Last week's blog focused on clarifying the rules for producing branch managers. This week, we will discuss some creative compensation strategies. My preferred way of compensating producing branch managers is to set them up on a traditional profit and loss model, but treat the “profit” as a fixed amount of basis points per loan amount. In other words, all expenses remain deductible. However, instead of defining profit in the normal manner, it is limited to basis points. There are certain additional components or elements of this plan that can be used in conjunction with a loss reserve account to diminish the differences between a branch manager's compensation before and after the effective date of the loan officer compensation rules. Those specifics, however, must be discussed with counsel and include a thorough assessment of the compliance risks that may be posed by more aggressive compensation plans. The point, however, is that the P&L basis point structure inherently provides flexibility depending upon how conservative and/or aggressive you want to be with branch manager compensation.
Yet, even without increasing compliance risks, the P&L basis point structure, in my opinion, most closely approximates–in process and ultimate result–the compensation pre-LO comp. It obviously rewards cost controls and most would agree that a branch's average basis point margins are fairly stable. Hence, a branch that averaged 150 bps on deals historically will generally continue that trend barring significant changes in personnel, compensation, or market shifts. Accordingly, assuming volume and expenses were to remain constant, if the branch is paid on basis points what it historically averaged, it follows the compensation should not significantly vary.
Of course, the wild card in this is the manner or method of changing the basis points if production shifts. Indeed, a valid argument can be made that if a branch knows it is getting paid a set number of basis points on each loan, its average bps earned per loan could change since the incentive to obtain overrides has been eliminated. Again, the manner and frequency of adjustments to basis points is something that should be discussed with counsel since there is no question that the basis points can be adjusted so long as the adjustment does not become a proxy for actual profit. The determination of how aggressive to be in such adjustments is something that must be considered on an individual basis taking account competitive and compliance concerns.
While this blog certainly does not answer all of your questions, hopefully it points you in the right direction and, with the assistance of counsel; a specific branch manager comp plan that fits your business is only a conversation away.
