The Flaws of 100% Commission Pay Plans

The 100% commission pay structure has long been considered the gold standard in mortgage lending as the best way to motivate originators to generate more volume.  Implicit in a 100% commission pay structure is that a large reward is available for sales professionals who do well. Lenders assume that originators who fail to perform will self-select from the company because they will not be compensated.

The problem arises when external forces create loan demand for a lender’s products and originators receive compensation for just answering the phones. The current refinance boom is a perfect example of the marketplace driving production results. Today, originators who lack the skills to generate new business are essentially being bailed out, which defeats the purpose of a commission-only program.

While mortgage managers often complain that originators are paid too much under compensation plans, they are reluctant to make any changes because they fear originators will jump ship to another lender. Thus, the 100% commission structure remains in place even though it does not align with what lenders require to achieve long-term success  amid intense competition and a dramatically transformed retail landscape.

Traditionally, 100% commission jobs arose from start-up companies or new industries that did not have the resources to pay employees a salary.  Industries such has real estate, stock brokerage, insurance, and financial services later adopted this compensation method because of its variable cost component.

Later, management teams justified that it would attract employees who were motivated to perform and work hard to achieve high income.


Fundamental Flaws of 100% Commission

The commission-only structure has a number of fundamental flaws starting with the reality that only 18% of customers come back to their original lender. This low percentage indicates that sales professionals are not forming deep enough customer relationships to earn repeat or referral business — an originator’s primary purpose!

The 100% commission pay structure has also hampered our industry’s ability to attract new sales professionals who do not have a book of business. It is rare that a rookie originator can be profitable after a 90- to 180-day draw period runs out.

In a recent conversation with a government agency consultant, the individual remarked that federal agencies had 200 interns this year and none chose to go into sales. The fact that some of the best college graduates are avoiding sales careers guarantees that mortgage banking’s hiring problems will only get worse in the future.

More Issues with 100% Commission:

  • Under commission-only programs, sales organizations tend to have high turnover. In the mortgage industry, turnover rates can range from 30% to 80%. It is hard to deliver an excellent customer experience across the board when managers must constantly replace their sales staff.
  • The commission-only model lacks a definitive career path for sales professionals. More often than not, top producers are promoted into sales leadership positions when they may not possess the core competencies to be a manager. Poor quality first-line managers can do more harm than good to a lender’s sales team and can negatively impact long-term sales results.
  • Corporate management has a limited ability to direct behavior with a salesforce that basically consists of independent contractors. When originators are responsible for their own sales training and development, many do not learn important advanced selling skills.
  • What is considered “good” at a company is mostly based on income earned by the sales rep. Other important targets that the lender might have are never taken seriously because the company culture is all about how much money they earn and nothing else.
  • Individuals who do succeed in a 100% commission structure at some point will realize that they are better off putting their talents to work as a broker when the company inevitably changes comp plans.

The flaws of the commission-only pay structure should raise serious concerns for senior managers and encourage them to look for better alternatives if they truly want to achieve long-term sales success for their organizations.