#1059 1970 · Handelsbanken (Jan Wallander) · Retail and commercial banking
Handelsbanken abolished its own budgets and let branches set prices instead of head office
the problem
Central bank targets and budgets pushed branches to chase volume regardless of local risk
background
By 1970 Svenska Handelsbanken, Sweden's largest bank, was in open crisis: a currency-regulation scandal had just forced out its CEO, profitability lagged rivals, and the bank had been chasing market share targets set centrally in Stockholm and pushed down to branches regardless of what any individual branch's local market actually needed. Like most large banks, Handelsbanken ran on annual budgets and volume targets set months in advance, which meant branch managers were rewarded for hitting a number handed down from above rather than for the profitability or credit quality of the loans they were actually writing.
The incoming CEO, economist Jan Wallander, had already run a smaller regional bank without central budgets and had come to see the budgeting ritual itself as the problem, not a tool that merely needed better numbers. His own account of budgets was blunt: a forecast is either roughly right, in which case it's trivial, or badly wrong, in which case following it is dangerous — and either way, a branch chasing a centrally-set target has no reason to price a loan for the actual risk and relationship in front of it rather than for hitting quota.
what everyone would do
The conventional response to inconsistent branch performance is tighter central targets and more detailed budgets — precisely what Handelsbanken had been running when its profitability lagged, and precisely the discipline most banking peers doubled down on, which kept every branch optimizing for a head-office number instead of its own customers.
what they saw
A budget forecast is either trivially right or dangerously wrong, and branches chasing it have no reason to price for real local risk. Wallander removed the target instead of refining it.
the move
Wallander abolished Handelsbanken's central budgeting process entirely in the early 1970s, along with company-wide sales targets, centralized marketing, and most head-office product mandates. He restructured the bank around roughly two hundred branches, later organized into regional banks, each treated as its own profit center with the authority to price loans, choose which local customers to pursue, and make credit decisions without needing head-office sign-off, as long as they operated within the bank's overall risk framework. In place of individual bonuses tied to sales targets, Handelsbanken funds a single company-wide profit-sharing pool (Oktogonen) distributed roughly equally to all employees whenever the bank's return on equity beats the peer-group average, so no branch had a personal incentive to chase volume the way individual sales targets encourage.
why it works
Without a centrally-set target to hit, a branch manager's only remaining lever for improving their own outcome is genuinely serving local customers well and pricing risk accurately, since the shared profit pool rewards the bank's overall performance rather than any individual branch's volume. Removing individual sales incentives also removes the classic banking failure mode where staff push unsuitable products or loans to hit a personal number, because there is no personal number to hit — only a shared one that depends on the whole bank's credit quality, which every branch has reason to protect.
the payoff
Handelsbanken went from below-average profitability in 1970 to Europe's lowest cost-income ratio for decades, with no 2008 bailout.
where it breaks
The model depends on branch managers competent enough to be trusted with real pricing and credit authority, and on a risk framework strong enough to prevent decentralized decisions from compounding into systemic risk without central visibility. A shared bonus pool can also invite free-riding in a much larger or more anonymous organization than a two-hundred-branch bank, where an individual's contribution to the shared outcome becomes too diluted to feel like it matters.
what came after
Wallander's model outlived him by decades, run by his handpicked successors on the same principles, and became the reference case for the international "Beyond Budgeting" management movement that emerged in the late 1990s, cited by companies and researchers seeking alternatives to annual budget cycles well beyond banking.
references
- [1]Svenska Handelsbanken: Controlling a Radically Decentralized Organization without BudgetsEuropean Accounting Review (ResearchGate), 2003researchgate.net