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?
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.
