The Head of the Equipment Finance Division at a regional bank came to McLagan seeking advice regarding the commission plans in place for the origination staff. The bank was utilizing 10 different commission plans and these plans were paying out above the market.
The Head’s concerns/goals included:
- Adopting a single methodology for calculating commission payouts
- Ensuring that commission plans paid out at market competitive levels
- Aligning commission plans with the objectives of the bank – focusing behavior on volume and margin
- Designing incentives that encourage Origination staff to cross-sell the Bank’s other products
- Developing consistency within the compensation methodology with a single plan document governing the entire division.
McLagan worked with the Head of the Equipment Finance Division and the Head of Risk to understand the Bank’s concerns about paying commissions only on realized profits and the types of behavior they wanted to achieve through the plan design.
Interviews were conducted with the managers of each of the different leasing businesses to determine the appropriate commission schedule for their business.
McLagan created a single plan document covering all origination staff that brought consistency to the compensation methodology, while taking into account the business specific requirements through tailored commission schedules.
The commission schedules were all calculated using a uniform metric which took into account margin, volume, and risk, thus better aligning pay with the profits of the Bank.
Under the new compensation plan, McLagan also recommended carving out a percentage of each month’s commission to be paid as an annual discretionary bonus.
The Bank now has a single commission contract that can be administered universally, and is paying out only on realized returns.
Origination staff are further incented to cross-sell the Bank’s other products, aligning their goals with the Bank’s.
Commission payouts have remained market competitive and in-line with business performance, and have reduced the Bank’s compensation expense.