Thin Margins, Deep Trust – Part II

by John Bloom

We received valuable feedback, by blog post comment, phone calls and a few emails, on the recent pricing change. Most clients and readers appreciated our transparency and insight into the price-setting process and how we shared the information with our community. With that transparency, some challenging issues surfaced. At RSF, we believe in the value of asking hard questions. Reflection is a critical tool of inquiry and thus an important part of our organizational learning. We hope that by publicly discussing some of the tougher questions, we continue to create a strong community for all of our stakeholders to share and learn from each other. This is what we mean by community. We also wanted to share some further thinking in response. We do not expect everyone to agree, yet engagement is essential. What follows are a few of the comments that were shared in the public arena, along with a sense of other comments and thoughts that came in response to the pricing change:

“It does not look like the margins of the senior staff are too thin. The CEO got $350,000 in 2011 according the Form 990 filed with the IRS.”

This is true. All of our executive compensation is public record, and can be found on our 990 tax forms. Our board evaluates executive compensation to keep it in line with industry standards and to maintain our compensation ratio of 8:1, meaning that compensation of our highest paid employee will never exceed eight times that of our lowest paid employee. Given that we are seeking to retain top talent in the Bay Area (one of the most expensive regions of the country), and that our CEO is responsible for leading a $160M organization and a $6M budget, we believe that this level of compensation is appropriate.

Compensation isn’t the sole indicator of the thin margins, which we are in fact operating on. In recent months we have thoughtfully reduced our budget expenditures, which required makings some difficult changes. All employee salaries are under review, but in our effort to maintain a competitive standard for top talent we made the decision not to compromise our investment in people.

“Are interest rates not going to be rising this year? Will borrowers continue to say that they can get loans cheaper elsewhere or that they can’t afford a small increase?”

Perhaps, all of the above could happen. The purpose of the quarterly pricing meetings is to be responsive to a changing environment.

Changing the borrower rate will certainly be part of the discussion this year and as that takes place we’ll be looking at key factors such as: if, given enough notice, will borrowers be able to pay an increased rate; and, what is going on in the market? The reality is that right now we are in a low interest environment and we have to keep our rates low in order to stay competitive. As the market changes, so may we. One big challenge is that big banks have extremely low cost of funds (near 0%) and therefore more latitude in how they price their loan products and also gain from the margins.

“I was wondering why during the course of my investment with RSF, the return has gone from one percent to 0.25 percent?”

Good question, and it is very much linked to the previous one regarding borrower rates and the subsidized advantage that big banks have. Investor rates have decreased as a direct result of the competitive environment for borrower business and what is going on in comparable investments. Having said that, we are currently on par with comparable short-term opportunities. However, we do recognize that our investors shouldn’t have to bear the full burden of this. And this point will be up for consideration throughout 2014.

That we had such responses is an indicator that our clients care about not only their own piece in the Social Investment Fund community, but about all the participants, and further understand the complexity of such transformational work. We thank you for your engagement.

Click here for Thin Margins, Deep Trust Part I

John Bloom is Senior Director of Organizational Culture at RSF Social Finance