In addition to employee frustrations related to the current compensation system, there are two key pieces of legislation that pose a threat to CHE. The Fair Housing Act includes a provision stating it is unlawful for an entity to discriminate against any person on the basis of race, color, religion, sex, handicap, familial status, or national origin. The Equal Credit Opportunity Act (ECOA) governs the actions an institution takes in determining creditworthiness of an applicant. The ECOA also prohibits discrimination based on sex, marital status, age, race, national origin, or because the applicant receives public assistance. Thus, these guidelines are designed to ensure that all potential borrowers are offered an equal opportunity to have a loan application processed fairly. While these provisions do not include income or loan size, CHE’s current incentive plan may cause TLC’s to give greater attention to larger loans, indirectly affecting protected classes. Disparate treatment, which can be caused by differing levels of assistance or friendliness, may result in significant monetary, legal, and reputation repercussions.
At CHE, incoming customer calls are randomly distributed among the TLC’s. Each loan application takes approximately 20 to 40 minutes to originate, regardless of the loan size. Under the current incentive pay calculation method, a salesperson who receives larger loan applications is generally assured a larger paycheck. Since large loans pay out significantly higher incentive dollars than small loans, this suggests that customers requiring smaller loans may not be assured the same quality of origination service as those seeking larger loans.
Management Perspective
In order to obtain management’s perspective on the issue, Denise Sampson, Operations Manager in the Des Moines office, was interviewed. Ms. Sampson stated that while CHE has not run into any Fair Lending / ECOA violations to date, the current incentive pay system is not ideal in keeping with the spirit of the rules, and compliance with these laws could hypothetically become an issue. Ms. Sampson also recognizes that borrowers seeking larger loans have the potential to receive superior service in relation to those who want smaller loans. While the current commission system pays more dollars to the TLC to encourage larger loans, the risk remains that smaller loans could be neglected in favor of the more lucrative loans.
Citigroup claims that its employees have “shared responsibilities to our clients, each other, and to the company.” In keeping with that philosophy, CHE management realizes that the current compensation system for TLC’s has room for improvement. Ms. Sampson stated that TLC’s should have incentives to work equally hard on all applications. However, she believes that TLC’s are already fairly paid for their efforts, and that a system that pays more is not required.
CitiMortgage, a separate division from CHE, uses a system that ‘pays per booked unit’ to the TLC. While this system has been considered for CHE, management is concerned that the 0.0515% budget for TLC commission could be exceeded regularly, and expected profits not met, if the average loan size were to fall below the financial models used in predicting success for the division. Ms. Sampson indicated that a replacement compensation system that uses a ‘pay per booked unit’ and does not exceed the budgeted allotment would be optimal for the clients, employees, and the company. Additionally, the new system should be more transparent for the TLC’s to estimate their end of the month commission check
Employee Perspective
When utilizing a commission-based pay structure (whether in whole or in addition to a base salary), individuals may be motivated to make additional sales calls, work harder to ensure sales are closed, and encourage customers to purchase additional products or services. The success of commission-based employment is conditional on individuals believing they have some control over the sale, the commission schedules are relatively stable, and incentive plans are not overly complex (Scholl).
A commission-based system can have several problems that should also be considered. These include the potential to encourage employees to focus only on closing the sale to the detriment of customer service after the sale and the potential for high levels of variability due to conditions beyond the representative’s control, such as business and economic cycles (Scholl).
When developing the revised commission-based pay structure for TLC’s, these considerations will be taken into account to ensure the program meets the needs of the organization, federal and state laws and the employee. The new system must achieve the goal of motivating and rewarding effective TLC’s, while ensuring appropriate customer care.
Industry Best Practices
Des Moines is also the home base of Wells Fargo Financial and Wells Fargo Home Mortgage, subsidiaries of Wells Fargo’s Home and Consumer Finance division. Both companies specialize in real-estate secured lending and offer variable compensation programs for their sales professionals. According to John Crawford, Program Associate for Wells Fargo Financial, the Wells Fargo model is a hybrid that pays for both volume and booked dollar amount in a tiered structure. Once credit managers sell four real estate loans in a given month, they receive a “kicker” for additional loans and are compensated at a higher rate. In the end, credit managers are encouraged to book all loans (in alignment with fair lending practices) and also up-sell to higher loans (to benefit the company’s bottom line). Conversely, CitiMortgage’s (as explained previously) compensation structure pays a set dollar amount for each loan closed and is not based on the size of the loan.
Proposed Solution
According to the interview with the CHE Operations Manager, there are four main goals in changing the current incentive compensation plan. First, incentive compensation should be based on “per unit booked.’ Second, the plan should not exceed 0.0515% of the total booked loan dollars on an annual basis. Third, TLC’s should be paid for performance: number of booked loans and average loan size (encouragement for up-selling loans). Fourth, the plan should be easy for the TLC to estimate their month end compensation payment. Therefore, the proposed solution should provide TLC’s with the clarity and ability to effectively estimate their monthly incentive pay and should be based on performance both in terms of number of booked loans and dollar amount of booked loans.
When planning and implementing an adjustment to variable compensation, management recently gathered a focus group of seasoned TLC’s to make suggestions on how they felt the system could be improved. These ideas were taken into consideration when developing the new system. When new or adjusted compensation systems are implemented, all of the TLCs are gathered into small groups, informed of the change and told how it will affect their paycheck. From there ideas are given for improving their sales strategies towards maximizing the new system, followed by a question and answer opportunity, and finally asked to sign a document stating they are aware of the new compensation system.
There would seem to be very few barriers to such a positive change. However, whenever management makes adjustments to variable compensation, the initial suspicion is that it will be to the detriment of the employee. This objection should be easily overcome as the benefits are explained and the overall percentage of the budget for variable compensation would not change. Citibank’s culture is one that expects and encourages change, so when policy adjustments are implemented, they are typically accepted without loss in employee morale.
There are five main characteristics that define an effective compensation system that must be addressed within the proposed solution. Those characteristics are as follows:
1. Enables organization to attract and retain qualified, competent workers;
2. Motivates employee performance, fosters feeling of "equity";
3. Supports, communicates and reinforces culture, values and competitive strategy;
4. Complies with government regulations;
5. Cost structure equals the ability to pay (Bohlander 386-417).
Our proposed solution to CHE’s compensation structure, as detailed herein, effectively addresses each of these attributes. 1) This market competitive incentive compensation system will allow for hiring and retaining high quality employees; 2) A clear, concise, transparent and equitable pay structure will foster a feeling of equity; 3) Creating a pay structure that stays within corporate budgeting guidelines, provides equal incentives (or equal opportunities for incentives) for the team members will reinforce the CHE culture of equal opportunity and market competitive compensation; 4) Our proposed system complies with government regulations and industry "best practices"; 5) Staying within budget, while implementing a clear and concise pay structure, allows for the ability to pay.
The proposed solution would work as follows. First, the group’s total booked dollars for the month will be multiplied by the maximum allowable budget for incentive compensation of 5.15 bps (0.0515%). This amount is the Total Compensation Dollars Budgeted and Paid (TCDBP). The TCDBP is then divided into two categories that emphasize the relative importance to the goals of the company. Total booked units will receive a 75% weighting, while total booked dollars will receive a weighting of 25%. Please note, the weighting of the ratios may be adjusted by management to improve group performance on an as needed basis. Each TLC’s total booked units will be divided by the group’s total booked units for the same month to arrive at a ratio which will be multiplied against the 75% weighting of TCDBP. Additionally, each TLC’s total booked dollars will be divided by the group’s total booked dollars for the same month to arrive at a ratio that will be multiplied against the 25% weighting of TCDBP. These two dollar figures will be added together and will be the TLC’s total incentive compensation for the month.
To give TLC’s the opportunity to estimate their incentive compensation for a given month, the group’s booked units and total booked dollars will be provided to TLC’s on a weekly basis. This allows each TLC to gauge their performance relative to their desired incentive compensation throughout the month. We anticipate greater employee satisfaction and motivation by providing this information, as it eliminates some of the guesswork involved in the current incentive compensation strategy.
Budget
The current incentive compensation budget will be maintained because the TLC compensation will still be ‘capped’ at 0.0515% of total booked dollars. The weighting of Booked Units and Booked Dollars will ensure that high performance is rewarded within the budgeted amount. See Appendix 1 (Addenda) for an illustration of the recommended compensation system.
Conclusion
In keeping within the constraints outlined by the CHE Operations Manager, we are not increasing the size of the available commission pool. Instead, we are dividing up the available funds in a different fashion among the team.
The proposed compensation system will accomplish the goals as stated. Compensation will be distributed on a per unit basis, maintain budget as set forth by management, pay more for higher performance, and enable the TLC to estimate their compensation more readily. The quality component is removed from the variable compensation model and will be included as a part of the TLC’s formal review process. By removing this component, we further simplify the model and allow the sales professional to better estimate their monthly compensation. Finally, the proposed system will more closely align with the legal requirements outlined in the fair lending regulations.
Research Citations
Bohlander, George, and Scott Snell. Managing Human Resources. Thomson South-Western, 2004. 386-390.
Citigroup. 15 Oct. 2006 <http://www.citigroup.com/citigroup/about/index.htm>.
Crawford, John, Program Associate, Wells Fargo Financial, Des Moines, Iowa. Personal interview. 20 Sept. 2006.
Sampson, Denise, Operations Manager, Citi Home Equity, Des Moines, Iowa. Personal interview. 25 Sept. 2006.
Scholl, Richard W., Reward & Evaluation Systems. Schmidt Labor Research Center, University of Rhode Island. 16 Oct. 2006 <http://www.uri.edu/research/lrc/scholl/Notes/Reward_Systems.html>.
United States. Federal Trade Commission. Office of the Inspector General. Equal Credit Opportunity. 16 Oct. 2006 <http://www.ftc.gov/bcp/conline/pubs/credit/ecoa.htm>.
United States. Office of the Law Revision Counsel. House of Representatives. Fair Housing Act, United States Code 42 U.S.C. 3605. 16 Oct. 2006 <http://uscode.house.gov/>.