What’s New? Performance Compensation for Lenders
We have just
developed a new return on equity (ROE) methodology for compensating
lenders. This methodology directly
addresses the following questions:
- How much should I be
compensating my lenders?
- Are our shareholders
getting their money’s worth?
- Who are my best/worst
performing lenders; how do I know?
We have run across
a number of simplistic lender compensation programs over the years. Most of these are “origination-based” programs
that compensate lenders based solely upon fee income or new business. The shortcoming with these programs is you get
exactly what you pay for -- loans structured to turn quickly so the
lender can generate more fees. We feel
this directly contradicts the concept of relationship banking.
rewarded based upon the return on investment the bank generates (e.g.,
ROE). Why should lenders be compensated
any differently? Aligning the
compensation objectives of both groups creates a win-win situation for
all. Lenders get an unlimited
compensation opportunity and shareholders get a return on their
based upon ROE sounds difficult, but it’s not. Our
methodology uses direct income and expense line items from your general
lender or loan system (most of which you already report upon). This avoids the often contentious issue of
allocating indirect expense. Capital is
assigned to loan portfolios based upon a simple formula.
Bottom line: Administration
is simple and straight-forward since all of the data is easily
obtained from your systems.
Like the traditional
STAKEHOLDERS scorecards, we establish a baseline for each lender. However, the baseline is based upon return on
equity. Once a lender’s portfolio exceeds
the baseline return on equity, a percentage of the “surplus” or
“excess” return is paid to the lender in the same manner that a
dividend is paid to the shareholders -- the greater the
return, the greater the dividend.
We can also factor
elements of asset quality, deposit acquisition and other scorecards
into the lender scorecard. A typical
lender scorecard will include (but is not limited to) the following
- Loan Fee
- Past Dues
and/or Watch List Loans
Scorecard Performance (e.g., Total Organization, Branch, Lending
This robust set of
measures gives lenders latitude to manage their line of business in the
manner that best suits them. A lender can
focus on balance retention, spread maximization, fee generation,
expanding relationships and/or asset quality. This
set of KPIs benefits the shareholders and, in turn, drives lender
Another benefit of
lender scorecards is the monthly status reports. We provide a detailed and concise set of
reports for each lender scorecard developed. This
lets lenders know exactly where they stand, what they have to do, and
what compensation they will receive when they get there.
scorecards will provide you with a vehicle to attract and
retain high performing lenders (while ensuring that your
shareholders are getting an adequate return on their investment). Poor performers will be “weeded-out” in an
objective manner based upon results.