Go-to-Market and Incentive Compensation Considerations for Lenders

Rising Interest Rates

Interest rates have increased at the fastest pace since the 1980s, as the Fed has raised rates nine times in the last year. The Central Bank has taken rapid action to battle inflation, and the benchmark federal-funds rate is now 5%. Bank loan volumes are expected to decline, and if the trend continues, by year-end the decrease could be dramatic.

Near-Term Retention Goals

For loan officers and other lending professionals, common commission-based incentive plans may be paying significantly less than last year’s payouts. This can create a cash flow crisis for these employees, particularly given the prevalent aggressive pay mix (base/variable proportion) of current loan officer pay plans. Most earnings are typically aligned with loan production. If the economy experiences a “soft landing” this year, institutions will want to retain their lending professionals for the following year. It’s more advantageous to retain loan officers now rather than having to recruit new ones in 2024.

How should institutions adjust their compensation plans to increase employee retention and still drive business goals? A good starting point for institutions is to identify their short-term and long-term priorities. Some examples of common goals are:

• Retaining historical top performers
• Minimizing downside due to current market conditions
• Maintaining a pay-for-performance culture
• Driving teaming and cross-selling across products and services
• Re-aligning incentives with changing company objectives
• Staying within prevalent market practices for lending incentive plans

Incentive Compensation Remedies

Based on total reward goals, there are three primary ways to address compensation implications of a down market: goal changes, pay guarantees or incentive plan design changes. The method selected for any management team should reflect the expected level of market impact to pay-outs, internal philosophies and practices, and leadership’s view of the short-term/long-term environments.

1. Goals and/or Performance Changes

• Goals:
  • Decrease Goals: Adjust current targets by a percent or dollar amount aligned to updated business plans and/or adjusted volume expectations. Adjustment may be universal or vary by seller.
  • Set New Goals: Stop current targets and set new aligned goals to updated business plans and/or adjusted business expectations. This must be done in combination with stopping the current plan and starting a new one.

• Performance Attainment:
  • Increase Goal Attainment with Achievement Credit: Increase attainment achievement by a specific percent. Adjustments may be universal or vary by seller. Companies using individual commission rate mechanics may favor this solution over other reductions to avoid reissuing ‘sales letters’.
  • Bridge Performance: Calculate bridge performance by using historical run rate for a period of time, as of a specific date. Institutions may choose the higher of historical run rate, specific date or actual performance.
  • Index Performance or Stack Rank: Use one of the following methods:
    • Recalculate final performance/payouts by shifting the median performer to 100% and reallocate variance to other sellers.
    • Stack rank sellers’ performance and allocate the incentive budget based on sellers’ relative ranking.

2. Pay Guarantees can be offered in the form of recoverable draw, cash payment, guarantee or a bridge incentive payment.

3. Incentive Plan Design Changes

• Stop plan (move to new plan, corporate plan or pay guarantees above)
• Change measures or weightings in the current plan
• Change threshold or targeted payouts to less than 100% of goals
• Uplift credit or change crediting
• Change pay rates/commission rates
• Remove linkages (gates/hurdles)
• Protection practices (caps, decelerator rate, windfall policies)
• Shorten performance period
• Provide SPIFFs
• Use rewards and recognition (spot bonus, equity, etc.)

As financial services organizations identify their top business and people priorities, the most appropriate compensation options emerge. For example, if retaining high performers is a top priority, companies could use a short-term sales incentive strategy (e.g., SPIFFS or rewards/recognition). Similarly, if the goal is to protect lower performers, companies may consider reducing or eliminating a threshold in the plan design.

It’s important to balance the short-term priorities identified above with the longer-term implications of having to “roll-back” any changes in the future. Management should be transparent in their views of market dynamics and forthcoming about their decisions through communication. Openness is absolutely critical. Strong support and alignment with first-line managers will also be an important lever of change management.

Time to Evaluate Go-to-Market Strategy

In addition to solving the short-term need to address compensation, institutions must also plan and evaluate their go-to-market strategy. Leadership should ensure they’re asking and answering the following:

Evaluate Overall Business Strategy: How will we maintain revenue and profitability through changing market dynamics? Where will we focus on the short term and the long term?

Re-assess: Are our coverage models aligned with growth opportunities? Re-assess target segments; current clients; new client acquisition; up-sell; cross-sell; etc.

Job Role Definition: Should we re-visit job roles and market coverage to optimize existing opportunities? For example, institutions may have an opportunity to focus more on efficient cross-selling.

Deployment of Resources: Is there an opportunity to re-align coverage territories and deployment of resources to match the opportunity in the market (e.g., deploy more external vs. internal branch lending)?

As rising interest rates loom, management should be ready with compensation remedies for lending professionals. However, the connection to other go-to-market elements should also be evaluated as institutions contemplate change.

Financial services organizations of all types can benefit from Alexander Group’s expertise and innovative solutions, allowing them to efficiently achieve their revenue growth goals and position themselves for future success. For more information on how to address compensation challenges or evaluate your go-to-market model, please contact an Alexander Group Financial Services practice lead.