Wachovia, the 80 retail units enjoying some regional autonomy contributed 7% last year toward the corporation's profit, up from an average of 6% in recent history. The goal for this year is 8%.

These two examples, however, also underscore how "local control" can mean different things to different institutions. At National City, U.S. Bancorp and Zions Bancorp, authority has been pushed all the way down to the branch level. Wachovia, and First Horizon, on the other hand, devolved authority down to regions, typically rural or suburban areas, while keeping corporate control in urban markets.

At Salt Lake City-based Zions, branch managers are responsible for their own profit-and-loss statements. They can waive fees, set prices within a corporate-approved guideline, approve credit and develop their own local marketing plans.

Credit approval, however, is carefully watched. Each Zions branch manager has authority to make loans up to certain limits and within certain categories. Large corporate loans must be approved at the bank's corporate office, but branch managers still remain the point of contact with those corporations located in their communities, says Lee Anne Lindermann, executive vice president and director of branch banking.

U.S. Bancorp, which is based in Minneapolis, has empowered its branch managers with similar decision-making authority for the past ten years, including separate profit-and-loss statements. However, due to several acquisitions in recent years, the bank has had to spend a lot of time imposing this branch-centric strategy on the acquired units.

For the most part, branch managers at the acquired branches adapted favorably to the changes, says Kathy Beecham, executive vice president of metropolitan banking. "They've generally found the experience to be liberating because we've given them what they need to take care of their customers, although some required retraining so they could understand how the decisions they make affect their balance sheets and the growth of their operations."

Empowering local managers at this level does require some sacrifice elsewhere in the organization. With 2,200 U.S. Bancorp branches each running a separate P&L, the task of compiling and analyzing all that financial information can be an enormous task. "But our chief financial officer believes in this model so much that he's willing to put up with the difficulties," Beecham says.

As part of their empowerment, U.S. Bancorp branch managers can make pricing exceptions and waive fees, although they are given models that reflect the market conditions in their specific region; there are 134 different pricing models within the company's territory.

"Within a given state, we may have as many as 24 different pricing models," Beecham says. "And even then, the managers can exception price off that. If they have a good customer whom they are at risk of losing, they can exception price or waive a fee. We teach them how to evaluate these decisions and provide models that help them decide whether an exception price would benefit their bottom line or not."

These modeling tools allow managers to simulate the effects of a policy change before a branch manager acts. Shaving a few basis points off a car loan, for example, might be a good thing if it keeps a big-balance customer happy. The computer model lets the U.S. Bancorp manager see exactly how the lower rate on the car loan would affect the branch's P&L over the course of the loan and then decide if it's worth taking the risk of losing the business.

Local Marketing

Not all banks are willing to give individual branch managers that much authority. Yet, they also want to preserve some of the benefits of local autonomy. For these institutions, the solution has been to give the authority to regional managers who run groups of branches in discrete markets. Generally, this occurs in rural and suburban markets where customers are used to person- alized attention.

First Horizon National Corp., for example, runs branches from the corporate level in Memphis, its headquarters town. But in some nearby suburban markets, such as Germantown, Tenn., the community president makes most of the decisions affecting six area branches.

"Some of the suburbs are more self-contained," says Greg Pauly, an executive vice president at First Horizon in Memphis. "There, the regional presidents are in better position to manage the banking needs of their communities because they are often heavily involved in community development and serve on local Chambers of Commerce and the like."

Bill Holt, Wachovia's community banking executive, says smaller communities tend to display unique economic and competitive characteristics. "In urban markets, by contrast, our ability to serve customers is not all that different from one region to the next. The needs of customers in Washington D.C., for example, are not all that different from the needs of customers in Atlanta."

Wachovia currently supports 80 "community presidents" in its smaller markets. These presidents each manage between two and 20 branches. This model stands in stark contrast to Wachovia's approach in major metropolitan areas, where there is uniform corporate control.

In order to tailor their services to their specific communities, Wachovia's community presidents are held accountable for the success of all the retail and small business operations in their regions. They are given their own marketing budgets. They set fees and select product offerings. And they decide who gets credit, for both consumers and small businesses.

Local control of marketing is particularly helpful. "Before, our corporate marketing department ran a lot of basic product ads in our local media. Today, we're still doing a few product ads, but we're doing more advertising that is directed specifically toward our community," says Alicia Laramy, city president for Wachovia in Columbus, Ga. Some ads, for example, run Laramy's photo with copy that talks about her community involvement. Additional ads mention other people who work for the bank in the area.

The goal here, Laramy says, is to make customers feel the decisions about their banking relationship are being made by someone they know and can call up on the phone. "We want to bring the local personal touch along with the national clout," she says.

This approach seems to be working in Columbus, a medium-size city on the Alabama border where Wachovia has the tough task of competing with home-grown Columbus Bank & Trust, a division of Synovus Financial Corp. First Union Corp., one of Wachovia's predecessor organizations, had lagged top contender Columbus Bank & Trust in market share throughout the 1990s, falling to fourth place in 2000.

Laramy attributes the declining share during those years to the fact that the bank was following a "metropolitan model of customer service that didn't work in this community." Last year, after receiving more autonomy, Wachovia's Columbus operations posted a gain in market share for the first time since 1997, reducing the distance between itself and the bank with the third-largest market share by two-thirds, Laramy says.

Variable Compensation

Empowering branch managers is a two-way street. In return for receiving more authority and a higher visibility within the organization, managers need to do more to bring in new business and solidify relationships with existing customers. In some cases, the entire job description needs to change.

"We expect our branch managers to spend about 75% of their time out of the office today," says National City's Conley. "They need to be out meeting people and talking to small businesses — not sitting in the office running things."

A branch manager's compensation today, Conley adds, is typically based on the growth in core deposits and loans at that office. In addition, National City measures customer satisfaction at each branch. Total compensation can rise or fall as much as 20% based on those scores.

This move to variable compensation is seen across the industry. "Overall compensation for branch managers has gone up, but not a lot, mostly due to the fact that we still have a sluggish economy," says executive recruiter Mary Mallett, whose firm, Charlotte-based SearchPro, works with bank clients. "The area where I have seen a big increase is in bonuses. Before, banks might have paid a modest bonus. Today, bonuses for bringing in new business can be quite substantial."

While the base salaries for branch managers have increased only about 10% to 15% in the last three years, the bonus portion alone is up as much as 40% at some institutions, Mallett says. Doug Rickart, director of Robert Half International Inc.'s financial division based in Minneapolis, estimates that bonuses for branch managers now average about 25% of total compensation, up from a previous average of 10%. Robert Half is an executive recruiting firm that specializes in financial services.

At U.S. Bancorp, Beecham says branch managers can earn as much as half their total salary from bonuses. "It is possible for a top performer to make a six-figure income." More typically across the industry, Rickart says, branch managers are paid between $55,000 and $70,000 per year, depending on the size of the branch and scope of responsibility.

The emphasis on business development has also changed how banks hire and promote branch managers. "Before, they looked more for people with experience in managing a staff. Today, they're looking for more multi-faceted executives with strong business development skills," says SearchPro's Mallett.

Instead of promoting from within the branch system, many institutions are now looking deeper within their own organizations. "It used to be assistant branch managers got the manager jobs, but they often didn't have much sales experience. Today, they're looking at other units in the bank for experienced sales reps to run the branches," says a branch manager at a Midwest bank who declined to be identified. She notes that experienced sales people from small business lending and mortgage units are more frequently being considered for new branch openings.

This hiring strategy can meet resistance, however. Even with improved compensation and greater authority, branch manager jobs are still considered career graveyards by some employees. "There is still reluctance by executives, particularly in commercial banking, to move to the branches," says Robert Half's Rickart. "Some still see it as a step down."

To circumvent that resistance, some banks look outside their profession for experienced sales managers. "We've looked at candidates who come from retail sales, such as department stores," says First Horizon's Pauly. "They understand selling and they're used to working long hours and weekends." U.S. Bancorp finds such "outsiders" particularly useful for running its in-store branches.

Executive recruiter Mallett, however, disagrees. "People who sell other products don't necessarily work out in banking," she says. "You really need people experienced in the financial side. You're better off recruiting from the competition or from other areas of your bank if you want sales experience."

Regardless of where the new hires come from, some additional training is always needed to go with the increased authority. Even those managers who have run branches for years need more instruction in credit issues if they're suddenly responsible for developing small business loans in their regions.

Institutions need to be careful, however, that this training doesn't become an empty exercise. The anonymous branch manager in the Midwest says her institution required that the managers spend several months taking classes on credit standards so that they could identify good lending candidates in their small business community. "But then they told us to send all the loan applications we got to the home office for final approval. I don't know what good the training was if all we are going to do is forward the applications."

This complaint underscores the fact that banks touting "local control" must be prepared to back up the rhetoric with real action. If corporate headquarters still makes the important decisions, branch managers will lose their sense of initiative — or seek other opportunities.

Zion's Lindermann has noticed that when competitors start moving authority to the corporate office, their branch managers start calling her looking for jobs. "Our competitors know we have 'real bankers' running our branches," she says. "Most of the branch managers we talk to want the ability to gauge the needs of their market and to be able to respond appropriately."

Ms. Giesen is a freelance writer based in Libertyville, Ill.

Copyright © 2004 by Banking Strategies, published by BAI.

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