For compensation modeling, the model is much more focused on how to pay people based on the expected market conditions. Image: Fotolia.
For compensation modeling, the model is much more focused on how to pay people based on the expected market conditions. Image: Fotolia.

WE’RE HEARING last week we discussed the importance of getting the loan officer compensation number right to attract the best people, avoid losing the good ones you already have and, above all, to avoid the risk of noncompliance. We talked about what the average mortgage bank was looking for in an LO, and we touched on what the average mortgage operation was looking for. But, who wants to be average?

While the averages have been fairly consistent over the past two years, every lender is different and the best in any business work hard to be the exception to the rule. There are certainly some independents that do a great job with lead generation and some bank-owned companies have excellent hunters. It’s also true that some of the differences of the past few years may not apply during the next few years, as bank walk-in traffic may decrease with higher interest rates and fewer refinance opportunities. While the averages tell part of the story, a company that is looking to refine their plans needs to carefully analyze how to determine what to pay based on the new market conditions. And when you start to try and figure out what and how to pay sales people, you need to also figure out what and how to pay the others involved in the sales management process, including sales management, loan officer assistants and others that get a piece of the pie.

Enter Matt Lind, senior partner at our firm. He earned his Ph.D. in mathematics from Harvard, which is quite similar to my educational background, except for the advanced degree and the Harvard part. He worked with our other partner, Nicole Yung, who also has more degrees that I do. Suffice it to say that when they pick up the chalk, I pay attention. These two have built some complicated models that are used to help companies forecast cash flow, capital requirements and balance sheet projections that shed light on a business for years into the future: the type of models used by CFOs and board room types. For compensation modeling, the model is much more focused on how to pay people based on the expected market conditions, the actual history of the current production staff (how much they originate and what type of loans they originate) and the type of production professionals (hunters or killers) the companies utilize. So, we have worked with clients on modeling pay plans, specifically to determine what to pay based on assumptions made about the current and future markets.

We think the modeling is important because an executive needs to know the impact of changes on compensation for all the originators that they currently have, and how the changes will impact the originator they are trying to attract. For example, how much will you be paying an originator if you change your compensation plan to increase pay on purchase loans? What happens to the producing loan officer comp plans and how is their pay affected? Or, what is the impact if you make the minimum per unit fee higher to attract more smaller loan balances or CRA loans?

Meanwhile, you may want to adjust the tiers to reflect the fact that the number of refinances is going down. And maybe you want to change incentives based on customer satisfaction to meet the requirements from the CFPB. What about pull-through and file quality? Is that something you want to incent and how can you do that? Now, figuring out each of these changes independently is not that hard—but you need to figure it out at each LO level to be prepared for the LO anxiety that may arise. And the pay is not based on the independent impact of these disparate items, but rather on the sum of all of the impacts and all the items at once.

Don’t feel bad if this sounds like a thorny problem to you. It is. It fills up more than one chalkboard, believe me. It also needs more than one degree to solve, which is why I needed help to tackle it.

Now, here is the really complicated part. Once you figure out all the ways you want to pay, you then need to model it based on assumptions about the market. So, what will happen to your top producer’s pay when you make all the changes and the percentage of refinance business drops by 10%, or 25% or 50%? How about if purchase volume increases by 25%? Will your new compensation plans be more likely to retain the top producers or the bottom ones? How are you going to design a management plan that provides compensation for production and the proper incentives for management? These are questions that really need to be answered and not something that comes from easy math, but rather from more sophisticated modeling.

Next week we will talk about certain types of incentive compensation and begin to explore the legal and compliance risks of the various compensation options. In fact, we are setting up a seminar at the MBA annual in D.C. (let me know if you want an invite) that will dig deeper into these topics for lenders who are interested in attending.

When it comes to compensation, it’s a jungle out there and the best-armed companies are the ones that will survive.

Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience, from Fortune 500 companies to startups, including management of two of the most successful mortgage e-commerce platforms. He was formerly with Chase Manhattan Mortgage and ABN Amro, where he was a senior executive during the sale of its mortgage group to Citigroup.