The Silent Cost of Incentive Compensation Overpayments

When mortgage lenders seek compensation management solutions, they’re typically responding to pain points voiced by staff. We commonly hear of payroll departments working overtime to calculate incentive comp, disgruntled commissioned employees who have been underpaid due to spreadsheet calculation errors, and the tedious strife of combing through payouts to identify and amend those underpayments.

But as significant as the time spent correcting underpayments may be, it only represents half of the true cost of an inefficient incentive compensation program. Mortgage lenders that mistakenly underpay some commissioned employees are sure to accidentally overpay others.

How Much Am I Losing to Overpayments?

Our experience has shown that while underpayments are typically identified and reported promptly, this is not usually the case with overpayments. One way to gauge how much the overpayments may be costing your organization is with some basic probability theory.   

Probability theory suggests that for nearly every type of dataset, the majority of data points fall around the average or the mean (the bell), and a minority of outliers fall on either side (the tails).

Normal distribution bell curve

In finance, statistics, and social sciences, bell curves are commonly used to model unknown data under the assumption they follow a normal distribution pattern. Similarly, you can use the bell curve to model the amount of money you’re overpaying commissioned employees.

When you consider incentive compensation at your organization, you know that most payments, the bulk of the bell, are calculated correctly. You also know that a minority of incentive compensation payments, which fall to the left of the bell, are erroneously under calculated. If you assume that, like almost anything else in nature, manual payroll calculation follows a normal distribution, then you are probably overpaying by the same amount you are underpaying.

Normal distribution of incentive compensation payments bell curve

So ask yourself this: How many manual checks are you writing every month? How many off-cycle payments are you making? How many people are disputing compensation in any given payroll cycle?

Mistakes made in the other direction won’t generate the same kind of scrutiny, but according to the principle of normal distribution, that’s how much money you may be losing to overpayments.  Implementing process improvement best practices and automation greatly minimizes the risk of these costly mistakes.   

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