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Compensation and motivation.

One-size-fits-all compensation for loan originators is a big mistake.

Here's a new model that uses compensation as a sophisticated tool to motivate new originators and struggling ones to emulate the successful behavior of top producers. It also offers tips on keeping and compensating high producers.

VIRTUALLY EVERY MORTGAGE BANKING ORGANIZAtion considers its number-one unsolved problem to be how to maintain a steady and healthy stream of production volume during the ups and downs of the housing cycle. Although in today's market, maintaining sufficient volume seems the last problem on most lenders' minds, when this refinance boom finally ends, the age-old problem of bringing in sufficient business will once again loom as a crucial challenge.

As an industry, we seem to have mastered the art of organizing the back office to sell loans in an orderly fashion into the secondary market. By contrast, the sales side of most organizations can best be described as organized chaos.

A few highly compensated originators bring in most of the business. They are our sales "prima donnas." The heart and soul of this effort is often the "producing branch manager" who spends some time managing the office but receives most of his or her compensation based on production. The remainder of the loan officers struggle in various ways to bring in loans, often working as hard or harder than the top producers, but mysteriously, with inferior results.

Management complains, on the one hand, that origination costs are out of control, while at the same time 50-basis point commissions seem inadequate to retain high producers. Our most effective salespeople are romanced by other companies offering a better commission split. These top performers are also tempted by the lure of opening their own mortgage brokerage. Many sales managers are reluctant to hire and train newcomers to the industry because of high turnover and high costs.

As I encounter owners and managers of origination offices, I am continually asked for insight into the various methods of compensation for originators. The questions they raise are crucial ones, but the answers are anything but simple. Managers, for example, might ask: Is one-half percent of the loan amount too much or not enough? Is a draw appropriate for a new sales person? Do the risks of being on commission motivate originators to work harder or do they demoralize beginning loan originators? If everyone is on commission, why are loan originators so slow to change unproductive behavior?

We pay salespeople so much that the other office staff is jealous, yet originators still don't seem motivated. And even if they do work hard, the production figures are often disappointing. What is wrong?

So just how do you motivate and compensate your sales staff to effectively produce a smoothly functioning, high-producing sales organization? No one company seems to have all the answers. While traversing the country, I train the sales staffs of more than 300 companies per year. Occasionally, I find individually effective solutions to one aspect of the motivation/compensation problem. However, these partial solutions are scattered about like pieces of a puzzle that no one has taken the time to put together. This article attempts to fit some of these pieces together and offer a new model so that a more complete picture of what it takes to mold a consistently high-producing and smoothly functioning professional sales force can begin to emerge.

Successful loan officer behavior

The Washtenaw Mortgage Company, Ann Arbor, Michigan, provides loan originator and processor workshops in 16 states as a part of our effort to market our wholesale mortgage banking services. Over the years, we have interviewed and surveyed hundreds of loan officers. Washtenaw has found that the defining characteristic of high-producing loan officers is the ability to focus on a small group of Realtors, builders and other referral sources in order to establish strong relationships with a core group of these individuals.

Compensation systems that succeed are those that reward the creation and maintenance of this successful behavioral pattern. Loan officers who diffuse their efforts among hundreds of Realtors by passing out rate sheets and engaging in other forms of fleeting casual contact usually fail (see "Calling Cards," Mortgage Banking, December 1990). A compensation system that fails to actively discourage such self-defeating behavior is not doing its job.

In order to understand the role played by compensation in the motivational complex of the loan officer, it is first necessary to stop viewing all loan originators as a single stereotypical group. For experienced, high-producing loan officers, commission compensation is a major motivating force that drives their efforts. For new or struggling originators, compensation plays a greatly diminished role in regulating their performance.

New and inexperienced employees are attracted more by superior training and management support, without which they know they may never earn substantial commissions. A successful compensation system must reward the acquisition of knowledge and sales skills. Beginning originators have yet to acquire the productive behavioral patterns of successful loan officers. Newcomers simply do not know what to do.

Below-average producers, or what I call struggling originators, manifest a slightly different set of problems. Both new and struggling originators must acquire certain product knowledge, learn sales skills and develop a pattern of customer relationships congruent with the known behavior patterns of high producers. But struggling loan officers also experience call reluctance and are continuously engaging in unconscious psychological patterns of pain avoidance that cannot be broken by simply offering a lot of money. Compensation for these individuals must be geared to help struggling loan officers meet these challenges. Straight commission is a compensation system totally unsuited to this task, because it is a poor tool for encouraging behavioral change.

Compensating the new originator

New loan officers might begin their first jobs in the mortgage industry with a base salary of $500 per month supplemented by a bonus. The base salary is intentionally set below subsistence level because any new hires who fail to achieve monthly goals and earn a bonus should leave to find a job better suited for their personality.

The bonus can be earned in two ways, first through the building of successful customer relationships outside the company and second, by acquiring product knowledge and selling skills. This system also stresses the discretion of the manager in awarding bonuses. A bonus system will give management more power and control over the formation of initial work habits.

From the perspective of the company, the training program must provide a quick answer to whether or not the new loan officer will be successful. Those who do not meet the first month's performance criteria and who elect to stay, should receive half of their first month's salary. Such a reduction in salary is intended to weed out those who lack confidence, determination and the drive to succeed.

A compensation strategy geared toward the development of work habits that ensure success is most effective in training new loan originators. A new loan officer should be compensated heavily for building relationships and less heavily for acquiring product knowledge. The important thing is to develop service and quality standards and set appropriate goals that correspond to the steps to success. If new loan officers' goals are stated solely in terms of production quotas, they may never find out how to maintain proper call frequency with a well-defined core group of customers. Frustration sets in, usually followed by call reluctance. Essentially, new loan officers should be compensated for reaching intermediate steps on the way to establishing behavior patterns that match the known behavioral template for successful loan officers.

In the first month on the job, new loan officers might be required to accomplish the following three goals:

* Develop one or two experienced Realtor mentors, or Realtor peer/co-trainees with whom they can share experiences.

* Acquire product knowledge and sales skills sufficient to handle telephone rate calls and maintain an acceptable phone conversion ratio.

* Work in the processing department to learn how to structure a loan file.

If the new originator seeks out a Realtor mentor, it's preferable that it be an older, successful Realtor who might later become the new loan officer's first core customer. Peers are new, promising Realtor trainees who are also learning to function in a new profession.

The bonus for accomplishing all three goals should be substantial, perhaps $1,000. If only the second and third goals are accomplished, but no mentor is found, then the base salary for the second month should be cut drastically, perhaps to $250. In addition, the bonus could be halved. If only one goal is accomplished, then no bonus should be paid.

New loan officers might object to this arrangement, saying they are not ready to establish relationships in the first month, due to their extremely limited knowledge of mortgages and loan files. The reply to this should be that mentor relationships are not predicated on a premise of mutual expert knowledge. They are built on the premise that one has knowledge and the other does not. The wider the gap in knowledge, the more justified the relationship. Peer relationships, similarly, assume no expertise on the part of the loan officer. They are formed on the basis that neither party is an expert and that both are involved in a parallel educational process.

In the second month, new goals should be established and the bonus amount should be raised if performance in the first month was outstanding. In particular, incentives should be substantial for those in the group who are continuing to expand their core group of Realtor contacts. This seems to be the one activity that is a consistent predictor of high production for successful loan originators. Any early investment in bonuses for someone skilled in building personal relationships with customers will later seem trivial in light of the future loan volume produced by such an individual. Conversely, it is questionable as to whether any bonus investment is justified for an untried individual who is unable to establish a personal contact in the training phase. This is true regardless of whether or not there were any accomplishments in acquiring product knowledge. Chances are that this person will probably never develop into a high producer.

The struggling originator

Loan officers who have some experience, but below-average success, are incompletely motivated by commission compensation. These struggling loan officers may lack successful habits, but also may need to shed counterproductive behavior patterns.

Like the new loan officer, the struggling loan officer needs a compensation system that reinforces clear behavioral goals. This is especially true if a company is attempting to shift from a weak or nonexistent management system to stronger leadership. Average loan officers stand to benefit the most from a stronger connection between success and reward. This can be brought about by a strong management commitment and a compensation system that rewards constructive behavioral change. Yet, below-average producers might also perceive any such new system as a threat or an unwanted intrusion into their comfortable corporate lifestyle. They may want the increased earnings that better management may bring, but fear and resent the changes that may be required to realize their new sales goals.

The ideal compensation system for struggling loan officers should initially provide substantial incentives for productive changes in their sales behavior. Struggling loan officers primarily need to change what they are doing. There also should be incentives for cost efficiency, for application quality and creative marketing.

Financial disincentives should exist for counterproductive and self-destructive practices. These loan officers can benefit most from a plan that mixes commission with bonus. If the struggling loan officer succeeds in making productive behavioral change, the bonus plus the commission might add up to more than the commission alone. But without the bonus, management has no leverage to demand improvement.

In the entire history of the mortgage industry, the very worst idea ever was the notion that loan originators should not have their compensation tied to quality. Whoever decided that loan officers should be paid a flat one-half percent commission, regardless of the quality of the loan application, or the amount of effort the loan officer put into finding that customer, did the industry a grave disservice. If business learned anything from the world revolution in competitiveness in the 1980s, it was that employees must be rewarded for quality and that poor customer service must be actively discouraged, or companies will be at risk.

The first step toward establishing quality service in the mortgage banking industry should be the removal of the flat-rate commission system for below-average loan producers. Flat-rate commissions reinforce poor performance and send the wrong quality/service message to sales staff.

Compensation for relationships

Why do we pay loan officers? We pay them primarily to find customers--not to take applications. If a company had a steady supply of customers and never had to worry about running out, it could take every single application at a cost of $50 apiece. There would be no need to pay a loan officer a $500 commission to take a $100,000 loan application. The point here is that loan officers should be paid more money for finding customers than for taking applications. If this were to happen, it would be a lot easier to effectively counsel average loan officers about modifying their sales approach and increasing their sales skills.

A loan officer might have a basic commission rate of one-half of 1 percent of the loan amount. If the loan officer finds the customer or cultivates a referral source, he or she is perhaps underpaid at this percentage. The number of productive salespeople who can cultivate six or more high-producing Realtors or builders that yield loan referrals on a steady monthly basis is small. These loan officers should be recognized for their outstanding performance, but the actual amount of appropriate compensation will be a matter of negotiation between the loan officer and the company.

In the case of a refinance or a referral, where the loan officer is not the procuring cause of the transaction, compensation should be lower. Furthermore, there are other important measures of cost, service and quality that cannot be ignored in setting compensation levels.

Compensation for quality

Washtenaw Mortgage's research on its customer base of 800 mortgage brokers, which recently included a detailed cost survey of Michigan mortgage brokers, has shown that processing loans that start with an incomplete or defective application can cost one-quarter of 1 percent more than for loans with properly prepared applications. Loan officers must contact applicants prior to sitting down to take the application to make certain that the borrowers bring all the necessary documentation to process the loan. Having all available documents beforehand is the principle variable affecting processing costs.

Loan originators can also reduce processing time and costs by taking applications on computer, producing the good faith estimate for signing and the truth-in-lending statement, pulling the credit report and obtaining letters of explanation for credit problems. Applications taken in this manner are worth a great deal more to the mortgage lender, and a loan officer's compensation should reflect this.

Loan officers are capable of producing high-quality applications that are cheap and easy to process. These applications also enhance the company's reputation with its customers. (The term customer as used here is meant to include both borrowers and those who refer loans to loan originators.) Why not pay loan officers who bring in such applications 55 basis points or more instead of the standard 50 basis points? If applications are poorly filled out and put together, why not pay 45 basis points or less? The amount of time and effort expended by the processors to make the application work and satisfy customer expectations will never be covered by a mere 5 or 10 basis points.

Managers and below-average producers need to work together in order to set appropriate performance goals and improve sales techniques. Loan officers should be rewarded for taking on the challenge of working with management in a constructive fashion. Some accomplishments that might be rewarded include taking courses, reading books, keeping written goals, keeping detailed call reports, making use of computers to improve service and reduce costs, engaging in creative marketing techniques and going to training workshops. These accomplishments should result in a modification of their unsuccessful behavior and, accordingly, boost their production.

High producers

A good case can be made that high-producing loan officers should be compensated on straight commission and left alone to originate 150 or more quality loans per year from referral sources. Loan originators are so highly compensated because of the personal economic risks they run, the stress they absorb and the simple fact that demand for outstanding sales skills exceeds supply. A top originator's replacement will be harder to hire and harder to train than the average employee. In addition, the high rate of failure in the position only adds to the expense and aggravation. High-producing originators must be retained if an organization wants to grow.

No loan officer ever left for another company unless that producer believed the processing at the new company would be equal or better than at the company he or she was leaving. This is the case, regardless of how much commission is being offered to entice the switch in employers.

Keeping this in mind, I believe there are three basic rules for retaining high producers:

* Pay must be competitive. But there is no need to match the worst excesses of the competition, if your company provides valuable management and support for its loan officers.

* Rigidly control the workloads of processors and encourage the processors to maintain quality communications with customers at all times. Overburdened processors give poor customer service. Quality processing and an atmosphere of teamwork in the office give the high-producing loan officer the greatest possible incentive to stay.

* Processors should be compensated by the company, never, ever by the loan originator. Incentive compensation for processors is not necessarily bad. But it should never be linked to a specific loan officer's volume. Furthermore, it should never be expressed as a percentage of the originator's commissions. Bonuses should always come directly from the company. Processors quickly learn where their financial best interest lies. If the company lets that interest derive from loan officers, then top loan officers will simply take their processors with them when hired away. A processor's loyalty must be first and foremost to the company.

Just because commissions can be relied upon to motivate high-producing loan originators does not mean that these individuals lack any need of management. But management for the high producer functions more like a support structure to enable those originators to meet their lofty goals and live a more satisfying personal life. Being a high producer is a grind. It's no wonder that many high producers burn out or quit to take less stressful positions. The stress and pressure are incredible. Anything a company can do to lessen the stress on loan officers will earn their loyalty.

Compensation for these individuals must be viewed as a combination of monetary and nonmonetary benefits. A motivating environment, satisfying human relationships, meaningful training, management support with customers and freedom from the undue stress of problem loans are all important aspects of motivation and compensation.

Companies and loan officers should invest together in education and training as a part of their ongoing relationship. Companies that bear the entire cost of these perks realize less in the way of behavioral change and build less loyalty than companies that form a cost-sharing partnership with their employees. When salespeople and companies invest together in increasing skills and behavioral change, the results usually justify the money being spent.

Sales management

Finding an individual to aggressively and effectively manage the sales force is the key to profitability and growth. Most mortgage brokers find it impossible to grow beyond approximately 10 employees. This seems to be the upper limit on size for an origination organization that lacks effective sales management. Others try to grow beyond 10 employees but find that without sales management they are unstable and soon fall back to approximately 10 employees again.

The right person to manage loan officers must have solid administrative capability. Sales management is an administrative position. High-producing loan officers will not make good managers unless they have solid administrative skills. Problem loans should be handled by a manager in the operations department who has the complete trust of both the sales manager and the loan originators. Together the sales manager and the liaison in operations are responsible for helping the originators with difficult loans. The success of this relationship between the sales manager and operations manager is one of the keys to profitable growth. However, one very important point to remember is, that it is a serious mistake to put your sales manager in charge of problem loans. He or she will not be able to function effectively as a sales manager with this responsibility. It will turn the sales manager from being a recruiter, trainer and supervisor into a crisis manager.

The principal duty of the sales manager is to supervise the training and sales efforts of new and struggling loan originators. Sales managers should help their employees set written goals, develop a core group of referral sources and maintain their contacts with this core group on an appropriately frequent basis. Ideally, sales managers should spend roughly 25 percent of their time recruiting new loan officers. Currently, no one I know in the mortgage industry devotes this amount of time and effort to recruitment.

Compensation is key

One of the most effective ways to develop a smoothly functioning, high-producing sales staff is to have an appropriate compensation package. The package needs to be crafted in a way that not only increases the motivation of the sales staff, but also sends a message to customers that your firm is dedicated to high service and good quality.

The compensation system should reinforce the key characteristic of high-producing loan officers--their ability to develop and care for a core group of Realtors, builders and other contacts that will provide a constant supply of loans. Furthermore, loan originators should be compensated for producing high-quality work and for providing good-quality service. Strong management support will be needed to achieve these objectives.

New originator compensation should focus on rewarding the establishment of behavior patterns that have proven to work. On the other hand, below-average producers need incentives to change their unproductive behavior. This can be accomplished by rewarding behavioral change and providing strong management commitment. If these steps are taken to change the current industry compensation norm, keeping sufficient loan production in the pipeline will no longer be a problem.

Richard Greene is vice president of marketing for Washtenaw Mortgage Company, Ann Arbor, Michigan.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Cover Report: Compensation; loan originators
Author:Greene, Richard
Publication:Mortgage Banking
Article Type:Cover Story
Date:Nov 1, 1993
Words:3780
Previous Article:Whole-loan book entry: a blueprint for the future.
Next Article:Paying for performance.
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