Without getting carried away by familiar clichés, debt collection is a tough profession, and debt collectors tend to wear out quickly. Sometimes the agent’s turnover in the collection centers is very high compared to the rest of the organization, and the cost of turnover (placement, sorting, training) becomes a real burden on the organization.
Our opinion is clear on the subject: the collectors’ reward system must include a significant component of incentives that will maintain the employees’ productivity over time.
But beyond productivity, the incentive system is an essential tool for achieving the goals of the contact center or the collection department as defined in the collection policy and the collection’s annual work plan.
Each strategic goal of collections must be matched with an incentive system that serves the goal. The organization chooses the following: does it prioritise collecting from as many customers as possible to retain customers, or does it emphasize collecting the maximum amount of money in a given time or on the maximum reduction of the debt balance within a given time, and so on? The selection of incentive components must be carried out strictly and sometimes it is better to turn to professionals who specialize in setting up salary and incentive systems.
A basic option is to define an incentive system based on collecting a given amount of money per month. However, it is clear that the distribution of customers in the department is usually unequal, and the senior collection representatives handle large and valuable clients for the organization. Suppose an incentive scale is established based only on the collection amount. In that case, the organization will quickly find itself facing collectors who “build themselves” a client portfolio that guarantees maximum incentives. These debt collectors have no interest in solving problems once and for all but prefer a “fruitful” relationship in which they have a collection of “satisfied” customers who regularly fall behind on their payments and pay late according to the amount required by the debt collector to collect.
This problem can be expanded and aggravated when generalized to the entire collection unit and its manager. A department that is measured only by the collection amounts is a “good” department, maybe even an “excellent” one, but nevertheless, such a department has no interest in eliminating the debt phenomenon. On the contrary, having a large debt turnover clearly indicates to everyone that the collection people are very important to the organization. This is, of course, a somewhat cynical statement, but it is taken from life.
Although the options for defining incentives are endless and depend on the organization’s needs and the availability of the data to the collection manager, it is important to define some basic indicators for collection incentives that will serve the organization’s goals optimally. A technique for building an incentive model will also be proposed.
There are no absolute solutions in this area because the solutions depend on the circumstances, the nature of the organization, the service or product being sold and the quality of the information systems. In this website, we will limit ourselves to presenting the right questions to guide the collection manager’s decisions.
A warning before we start – wrong incentives could potentially arm the customers and the organization.
The impact of employee incentives on the collection process, particularly concerning vulnerable customers, is a significant and multifaceted issue. Incentive structures in debt collection agencies often focus on maximizing recoveries, which can lead to overaggressive collection tactics that disproportionately affect vulnerable customers. If not carefully managed and ethically designed, these incentives can lead to several negative outcomes.
Promotion of Aggressive Collection Practices
When employees are rewarded based on the amount of debt they recover, they naturally tend to employ more aggressive tactics. This can include frequent calls, threatening language, and even pursuing legal action. Such practices can be particularly distressing for vulnerable customers who may already be facing financial hardships, mental health issues, or lack of financial literacy.
Erosion of Trust and Customer Relations
Overaggressive collection practices fuelled by employee incentives can severely damage the relationship between the creditor and the customer. This is particularly true for vulnerable customers who may feel intimidated and harassed. This erosion of trust can lead to a lack of cooperation from the customer, making it even harder to collect debts and potentially damaging the creditor’s reputation in the long run.
Financial and Emotional Impact on Vulnerable Customers
Vulnerable customers, such as those with low income, elderly individuals, or those with mental health issues, are often less equipped to handle aggressive collection tactics. They might be coerced into making payments they cannot afford, leading to a spiral of financial distress. The stress and anxiety caused by relentless collection efforts can also have severe emotional and mental health consequences.
Legal and Regulatory Risks
Companies employing aggressive collection tactics motivated by employee incentives may find themselves in violation of consumer protection laws. Regulations like the Fair Debt Collection Practices Act (FDCPA) in the United States set strict debt collection guidelines. Violations can result in legal action, fines, and a damaged public image. The Consumer Credit Act and the regulations enforced by the Financial Conduct Authority (FCA) are central to the legal landscape governing debt collection in the UK. The FCA requires firms involved in debt collection to adhere to fair and transparent practices. This includes treating customers fairly, particularly those who are vulnerable or experiencing financial hardship. Companies must ensure that their debt collection practices do not contravene these regulations. Failure to comply can result in enforcement actions, fines, and damage to the company’s reputation.
Short-term Gains vs. Long-term Relationships
While aggressive collection tactics may yield short-term gains, they can be detrimental in the long term. Customers who are treated unfairly are less likely to engage in future business and may dissuade others from doing so through negative word-of-mouth. This is especially true in the era of social media, where bad experiences can be shared widely and quickly.
Alternative Approaches and Best Practices
Companies should consider incentive structures that promote ethical collection practices to mitigate these issues. This could include rewards for maintaining customer relationships, successfully negotiating payment plans, or helping customers find financial counselling. Training staff to recognize and appropriately handle vulnerable customers is also crucial.
The Role of Regulation and Oversight
Regulatory bodies play a vital role in overseeing collection practices and ensuring they are fair and ethical. Regular audits and penalties for non-compliance can help ensure that companies prioritize customers’ well-being, including the most vulnerable.
In conclusion, while incentivizing employees in the collections department is a common business practice, balancing these incentives with ethical considerations, especially regarding vulnerable customers, is crucial. Overaggressive collection tactics can lead to various negative outcomes, from damaged customer relationships to legal repercussions. Adopting more compassionate and ethical approaches benefits customers and can enhance a company’s reputation and ensure long-term success.
Possible indicators to include in collection incentives
The amount of collection
The amount of collection is used as the simplest measure, and most of the incentive systems of collectors are based on it (sometimes while missing the point). When it comes to determining the collection amount that will be used to calculate meeting the target for each representative, several questions arise:
What is collection? Is this the money the customer promised? Is it the money the customer paid by check or the amount received a few days after it was paid? Who records the collection? Is the collection representative himself, or is there a reliable system that shows a receipt while assigning it to the representative who performed the collection? What happens when a check bounces back? Is the collection representative entitled to his commission? What part of the collection results from the real effort of a collection representative, and what part is the customer paying spontaneously, even without the intervention of a representative?
Number of customers:
The number of customers from whom money has been collected is an index very similar to the amount of collection, and the questions asked about the former KPI are also valid here. The main role of the credit and collection managers is to ensure that collection agents do not only handle large debtors at the cost of neglecting small debtors, which will lead to damage business due to the accumulation of small debts.
The amount of the debt balance: this is an important goal in all things related to collection goals, and the goal is to reduce the overdue outstanding balance. You can set the target as an amount of money or a percentage of the total outstanding balance (of all customers). Also, the goals can be calculated according to the central goals of the collection (see further section, which presents the reporting and control system of the organization):
• The proportion of the accounts receivable from the sales cycle.
• The rate of collection from the sales cycle.
The amount of the credits and/or write-offs
The amount of credits requires special supervision. A collection representative can be tempted to grant a credit too easily at the customer’s request if his incentive system does not distinguish between the reduction of the balance of debt resulting from collection and the reduction of the balance of debt resulting from crediting and debt cancellation.
Customer retention
It is possible to set additional customer retention goals or recovery goals at the end of a financial dispute. It is also possible to set a customer abandonment target due to the collection process and fine the entire collection system or certain representatives with a negative incentive in case of customer churn beyond the target.
Transferring clients to legal proceedings
Like the previous retention goal, you can set a target or a cap for transferring clients to legal proceedings. This target can be estimated from the organization’s bad debts and legal collection targets.
Let’s say the organization’s bad debt target is 0.5% of sales. Also, let’s assume that the legal collection succeeds in collecting 50% of the debts transferred to it. It is possible to limit the amount of debts that go to legal treatment to a ceiling of 1% of the turnover and thus ensure (assuming that the legal collection will indeed collect 50% of them) that the lost debts will not exceed 0.5% of the turnover.
Team incentives
The incentive calculation can be based on the achievements of the entire team. This is the correct solution when there is real difficulty in measuring the outputs of the individual employee. Also, a group incentive has a positive effect on teamwork and strengthens cooperation between collection centre employees.
Manager Evaluation
This component is very common, although it is very problematic. It is difficult to assess the nature of the manager’s evaluation, and the quantification is not exact. Sometimes, this component is used as a disguised salary supplement and thus loses its value as a collection incentive. Sometimes, it is used due to the inability to measure the employee’s productivity accurately; if the message to the employee is ambiguous, then the incentive usually misses its purpose.
Project incentive
A project component can be introduced into the incentives, designed to reward an employee for completing a task, succeeding in a project, or restarting a stuck process.
Decisions on the incentive structure
Preliminary questions
Before determining how to calculate the incentive, a series of framework decisions must be made that will guide the process. Here are some guiding questions that can help in making those decisions:
- When is an employee entitled to receive the incentive – from the moment he starts working in the team or after a certain training period?
- When is the incentive paid – immediately at the end of the month or delayed by a month or more? Sometimes, collecting the information, checking it, performing the calculations, and approving the incentives can take over a month.
- What is the incentive frequency – monthly, quarterly, annually or any other scale?
- Will the incentive be calculated as a percentage of the salary or as a percentage of the employee’s output?
- What will the incentive amount be when the employee reaches the goal?
- Will the incentive be uniform, or will it be built gradually? For example, the one who achieves 100% of the target receives 10% of the salary, and the one who achieves 130% of the goal will be awarded 25% of the salary as an incentive.
- Is there a “ceiling” beyond which there are no incentives?
- Is there a floor level from which the entire incentive is eliminated? For example, if there is no compliance with at least 70% of the target, is the representative not entitled to an incentive at all?
- Is the incentive an addition to the base salary or is the incentive part of the base salary? Could the representative receive less than the base salary if he does not meet the target?
The incentive components
Theoretically, it is possible to build incentives that combine as many elements as you want. However, over-dividing the incentive into components will make the contribution of each component marginal and miss the goal. It is, therefore, better to focus on two or three elements that have a clear business meaning for the employee and the organization.
How do you build an incentive?
Initially, the relative weight of each component in calculating the general incentive must be determined. Let’s assume that three elements are selected: the collection amount, the number of customers who paid, and the percentage of reduction of the number of debtors. The collection amount and the number of customers from whom we collected are personal goals and can be measured for each amount separately. The percentage of reduction in the number of debtors can be a personal measure of the collector if a customer quota is allocated in advance to each representative, but it is usually a group component.
The weight of each of them can be determined according to the department’s policy:
60% collection in money, 20% collection in customers, 20% reduction of outstanding debts: this composition determines a relatively large weight to the amount of collection in the incentive rule.
Another option could be 30% collection in money, 60% collection in customers, and 10% reduction in outstanding debts: this composition gives priority in the incentive to the number of customers and only a small part is determined according to the group effort.
Outsourcing the collection contact center versus a corporate collection center
Outsourcing of the collection process is based on the general theory of outsourcing. In essence, it is a solution that advocates the employment of an external party that performs the work of the collection centre for the organization because this is his speciality – a combination of professional knowledge (Best Business Practices) of unique professionals (Best People Practices) and dedicated information systems for the collection field.
Advantages:
- Professional knowledge that allows determining who can pay and what collection strategy should be adopted.
- Models and methods that have proven themselves.
- The fixed quality level and sometimes agreed-on labour standards, such as international standards such as ISO and others.
- Data analysis and optimization capabilities.
- Use of automated dialers.
- Variable costs without inflating the headcount.
- A dedicated training system for all collection issues.
- The possibility of promoting employees within the collection professions (this possibility is extremely limited within the organization).
Disadvantages:
- Requires providing access to the organization’s core systems to an external party.
- Need to transfer the customers’ data to a third party.
- Information security and remote connection issues.
- The complexity of training external employees on the organization’s core systems.
- Dependence of the organization’s cash flow on a third party.
- There is no accumulation of knowledge and best practices within the organization.
- The external party might refuse to initiate organizational changes in the future that may harm its profitability but serve the organisation’s interest.
- Sometimes, there is a conflict of interest between the outsourcing provider and the organization. For example, the supplier will want to achieve the maximum collection with minimum effort and costs and not necessarily to achieve the maximum collection.
In a very simplistic way, we can say that outsourcing is better when the advantages outweigh the disadvantages in the examination made for the specific organization. It will also be preferable in cases where the company management prefers to focus on the core business and not on the collection process. In this case, outsourcing collections helps assuring a sound collection process and maintain the cashflow with very little management attention.
But beyond that, the establishment of an intra-organizational collection center and its operation requires a lot of effort in obtaining knowledge and tools in addition to special budgets. Sometimes, it is simply not worthwhile for an organization to invest so much effort and resources in improving collection, and it is better for it to concentrate on its main field of activity and let a professional company handle the outsourced collection.