Loan Officer Incentives

thePoint
May 19, 2005

Loans are an important part of your business. You want to encourage your loan officers to generate increasing numbers of quality loans for your credit union. What can you do to boost performance, raise the numbers, and invigorate your staff? CU Management Magazine reports many credit unions turn to incentives.

At the $140-million, 16,000-member Tucson Old Pueblo Credit Union, with 57 full-time equivalents in Tucson, Arizona, for instance, president/CEO Randy Baldwin is a firm believer in incentives. "I think a good incentive program can really improve your sales results and motivate the team," says Baldwin. He has offered a variety of incentives for loan officers:

• A flat, per-file incentive. "I like it because it's easy to track, but I don't like it because it doesn't reward them for 'selling up' a higher loan amount,” he says.

• A percent of the average yield. "This ensures they don't give away rate if you allow some rate matching flexibility or if they can barter buying down rate with points,” says Baldwin. “The only problem with this is that they might try to sell a higher rate to get more incentive and that isn't in the member's best interest. If we give loan officers some discretion to match a competitor's rate, the loan officer might be tempted to always reduce our rate and give the member a lower rate all the time rather than only when they need to match a rate. If we pay incentives based on the average yield, they would be affecting their incentive by matching rates all the time. This structure would ensure that they offer our posted rates and only match rates when there really is a competitive offer."

• Incentives for net loan growth, with a tiered structure that pays more for higher levels of growth. Baldwin: "I like this one, but sometimes the team can have a good month in loans closed, but not see any growth because of heavy refinancing. That can be de-motivating."

• Percent of the total loans booked for the month, with a tiered structure that pays higher for higher volumes. "This is good, provided the lowest tier is high enough so you aren't paying them for mediocrity,” he says. “It's good to set different targets and incentives for each product. You have to raise or lower the bar periodically as your strategies and priorities change."

Baldwin says he likes the percent-of-total-loans-booked approach best, but still isn't completely satisfied and will continue to do some tinkering. "I got lazy this year and just decided to pay a percent of the total loans booked regardless of product,” he admits. “I think I'll change it next year."

A primary reason that Baldwin has been successful in the use of incentives is that he pays attention to results and makes adjustments as necessary, rather than instituting a program and then never looking back. It takes more time and attention to detail to develop a strong program, but the results, at least for Baldwin, are worth it. ROA, he says, is the highest in nine years, delinquency has dropped 41% in the last six months, and morale is very high. "Teams feel that they are more in control of their financial destiny," he says.

Not all credit unions are as sold on incentives as Tucson Old Pueblo CU, though. At $330-million, 58,000-member Arkansas Federal Credit Union, with 131 full-time employees in Jacksonville, for example, Dennis Gibson, senior vice president of service delivery, says that, with the exception of incentives for selling credit life and disability insurance over and above the target, "quite frankly it hasn't worked terribly well for us."

A key concern, of course, is that the incentives move loan officers to produce high-quality loans and don't simply push the numbers. One former loan officer says the key to success with incentives is how much control the loan officer has in the approval process.

"The more control they have, the less incentive you can offer," says this lending professional. "As a business loan officer, my job was to evaluate the ability and character of the business owner, financial condition, and ability to repay the loan and any other factors which could affect payback ability. I then recommended approval or denial to our loan committee. An incentive certainly could have affected my analysis and recommendation—and even if it didn't, you would never convince an auditor. Anything that presents even a remote possibility of a conflict of interest will draw their attention and create problems for management. In some cases, a loan officer has final authority to approve or deny. This is obviously a bad place for incentives."

A better practice, the former loan officer says, would be to make the loan officer's job to get the loan applications, but offer no authority over the loan decision.

There are a number of other prerequisites that any good incentive program for loan officers should include. Whether you're establishing a new program or tweaking an existing one, consider the following points.

Make Sure Incentives Drive Your Goals

This seems to be such an obvious point, but too often incentives (however inadvertently) drive behaviors that are just the opposite of what you're looking for. If your incentives are designed to increase loan numbers, for example, you might be rewarding quantity over quality. You might need to consider a more complex incentive, as Baldwin has done, to combine elements of both quality and quantity and ensure that you're not rewarding for behaviors you don't want to see.

Thomas McCoy, managing member of TJ McCoy & Associates in Kansas City, Missouri, says incentives "can be highly effective for an organization. However, the incentive design needs to be examined carefully so that it drives the appropriate behavior and quality needs to be a consideration as well as production." He has seen situations where productivity has been the only criteria and admits this can be "great during an upturn in the economy, but when the economy turns south the organization is saddled with a lot of non-performing loans."

Paula Godar, product manager for Maritz Incentives in Fenton, Missouri, agrees with McCoy. "I'd say that making sure the right goals are set is very important,” she says. “We follow the phrase 'meaningful, measurable, and movable.'" Make sure the goals are meaningful, that you can measure performance, and that your incentives are driving positive changes in behavior.

McCoy says there are some standard approaches that are used in developing incentive programs for loan officers. One is an individual approach where the originator treats the loan officer like a "hired gun.”

"If that's part of the business strategy," he says, "that's perfectly OK. But, if the business strategy is to emphasize individual productivity, then obviously you'd want a commission plan that reinforces that." Some plans that have proven effective are a percentage of the loan volume or a percentage of the fee revenue. "Each of those approaches drive a different kind of behavior," says McCoy. "Either one is appropriate, as long as they're in line with the business strategy."

Don't Forget Support Staff

One of the problems with individual incentives is they don't do much to reward team behavior. And, at their worst, they can erode team performance when some team members conclude their supportive efforts aren't being recognized or rewarded.

"Usually, we address that by communicating directly with the people who are involved in the incentive program and not trying to accentuate that it's only for a specific group," says Godar.

But there's danger in this approach, especially for small credit unions. Word is likely to get out and then you might find yourself caught in a double bind. You're not "sharing the wealth" and there might be a perception that you were trying to hide the fact that some staff members were eligible for incentives while others weren't.

Another option, says Godar, is to provide those people who support the loan officer with some related earning opportunity. Or you could structure the incentive as a team incentive.

With a team approach, says McCoy, the incentive plan could be structured so all loan officers are working together as a team and their commission is coming in the form of a percent of average loan volume or a percent of average fee revenue. "A hybrid of that is including the support group as part of the commission structure so that you have the loan processors and the loan closers linked to the performance of either the individual loan officers or the team of loan officers that they support, depending on the organizational structure,” he says.

Don't Aim Too High

You want to make sure your incentive dollars are being spent wisely and generating results. But while you don't want goals to be so low that you're basically giving money away, you also need to be cautious about setting goals too high.

"Sometimes goals are so big," says Godar, "and it's going to take so long to get there, that people get discouraged." One way around this problem, she says, is to set milestones along the way and to reward people for reaching those milestones. And if you're wondering how to do it right, ask the people who know—the loan officers themselves.

"It would be a good idea," says Godar, "to get a small group of some of the top loan officers together and have them come up with the measures."

At Maritz, she says, a process called "Excellence" is used to accomplish that whereby a task force gets together to help set measures and criteria. "You're really kind of raising the bar for everyone by setting it up that way," she says. An added benefit is that loan officers will have more buy-in and confidence that the program is challenging, yet fair.

Keep It Out Front

One of the common problems with incentive programs is that they lose their ability to incent after a while. Employees begin to take them for granted, or worse, forget they even exist.

"Awareness," stresses Godar, "is a big thing. Organizations will often make a big deal out of announcing a program and then rarely talk about it again. Just keeping it 'top of mind' is very important."

You should be doing ongoing communication about the incentives with new and existing staff. In addition, make sure you're providing staff with frequent progress reports on how they're doing. The need for feedback shouldn't be overlooked. It also offers an opportunity to recognize top performers in a non-monetary way.

Gibson agrees that feedback is critical. "Recognition is clearly the strongest point," he says. "I think recognition comes out even better than money."

This article was prepared by the staff at the Point for Credit Union Research and Advice and was published online at http://thepoint.cuna.org/. Reprinted with permission.