Setting Effective Goals For Collectors
“What’s my goal this month?” is a common question you’ll hear from collectors. But then again, it depends on where they work and how their managers put their goal together. Setting effective goals for your collectors is one of, if not the most important piece of developing an effective collection strategy. Goals are the standard, the benchmark, the target. If you don’t have a good method for creating your goals, then you could be sending your collectors on a wild goose chase. You want to make sure your goals are attainable, but at the same time you want them to be just difficult enough so that the bonuses are justified in the returns. This is our take on setting “The Goal Standard”, and making sure you are setting effective goals for collectors in your shop.
Goal calculations are a science, and sometimes the process of setting a goal doesn’t get the attention it deserves. There are so many variables that can go into how a Collection Manager will create a goal; Do you base it on gross collections, or fee collections? Is your month from the 1st to EOM, or do you closeout early? Is there an introductory goal that tiers off as the collector works there longer? Do you base it on their account load? Is it based on the client’s goal? Or is it a goal based on meeting your company’s needs for a positive ROI on the staff member?
Let’s just say, we hope you have a method to your goal, because as a Collection Manager, the last thing you want is a collector asking you how their goal was calculated, and all you say is; “The boss makes the goals” or something to that effect. However, even if you do have a generalized goal, you may still find it difficult to explain to your staff why Collector A, who has a goal of $10,000 fee dollars, has the same goal as Collector B whose paper has a higher fee rate (contingency fee).
So what we’re going to do is break down a few different goal methods to help some collectors learn about how goals can be set, and also to give you some ideas on how to set goals if you’re only used to seeing the way you’ve done it. The names of these methods are completely arbitrary and made up by us, you may call it something different in your shop, so don’t think that the names matter; they don’t!
Fee Dollars v. Gross Dollars
So we think it’s important to start off by explaining the difference between “fee” dollars and “gross” dollars collected. Basically, “fee” dollars is the total value that a company receives for every dollar collected. For example, if your company has Bank ABC paper, the bank will pay a “contingency fee” of 28% of gross dollars collected. So if Susie Collector gets a payment on an account for $100, then the company Susie works for makes $28.
Gross Dollars Collected: $100 Fee Dollars Collected: $28
So you might think, ok well the clients’ goals, and usually the company’s goal is always stated in gross dollars, but from a business standpoint, your goal should be based on the fees. Let’s say Bank XYZ pays you a 35% contingency fee. As a company, you want to collect more on this paper because you’re making more money off of it.
Bank ABC Fee’s for $100: $28 Bank XYZ Fee’s for $100: $35
If Susie collects $100 for Bank ABC, and John collects $100 for Bank XYZ, and you want to analyze each persons added value to the company, you may find them to be putting in the exact same amount of work and they both get paid exactly the same. After review, John looks better on paper because his account has a higher fee rate, so his efforts result in a higher rate of return. Sometimes companies will base their goals on fees, and as you can see, it may create some conflict for Susie and John. If Susie only has accounts with a 28% fee rate, and all John’s accounts are at 35%, then Susie has to collect $125 to match John’s $100 to get the same fee amount.
But before you get all huffy and puffy, there are a lot of other things that go into this, such as account balances, expected liquidation rates, types of paper, age, etc. So before you go tell your boss you want the accounts with the highest fee rate, make sure you think about these factors. You may find one client pays a 50% contingency fee (like the good ol’ days), but the reason they do this is because the paper actually came from the good ol’ days. So collectors should always remember, nothing is ever as simple as it seems, there are many layers to the goal setting process and distribution of accounts. At least we hope your company is thinking about it that way.
In our experience, it’s usually the law firms that work off a “fee” based system, and agencies work off the “gross” collections system. The only logical reason we can think of for this is because the lawyers have to work out the costs and the legal fees associated with an account, and a lot of the times payments will be reimbursed to their clients, therefore they don’t always make 100% of their fee on their gross collections. In these cases collectors may base their collections on “fees” not on “gross” dollars. We’ll get more into that in the “Legal Collections Goal” below, for now we just thought it would be important to explain the difference.
If you work for a debt buyer working their own paper, well then you get 100% of the gross collections, and this doesn’t apply to you.
The ROI Goal
From a business stand point, this goal makes the most sense. However, you have to consider the variables and make sure that the goal you set with this formula is attainable, but you also don’t want it to be too easy, because then you won’t get the best out of your team once they hit it. The concept behind the ROI goal (ROI = Return On Investment) is that you want to set a goal that when a collector meets it, they’ve satisfied your business needs for the employment expense.
EX: John Collector gets paid $10/hr and works a full time job as a collector. His monthly base pay is about $1,750. On average your company pays a bonus of $1,500 a month to its collectors. You’ve assigned a value for the unit cost per month to each collector of $1,000. So you can allocate an expected investment of $4,250 per month for John Collector. ($1,750 base pay + $1,500 bonus avg. + $1,000 unit cost)
Side Note: The unit cost is the cost incurred by a company to produce something, usually used in manufacturing, but we borrow the term and allocate a certain value to the cost of having a collector in a desk on a phone with a computer. So all overhead costs and even support staff can go into this. An oversimplified way to do this would be to take all overhead costs and support staff costs together and divide that total by the number of collectors.
So, as a business, you want to invest your money, every person you hire is an investment. You want to know that every dollar you put into something will give you a good rate of return. If you put your money in a mutual fund right now, you’ll probably get between 8-10% a year on your money, it’s a SAFE bet. In business, we take risks, and the reward should be much greater. We have seen usually an expected ROI rate of 3 to 4 times the investment on a collector be a good rate to cover costs and meet a decent profit margin. So for every dollar a company pays out, they expect to see at least 3 or 4 dollars back.
So, if John Collector’s total expense per month for the company is about $4,250, and we want at least 3x ROI, we multiply the cost (4,250) by the expected ROI (3) giving us a goal of [4,250 x 3 = $12,750]. This is obviously a “fee” based goal. So if John’s accounts are all assigned a rate of 35% contingency, we can convert his minimum requirement goal to gross dollars and get a goal of $36,429. (12,750/.35) Then you can have your actual goal at 4 times, which would be $17,000 in fee or $48,572 gross dollars. Now you know that when John meets his goal, the company is getting a good return on their investment, and anything over that should be shared with John for exceeding his expectations. But bonus structure will be a different post.
Liq Rate Goal
The liq rate goal (pronounced “lick”) is used to assign a goal based solely on the expected liquidation rate of the paper. The way you can calculate this goal is by determining what the different types of paper in your office are liquidating at. Because we aren’t in your office analyzing your accounts, we’ll use arbitrary rates that are close to industry standard numbers, if you’re way above, or way below this, don’t worry as long as you’re meeting your client’s goals you should be ok.
We will use the example of first and second placement credit card paper. On average, you should probably see an annual liquidation rate for these types of credit card portfolios of about 10 – 15%. What this means is, if your office receives a batch of accounts with a value of $100,000 on January 1st of 2014, by December 31st those accounts should have received about $12,500 in collections. This would be a 12.5% liquidation rate on that batch.
So how do we apply this to a collector? In an environment that assigns accounts to its collectors, let’s say Susie has 800 accounts with an average balance of $5,000. Susie’s account value is $4,000,000. So if Susie were to come in at the industry standard liquidation rate, of that $4 million, she should collect $500,000 in a year. Divide that by 12 months, and you get a monthly goal of about $41,700 gross dollars.
But now you have to think about the different types of paper, some auto deficiency paper only liquidates at 6 – 8% annually, so you need a lot more volume or a lower goal to make this a realistic goal for a collector under this method.
Client Based Goal
Now we can go to the client based goal approach. This is similar to the liquidation rate goal because usually the clients are basing their quarterly and annual goals on expected liquidation rates. This approach is different because you aren’t basing it off of your internal liquidation rates, you’re basing it off the clients rates. And in our experience, the clients don’t always get it right. Sometimes their methods are unique to their company’s needs, or based on the overall network of collection agencies and law firms. So this approach doesn’t always work out in your favor, but sometimes it can be the best thing that ever happened and you knock it out of the park. However, we’re not here to critique how the client’s create their goals (even though we think this is a huge talking point since they assess your performance on these goals, and sometimes it seems like they’re just throwing darts at a board with numbers on it).
Anyways, here’s the breakdown. Let’s say Bank ABC has a goal for your company at $320,000 for the month of June. You have six collectors working their paper. What you can do is then assign a goal based on the distribution of paper. Here’s how you can do it. Let’s say you have a current active inventory for Bank ABC of 4,200 accounts. (We say ‘active’ because the goal is usually based on recently placed accounts, not on payment plans you’ve had for over 6 – 12 months) The easiest way to split this goal up would be to assign a value to each account. $320,000 goal / 4,200 accounts = $76 per account. So then you go to each collector and multiply the number of accounts they have in their queues to come up with a goal value. So if Susie has 550 of those accounts, you can give her a goal of $41,800 (550 accounts x $76).
This is usually easier to do when you have an assigned team to a client. Another tip for Collection Managers is to think about the goal setting. Usually you’re going to want to be the best in your network for that client, so you may want to take your clients goal and increase it by 5 – 10%. This way your team’s goals combined get a number higher than the clients, and when they meet them, you’re not just “meeting” the client’s goal, your crushing it.
Like we said though, this may not always work. Sometimes a client’s goal may be WAY too high as a result of a recalled batch, a bad batch, or even just an unknown. Sometimes the client goal can be way too low, and then your collectors goals are going to be annihilated and you’re paying bonuses for work that wasn’t accurately graded.
Company Based Goal
The company based goal is more similarly situated with the ROI goal, and also the Client Based Goal approach. Every Collection Manager should know how much it costs to run the business. If it’s a big corporation, then they should at least know how much it costs to run their division and their support staff’s division, to effectively run their department. As much as the people in the industry say they are “…here to serve the client”, which is absolutely true, however without making money they won’t be “…here at all”. You have to do what’s right for the company, and the collectors will understand this. If you put all your collector goals together, and they don’t even add up to covering your expenses, the bonuses you pay when they meet exceed the goals will just be adding insult to injury.
Here’s a way to think about it. Take an agency with about 25 total staff members. Think of all the costs that go into running this business; you need an office (rent), you need materials (desks, computers, phones), you need connectivity (phone and internet), you need licenses and insurance, you need employees, you need pens and paper, you need water and coffee, you need servers to run your accounts, software, etc. The list goes on and on for business expenses, and they can really add up.
With what it takes to meet all the compliance standards these days, we would estimate that running a top of the line agency with 25 people can cost on a monthly basis between $100 – 150k a month, if not more. (Depending on the areas of course, with rent and wages varying by state)
For this company to stay in business and not be at risk, they should be bringing in at minimum 15 – 25% net profits annually, so you want to set a company goal that gets you there. Let’s say you’re monthly expenses are $125,000. You should set a goal of $137,500. Just to make it more relatable, gross it up by your company’s average contingency rate of say 27%, and your 25 person shop needs to bring in $510,000 just to hit a low 10% profit margin.
Then you would just take this $510,000 and split it up amongst your collectors. Collectors might be thinking “Hey! Why do we have to cover ALL the costs?!?” Well, that’s because you are what’s called an RGE (Revenue Generating Employee). Sometimes non-collectors feel like they are left out of the equation when it comes to the business because the company puts so much emphasis on the collectors. Well, in a way, the collectors carry the weight for the whole team. But that doesn’t demean the role that everyone else has, because without the support staff, the collectors wouldn’t have a job. This is where the age old term of “synergy” comes in. Everyone needs to work together in a collective way to help meet the company goal.
So if you have 13 collectors and 12 support staff including managers, owners, etc. then you split up the company goal ($510,000) and result in an individual goal (for 13 collectors) of $39,300. This way, when everyone meets their goal, the company is confident that they are not only meeting their expenses, but they’re making a profit.
Legal Collections Goal
So the only real difference between a legal collections goal and an agency collections goal comes down to the application of costs, fees, and post judgment executions. This is another tricky area to work out. Collection Law Firms have far more overhead than an agency needs to have. You have lawyers, legal clerks, process servers, post judgment clerks, legal software, court appearance attorneys, and all sorts of expenses that increase the overall company’s monthly budget. Surprisingly enough, most legal contingency fees are either par with agencies or sometimes even LOWER! Crazy! The idea is that the liquidation rates will be higher, because a sued account has a higher likelihood of paying. That’s not always the case. (No pun intended, well maybe just a little bit.)
With that being said, you also have long account life cycles, where the average account stays with a firm for 6 months without suit, and once sued, it stays until the suit is dismissed or the judgment is completed. This means a law firm can have an account for 20 years (no joke). Law firms also have different remedies available to them in different states, things like garnishments, bank levies, till taps, judgment liens, debtor exams, etc. But a lot of these types of remedies that bring in money require very little work on the collector’s part and a lot of work on the attorney or post judgment clerk. Not only that, but some of these assets are found using various skip companies like VeriFacts Inc. These assets aren’t free either, so it doesn’t make sense to give a collector credit for a judgment account execution payment that they didn’t have anything to do with. The firm paid the vendor for the asset info, the post judgment clerk prepared the execution, and the collector didn’t even know it until he saw the account change status or receive a payment.
So you run into a series of issues with legal collections and goal setting. The general idea is that the collectors should be there to collect on what is called the “Front end”. This is before suit is filed. Using a legal talk off, collectors should be more effective in scrubbing out the easy pays and getting money up front before filing suit. The earlier you collect on an account, the less money is spent on collecting it. Therefore you should give more credit for the more profitable dollars collected.
However if a collector can’t get money in the door and a judgment is entered and an execution processed, should that collector get credit just because the account was in their queue?
This is a question for the collection manager, because in all honesty, there are very few collectors who really “didn’t do anything on the account”. They call it, they skip it, they work the account according to your standards. This is also true with “kiss accounts”, where a collector gets the account today and the person calls in to pay because they received a letter, and the collector hasn’t even called on it yet. We believe that if you give the collector an account and they get credit for a payment without doing work, there’s a flaw in your system, not in the collector. So you shouldn’t penalize them for your flawed system. Trust us, there is no way that a collector is going to bonus on just kiss accounts, if they do, then you really need to look at your process.
Anyways, there are various ways to deal with the legal aspect. This is why we mentioned above that fee goals are better suited for the legal environment. The client usually won’t pay fees on court costs recovered. So if your court costs total to $100 and your collector gets a $100 payment on a sued account. That first $100 makes the company $0. So in a gross collection goal, John will have $100 gross dollars collected, but in a fee based system, he still hasn’t collected anything.
You may also want to reduce the amount of credit a collector gets when it’s a garnishment payment. These so called “annuities” will continue to bring in money with little to no effort on the collectors part. But what if the collector found the asset, should they get all the credit? Some of it? Or only some for a period of time?
It all depends on your strategy, but when creating legal collection goals, you want to take all of this into consideration.
In sum, the best goals don’t follow any one particular method, they’re a combination of all of them. All in all, no matter how you slice and dice it, almost every method will come close enough to the end result of another, but the most important part for anyone to remember is that goal setting is an art, it shouldn’t be arbitrary and it should fluctuate as different factors change in your environment. Some managers may choose not to tell their collectors how their goals are calculated, or just say something like “It’s not my job to explain your goal to you, it’s my job to make sure you hit it!” That’s always reassuring to hear as a collector. (Sarcasm intended.) Knowledge is power, and the more a collector understands their goal, the more they can use it to their advantage. You want collectors to think about how their goal affects the overall company. When they don’t get that bonus check, saying “My goal is too high” won’t be an excuse, because they know their goal is that high because of; expected ROI’s, the company’s goal, the client’s goal, and their queue of accounts.
We don’t want to say that these are the only goal standards, or that they’re the ones you should follow. These are just one’s we’ve seen in the past, and that we think work. They’re easy to calculate, and they’re logical. So whether you’re setting the goal, or trying to hit it, always find ways to learn about it so you can keep on meeting and exceeding them. And the next time the goals go up, ask about it, we promise they’re not usually going up just to make you mad.