By Timothy Reimink
A survey of financial institutions across the country indicates they plan to open an average of nearly four new branches each by 2010. That’s an indication that bank officials anticipate continued growth over the next few years.
Financial institutions have opened 240 branches in New Jersey since 2002, including 57 last year, bringing the total to 3,279. The state’s expansion trend began in earnest in 2003, when 63 new branches opened, up from 19 in 2002. In 2004, 55 new branches opened, with another 65 launched in 2005.
But as every bank executive knows, new branches aren’t successful in and of themselves. It takes product sales to make a branch flourish – and, according to the Crowe Report on Branch Performance released in May, employee incentives can do much to spur those sales.
The study examined operating practices and performance in 1,994 branches at 91 institutions across 32 states. It looked at branch-level performance data such as sales of deposit products and loan products, investment sales, total number of accounts and balances by products to establish benchmarks for branch performance.
It sheds light on many of the areas that affect today’s financial institutions and gives banking executives across the country new insights into how they can improve branch productivity. To do that, the study also examined operating practices such as sales programs, compensation, management practices and branching strategy.
Incentives Improve Sales
The Crowe Report found that demographics play a key role in branch product sales, regardless of whether a branch is part of a financial institution that has a high focus on sales or one that places more emphasis on customer service. At the same time, however, the report showed a clear link between incentive compensation and sales of certain products (see Figure 1 on the opposite page).
As one would expect, branches that offer incentive compensation to their employees sell more home equity loans, and also more free personal checking accounts and business checking accounts per full-time equivalent (FTE) employee than branches that don’t offer incentives. Crowe evaluated data in terms of FTEs because doing so helps moderate for differences in branch size.
A more surprising result was that product sales increases vary according to which employees receive the incentives. For example, as seen in Figure 2 (on the opposite page), desk staff and teller incentive compensation programs are associated with higher personal savings sales, while manager incentive compensation is not.
The differences may be due in part to the basis institutions use to determine incentive rewards for various employees. Branch manager incentive compensation is typically linked to an increase in total deposit balances, rather than the number of accounts. Desk staff and teller incentive compensation is often linked to the number of smaller-balance accounts, such as personal checking and savings.
Two-thirds (65 percent) of the institutions that responded to the Crowe operating practices survey have formal incentive programs for branch managers and tellers, while nearly as many (62 percent) offer incentive compensation to desk staff.
The incentives are based on different measures for different employees. Virtually all the institutions (91 percent) that offer incentive compensation to branch managers pay them on the basis of branch performance. Half (49 percent) also pay on individual performance, but only 36 percent of branch managers receive incentive compensation linked to the financial institutions’ performance.
In considering branch managers’ performances, 71 percent of institutions look at deposit balance growth, 64 percent at new deposit accounts opened and 57 percent at referrals. Only 38 percent of responding institutions include branch profitability as a measure for branch managers.
Incentives are linked to different factors for tellers and desk staff, both of which are more likely to be rewarded for individual performance rather than branch performance. Branch performance enters into incentives for desk staff more often than for tellers, however. Only 49 percent of institutions consider branch performance in determining incentives for tellers; 69 percent include it when establishing desk staff rewards.
By contrast, 85 percent of institutions base teller rewards on individual performance, although the individual performance measures vary. Referrals are by far the most common measure, with 73 percent of institutions offering incentive compensation to tellers for referrals of loans and deposits and 69 percent rewarding referrals of other products.
Only 36 percent of institutions consider balancing of cash drawers in determining teller incentive compensation; even fewer (31 percent) look at branch deposit growth.
The incentives for desk staff are a little different from those for tellers and branch managers, although referrals are still the primary measure – cited by 73 percent of institutions. For desk staff, however, 66 percent of institutions also consider new deposit accounts opened. New loans booked enter into desk staff incentive compensation in 59 percent of institutions, while 46 percent consider cross-selling.
The differences in what is rewarded affect what is sold. Branch managers, whose incentives are typically driven by total deposits and loans, appear to steer employee efforts toward larger-balance deposit accounts. Desk staff and tellers, whose incentive compensation is usually based on new accounts opened, are more likely to focus on higher-volume checking and savings accounts.
Branches that offer incentive compensation for desk staff sell 23 percent more personal checking accounts per employee than those without incentives. As seen in Figure 3 (on the previous page), new personal checking accounts total 9.7 per FTE per year in branches where desk staff personnel receive incentive compensation. In branches where there are no incentives, new personal checking accounts total only 7.8 per FTE per year.
Similarly, in branches that offer desk staff and teller incentive compensation, there are about 23 new personal savings accounts per FTE per year. Branches that do not reward desk staff report 17.2 new accounts per FTE per year; those that do not reward tellers show only 16.4 new personal savings accounts per FTE per year.
Despite evidence that incentive compensation and other sales practices improve branch productivity, however, institutions have not yet widely adopted such practices. And, while institutions want their employees to sell and refer more often, they aren’t providing support for those efforts in the form of training.
A significant majority (86 percent) of institutions offer cash incentives for referrals, for example, but only 65 percent have implemented formal incentive compensation programs for tellers, desk staff and managers.
Similarly, although 76 percent of institutions say they have formal programs to encourage referrals and cross-selling, only 57 percent require managers to complete management and sales skills training. Only 60 percent offer formal ongoing sales skills training and only 58 percent use formal sales management processes. At the same time, 67 percent of institutions set specific employee sales goals and 69 percent sponsor institution-wide sales contests.
Sales Focus Impact
The choices institutions make regarding sales processes establish the level of sales focus within their organizations, which in turn affects their success in selling certain personal products. Branches with a high sales focus, for instance, sell three times as many home equity loans and two times as many money market accounts per employee as branches with a low sales focus. High sales focus, of which incentive compensation is a major part, is associated with varying disparities in sales of products, as shown in Figure 4 (on the previous page).
The Crowe Report defines high sales focus as those institutions that provide incentive compensation, use formal sales management processes, consider branch managers as primarily sales managers, provide branches with targeted call lists, set outside calling goals for managers and conduct sales contests.
Thirteen institutions, with 911 branches, were categorized as having a high sales focus. Another 35 institutions, with 674 branches, had a medium sales focus (include some but not all the above practices); while 26 institutions, with 316 branches, had a low sales focus (use few of the above practices).
Higher sales focus also corresponds to higher balances per FTE across major deposit categories except certificates of deposit (CDs). It appears that branches of high sales focus institutions may push personal money market balances as alternatives to CD balances, as personal money market balances increase with heightened sales focus. CD balances are highest in institutions with a medium sales focus.
Sales focus appears to have little influence on the sale of personal checking products, which may be evidence that employees are most often selling to existing customers who already have checking accounts. Demographics play the predominant role in the sale of some products, including personal checking, mortgage and personal loans, while the effect of a high sales focus is marked with other products.
The exception is with free personal checking accounts. High-sales-focus institutions’ branches sell about 1.5 times as many free personal checking accounts than do their low-sale-focus counterparts. The explanation may be that these products are easy to sell and employees use them to meet sales program requirements.
Customers ARE No. 1
Regardless of how much emphasis institutions place on sales, attracting and expanding customer relationships remains the largest source of branch revenue growth. Therefore, efforts to sell personal products and increase balances in the accounts are vital to branch success.
The Crowe Report on Branch Performance clearly indicates that incentive compensation can be a valuable tool in motivating employees to achieve institutional objectives, especially those that are sales-related. Branch success is determined by sales, and is buoyed by the fees and account balances associated with those sales.
The report also demonstrates that the choice of incentive compensation programs, who gets incentive compensation and the categories that are rewarded, make a difference in results. Thus, while there are many ways to design, administer and pay incentive compensation to branch employees, institutions should be careful to match their programs to their products, their customers and their strategies.
Timothy Reimink is senior consultant with Crowe Chizek and Co. LLC in Grand Rapids, Mich. He can be reached at (616) 774.6711 or via e-mail at email@example.com.