A Prescription for a Balanced LO Comp Plan

Devon Yu/Feng Yu - Fotolia

WE’RE HEARING over the last few weeks I have discussed that mortgage companies are having a hard time figuring what to pay loan originators and other sales staff in this market. I pointed out that the challenge was balancing the needs of the sales staff with those of the compliance or legal folks who are feeling pressure from the CFPB and others regarding how sales staff should be paid. I also discussed how the finance folks appreciate the need to figure out how much to pay staff, especially in this new market climate.

For example, a compensation plan with tiered compensation that was designed for a refinance market may not be best for a market where purchase loans are now the norm. We have received a lot of responses to this series of articles and those responses (some pretty well thought out and others simply calling me an idiot) seem to show that this is a topic of interest for many in the industry.

When you talk about pay, industry folk can get pretty revved up. Makes me think I should have a lawyer present when I talk about this topic? Actually, that’s what we’re doing, not because I plan to plead the fifth, but rather because it is very hard to have a meaningful discussion about compensation plans without having a discussion about compliance. So, based on the high level of interest in this topic, Stratmor is partnering with attorney Mitch Kider to offer a free event at the MBA annual in Washington later this month to discuss this topic in more detail.

Meanwhile, let’s discuss some of the reactions that I received. There were readers who think that the whole compensation and staffing model is broken and should be changed. This group seems to think that originators should have more of their pay based on quality (however that is determined), maybe with higher base salaries, which could attract more new talent to the industry. Some even drew a parallel with the pharmaceutical industry, where college graduates are brought in, trained and sent out to sell doctors on better drugs much the way loan officers are sent out to develop relationships with Realtors. One interesting parallel here is that the FDA recently created a series of restrictive rules governing how pharma reps can market to, incent and provide gifts to docs that look similar to some of our own RESPA rules. So, maybe we are similar to the drug peddlers!

So, perhaps the concept of the pharma plan is a different model, and comes with advertising targeted direct to consumers. After all, the drug companies are marketing directly to consumers now, in an effort to get them to ask the referral source (their doctor) about a certain ailment. It’s unclear how effective these ads are, given that consumers are forced to listen to the inevitable disclaimer about potential risks. Is it really worth risking death to cure “shaky leg” syndrome or risk four hours of pain just to “be ready when she is?” If we end up like pharma, are we soon to see a commercial targeting consumers and urging them to “ask their Realtor about a loan process lasting longer than 45 days?”

I don’t have a specific position on any of these tough questions. But, what I believe is that every company is different and one size does not fit all. The pharma model may work for some, while others want to pay high basis point compensation plans for hiring the hunter who will go out and get the deals. There is no single comp plan that works for everyone, but we encourage lenders to follow a systematic approach to redesigning sales compensation.

That approach should be tied to the strategic plan or the business objectives of the organization. Those plans may be changing based on market conditions, which is another reason why so many compensation plans seem to be changing right now. Compensation also needs to be competitive in two ways—it needs to pay enough to attract and retain talent, and also needs to not pay so much that the company can’t be competitive in the market place. After all, every basis point paid out is a basis point that needs to be built into pricing and that makes things tougher in a market where margins are already tight. Finally, compensation plans need to be compliant, and complying with the new rules is a tough order without the best advice.

Kider recently put it very well when he said, “Creating the right loan originator compensation plan requires an economic, business and legal approach. Understanding and assessing the economic environment and business goals of a client enables us to then create a plan which is compliant and legally sound.”

We hope you join us at the MBA session, and welcome more feedback on this important topic.

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.