Employee Compensation

We have seen the compensation for mortgage origination change more in the last 10 years than in any time period prior. Are we paying the right incentive for the right behavior or are some of the incentives actually creating bad behavior?

Incentives
Oftentimes we continue to use compensation plans because they are the ones we have always used, or because those are the plans that the competition uses and we think we must use them to be “competitive.” The problem is that we do not always take the time to see if the compensation plan actually creates an incentive for the loan originator to do what you want them to do. Given what has transpired over the last 18 months, I would say that in many cases they did in fact have unintended consequences.

Compensation Plans
Over the last 40 years, we have seen a number of compensation plans, including salary only, commission that is a percentage of the origination fee, commission that is a percent of the loan amount, commission that is a percent of the gross revenue, overages, volumes incentives, cross-sell incentives, mortgage protection incentives. The mortgage industry as we knew it from 2000-2007 is gone and I feel the changes we have seen so far are just the tip of the iceberg with many more coming in 2009, some of which will certainly include compensation.

Future Loan Performance
One idea that has surfaced over the last year is compensation that includes a factor for loan performance in the future. You might be saying, “That can’t be done! How would we track it?” Loan originators are not underwriters, so why should they be held accountable? Their job is to bring in loans, not decide whether they are good loans. Those are some of the typical reactions you get when this subject comes up. I am not taking sides but would like to point out some contradictions to that type of thinking:

• It can be done and could be tracked if the industry required it.
• They are not underwriters but they do have the ability to prevent transparency, which in turn prevents a prudent underwriting decision.
• Even if the loan was good on day one, does it make sense for the loan originator to receive full compensation even though the loan went bad in nine months?
  

Personally, I am challenged to figure out how to make this work but I do know that we will be asked to look at things very differently in the future, so it is worth thinking about.

My Compensation Plan
Our company pays a base salary plus a commission of approximately 30 to 50 basis points after closing a minimum dollar amount of loans on a monthly basis. We have chosen not to pay overages to eliminate any chance of creating an atmosphere that fosters discriminatory lending practices. As a bank owned mortgage company we strive to encourage our people to get out and bring loans into the bank, but honestly, there are times when this compensation actually encourages them to stay in their office and capture the loan customers that call in or walk in. This is a good example of how the compensation plan may not be creating the actual behavior that we desire. It does a great job increasing the loan originator’s desire to close more loans, but it does not always increase their desire to go out and uncover opportunities. Our company is fortunate to have a large customer base, and because of that we do have a lot of opportunity that just falls in our lap which is a great deal for the loan originators, but it might be time to re-evaluate.

Eliminating Overages
A second line of thinking is that it is time to eliminate overages from compensation. The proponents of this idea feel overages create an atmosphere primed to take advantage of the less fortunate. Once again, this would create turmoil in the industry, especially from those who make a good portion of their compensation from overages. While I think that in many cases we are talking about an eighth here and a quarter there, I must admit that in the extreme cases it would be hard to explain how it is the right thing to do when you charge a less fortunate person substantially more just because they didn’t know any better and you are personally rewarded for doing so.

Looking Ahead
As managers, we are charged with creating a sales team that will go out and maximize production in a way consistent with the desires of our company. Part of doing that is to create a compensation plan that rewards the team for accomplishing the goals placed before them. Consider the following: Is your team clear on what your company wants their behavior to look like? If not, it is up to you to clarify. Our salespeople need clear direction on how our companies expect them to produce mortgage loans and then be held accountable to those standards both with compensation and disciplinary action if needed.

How Do You Spell Success?

How do you measure the success of a loan officer? What is your definition of success? What disciplines increase the chance of success? As a leader, you have multiple methods of tracking the success of your sales team members. Closed loan reports, revenue generated reports, pipeline reports, new application reports and call reports are just a few of the options available to help you determine the success level of each loan officer that you lead. Now that you have this information, what do you do with it? Let’s be honest, none of those reports reveal why the loan officer was successful, or how you as a leader should respond.

What we need is a tool that not only shows the loan officer’s level of success, but also the disciplines that create success and the guidance for you to become the leader that they need. Tim Enochs, Master Coach at Building Champions and author of Every Day is GAME Day! stepped in and helped me develop such a tool, which we would like to share with you in the hopes that it will improve your ability to coach your team to higher levels of success.

The Success Management Model
This model is built around a four-quadrant chart that is customizable for each team member’s position based on your expectations of them—both from a production perspective and a discipline perspective. Each quadrant describes a combination of good results/poor results and disciplined/not disciplined in reference to your team members. Depending on which quadrant a loan originator falls into, there are arrows that describe the best possible course of action that will lead to a “Model Loan Originator.” For example, this chart says that an originator who falls into the poor results/not disciplined quadrant will need greater accountability through further training opportunities. The beauty of this model is that you determine what is considered good, poor, disciplined and undisciplined as opposed to a stale document that doesn’t really fit your organization.

Step 1: Create your definition of “Good Results” and “Poor Results”
It is important to define these terms for yourself and your team. To help define these conditions, I would suggest that you look at a variety of measurements including what you feel are positive monthly closing number, monthly gross revenue, monthly net revenue and cross-sell levels. Define “Good Results/Poor Results” by using weighted success criteria.

Step 2: Create your definition of “Disciplined” and “Not Disciplined”
You need to be clear with yourself and your team on what performance is considered “Disciplined” and what is “Not Disciplined.” Again, I would use several factors in making this determination including looking at what you feel is the acceptable number of past clients to be contacted monthly, the number of monthly pre-application consultations, monthly face-to-face meetings with referral partners, and the number of applications to be completed monthly. Again, define “Disciplined/Not Disciplined” by using weighted success criteria.

Step 3: Plot each loan officer on the Success Leadership Model Quadrant
The Success Leadership Model Quadrant (mentioned above) is designed with the following labels: Disciplined/Not Disciplined and Good Results/Poor Results. Using the results from step one and step two, plot each loan officer using this quadrant system. The model will then tell you what action needs to be taken. For example, the loan officer that has good results and is disciplined would be considered a model loan officer. However, the loan officer that has good results but is not disciplined is probably riding the success of the company by catching referred or call-in deals. I would recommend diverting those leads to the model loan officer, which should give this loan officer incentive to becoming more disciplined to continue to achieve good results. The bottom quadrants are where this model becomes most valuable because this is where management becomes challenging and sometimes difficult.

When a loan officer falls into the poor result and not disciplined quadrant, the result must be additional accountability. This loan officer would need to agree to and embrace intensified coaching and additional training from the company in hopes that their results would improve. If they cannot embrace this idea, it should be clear that it is time for them to seek employment elsewhere. Similarly the loan officer that falls into the poor results and disciplined quadrant needs additional training to allow their discipline to create improved results. These are the people that are willing to do what you ask but have not achieved acceptable results. When they have received appropriate training and have had enough time to improve, check the results again and make necessary adjustments.

Once you have designed this system to meet your criteria, it becomes a very simple tool to use with each loan officer to keep them focused on success. My goal would be that your loan officers would begin to plot their results on this model themselves, and take the appropriate action even before you do, creating a much more satisfied and productive team.