The Topic Not Often Discussed: Viability of Variable Compensation

Next week, the annual MBA conference starts in Boston. Approximately 5,000 industry members are expected to attend. The conference has an impressive roster of speakers —from Fox News anchor Megyn Kelly to NASA Commander Captain Mark Kelly and his brother — sharing their inspiring stories on how to run a mortgage banking firm in today’s dramatically changing marketplace.

I have been attending the conference for years and have even been a moderator on several panels (By the way, it is really hard work if you want to have a good panel discussion). I have been there when protesters have signaled their unhappiness with the industry and when politicians have shared their thoughts before announcing their entry into the president’s race. This year’s topics range from big data to e-mortgage and the final barriers to making it part of the industry.  Granted, these are important topics but not the one that I would like to see addressed.

My selection for a session would be a discussion on variable compensation. Does 100% commission fit in the new world of mortgage banking where customers can complain in real time and brand equity can evaporate overnight when borrower’s expectations are not met? Last week, I discussed how the customer’s experience is the number one product of every lender. Today’s reality is that just one bad interaction with an originator or processor can ruin any chances of the customer recommending a lender to friends and family.

Variable compensation has many different versions and so I am discussing 100% commission plans that are the industry norm in mortgage banking. Our industry’s fascination with 100% commission is rooted in our alignment with real estate agents (who still are 100% commission) and the common belief that a low cost payroll model is best because it will weed out inefficient producers.

The idea behind variable commission plans is the company pays only sales professionals who produce and employees who don’t produce — well they will leave on their own because they will receive no income from the lender. At face value, this sounds reasonable but unfortunately, it does not match the reality of today’s business climate and the impact it has on the quality of the sales force. Here are just a few examples of the negative fallout:

• Originators adopt a mindset that they are there only to sell “so to heck with the lender and their silly rules.” This encourages management problems when the “win” is only income for the originator. The customer experience doesn’t matter in this environment.

• Companies falsely assume that a 100% commission underperformer does not cost the lender any money. Lost sales opportunities are not factored into the equation. The time invested in onboarding is not accounted for either.

• When your business model is low investment in employees, attracting new people to the industry becomes next to impossible.

• High turnover becomes embedded and low morale takes over. Both are not compatible with a lender’s growth or long-term success.

• Lack of a career path and self-development leads top producers into management positions in order to grow their business and move up to the career ladder. The problem here is that top producers may not have the skill set to be good managers.

The list goes on with the end result being a salesforce that is really a group of independent contractors who are rented for a short time period until the next lender hires them away.

When will this set-up change in sales organizations? Frankly, it has already happened. Just look at Wall Street firms. At one time, many were set up similar to mortgage banking where 100% commission was the pay plan for their sales people. In the ’80 and ‘90s, as more regulations were passed (Series 7/63), these firms decided to hire differently (no longer people they knew) and more objectively. They also decided to invest in training their sales force. The bottom line is they hired better people and then invested in improving employee skill sets. What the Wall Street firms did wasn’t rocket science, but it was smart and took leadership by their executives. So maybe next year, this topic could be a session. I would love to lead it.