Garth Graham From STRATMOR Group: Evaluate Sales Compensation Structure to Regain Profitability

Senior Partner Garth Graham manages STRATMOR Group’s mergers and acquisitions activities, providing strategies for some of the largest independent and bank-owned mortgage lenders. He also leads the marketing strategy and execution practice, which focuses on lead generation and lead management methods and practices primarily for the consumer direct and retail mortgage origination channels. He has more than 30 years of experience in mortgage banking, ranging from Fortune 500 companies to successful startups, including management of two of the most successful e-commerce platforms.

Garth Graham

When looking to cut loan production costs, mortgage bankers tend to look closely at fulfillment—or back office expenses—yet the opportunity for significant savings there is limited. For instance, let’s say a lender somehow manages to cut fulfillment costs by 20%, which would be an excellent outcome. This would equate to a cost savings of $500 (based on $2,500 fulfillment costs), representing only 5% of an assumed $10,000 total cost to originate. Imagine cutting the fulfillment costs in half (WOW!), generating over $1,000 in savings and realizing that is still only about 25 basis points of savings. Still, fulfillment is where the industry has traditionally gone to cut production costs.

Meanwhile, retail sales costs have grown and constitute the largest share of the cost to produce. While we see some evidence that sales costs are dropping as revenues drop and margins have compressed, it is highly unlikely that the percentage of sales costs to total origination costs will change materially. Sales will continue to be the biggest component of production costs.

So, what can be done to manage this beast? How do mortgage lenders make the most out of their spend, to actually “get what they pay for?”

It Starts from the Top

A sound compensation strategy always starts with a thorough understanding and alignment of a lender’s culture and objectives. Examples of different lender cultures and models include:

Heavy Hitter: Focus is on top producers, extra competitive pricing, very high scale, footprint in urban areas, higher average loan sizes.

Mid-Market: Focus is on mid-range producers, lower scale, footprint largely in suburban or rural areas, lower average loan size.

P&L Branch Manager Centric: Focus is on high producing branch managers, with a P&L branch model where the branch manager receives compensation tied to the financial performance of the branch.

Balance Sheet Focused: Depository with a focus on portfolio lending, more reliance on depository brand, bank referrals and mining the customer database.

Captive: Builder or realty captive with a focus on superior service to their affiliate and maximizing capture rate.

Once there is a complete understanding of culture and model, executives should consider the common structures and elements that can be used. According to STRATMOR’s Compensation Connection® Study, the most common compensation structure in place today is to pay basis points of the loan amount rather than a flat dollars-per-loan amount.

But is this really aligned with the company’s goals, and are there some other structures or elements to consider?

For example, you may want to think about a unit-based pay structure with adjustments for certain factors like loan type or submission success rate. You could put your compensation floor at a fixed amount, say $3,000 per loan, but then move that number up and down based on certain elements such as:

Pay less for refinances — after all, they are easier to do and are usually present during high demand periods.

You could pay an extra amount, maybe $500, if the LO achieves a high customer satisfaction score.

You could pay an extra amount, maybe a couple hundred dollars, if it’s the LO’s previous customer coming back for a refinance or new loan.

You could pay a couple hundred more if your average lock pull-through rate is over 90%.

You could pay another couple hundred dollars if the LO’s first time submission to underwriting is over 90%.

You could pay a bonus if the total number of loans hits a certain milestone during the month.

You could pay a bonus for a TEAM goal of hitting a certain quarterly objective.

If the lender services loans and an LO keeps a borrower from churning out with a new loan or refinance, they get a bonus.

Unfortunately, many of these factors are ignored in compensation plans today because the only thing we focus on is the loan amount. How can we expect our sales professionals to give us what we need to grow stronger businesses and focus on these quality metrics if it’s not built into their comp plans?

What Holds Lenders Back from Making Changes?

No one wants to lose their top performers because of changes to their compensation plans. Yet I’m not sure that would happen, especially if you took a thoughtful approach to the changes and included compensation incentives that would motivate your performers to achieve certain metrics. But it takes a great deal of intestinal fortitude to even contemplate changes to compensation structure. This is especially true in a highly competitive environment.

But the reasons to make certain changes are compelling. If you’re running a bank, for instance, and your executives are constantly trying to convince regulators that you are all about fair lending when you know your current LO comp plan pays originators based on the size of the loans they originate, you may want to consider a unit-based compensation structure, more aggressive use of floors and caps, or a hybrid of dollar and unit volume tiers.

When I talk about changing sales compensation, most lenders think I’m talking about taking pay away from their top performers. That’s not necessarily what I’m saying.

A new comp plan is a new way to pay, but it doesn’t mean you have to start cutting the pay of your top producers — the pay would just be structured differently to complement corporate goals. You also may be paying fewer LOs, because you can keep your best LOs and release the ones that are currently costing you too much.

It’s okay to pay more if you’re not getting less. You just have to make sure that you’re getting what you pay for.

How Lenders Can Start Solving this Problem Now

The important takeaway from all of this is to make your changes now and make sure they benefit your institution over the long haul by paying for the behaviors you want to see in your professional sales staff.

STRATMOR works with lenders every day, helping them craft compensation plans tailored to their actual needs, their real costs and around what drives profitability. Here are two approaches that work well:

  1. Start with the Channel

When you make a companywide change, it’s always good to start in an area that will have the smallest impact, or the impact will be on the smallest group of people. In the case of LO compensation, maybe that place is the consumer-direct channel. Many of STRATMOR’s newer LO comp engagements are happening here because consumer-direct is a great place to start. Although they are still very valuable, a consumer-direct loan officer does not make the same contribution to the enterprise as an originator who can source their own business.

In addition, this department typically analyzes their expenses by cost per unit and loan sizes tend to be more consistent than in traditional retail. They don’t obsess over basis points, like other lenders do. Instead, they are all about reducing the total marketing cost per unit.

The consumer-direct business is down so much in this environment that any changes companies make would almost go unnoticed but have a huge impact on their business when the market comes back. Also, LOs in this channel are less likely to leave for another job in the business because no one is currently hiring consumer-direct LOs.

  • Start with New LOs

A lender could also start by leaving their veteran originators on their existing comp plan and change it for the new rookies that come into the business. As the older generation ages out, they can pass their wisdom along to the younger LOs, who can then carry on under the new comp plan.

As soon as the veterans hear about comp plan changes and begin to search the job listings, let them know that the changes won’t impact them. This is all about bringing in the next generation of loan officers and preparing the institution to succeed in the future.

Once the experienced LOs realize that they can work through to retirement—which is very close for many—without a disruption to their income, they will be more likely to help bring the new LOs up to speed, especially if lenders build that into their comp plans.

Some Final Points

In determining what changes might be appropriate, it’s important for lenders to run projections on how any changes might impact overall average profit margins not only today, but in a variety of rate and volume scenarios in the future.

By understanding your culture, evaluating various compensation models and implementing strategic changes, you can position yourself for success, even in a competitive environment. Lenders who hope to stay in the game over the long term—and be wildly more successful when the cycle turns and the business comes back—should be working on sales compensation structures today.

To learn more, read my full article on sales compensation strategies here.