Walking the tightrope

Finding a commission structure that is attractive to agents and fair to the brokerage can be a difficult task.

by Bridget McCrea   Greg Glenn overhauled his company’s commission structure last year and he’s still waiting for it to pay off.

A broker-owner at Prudential ADA, REALTORS® in Amarillo, Glenn was feeling the competitive pressures from brokerage firms that pay high commission splits in his region, so he shelved the company’s graduated commission split, in which the agent portion increases as her individual sales increase, based on her performance over the last 12 months.

The company’s new plan is targeted both at existing agents who want to reach a high commission split without having to pay for their own overhead and also for new agents who are grappling with how to pay for their own startup costs. "We stepped back and looked at what it really takes for someone to get started in this business, and came up with a starting commission split," says Glenn. Once an agent begins selling more, the percentage goes up rapidly until it tops out at the firm’s highest level.

Glenn says the arrangement is particularly attractive for new agents who want to build up their clientele without having to shell out money up front for office space, advertising, and other startup necessities that a 100-percent brokerage would require. "We shoulder a part of the early overhead burden," says Glenn. "This appeals to the agent who isn’t a total risk taker."

The new plan also borrows from the company’s original compensation setup, in which the office and agents share expenses like advertising. So far, Glenn says the agents like the new structure, though he admits that the company has yet to see any financial rewards from the switch, which went into effect January 2002. This will be the telling year, says Glenn, who is keeping his fingers crossed. "The trade off was that we knew we had to get our volume up–and launch a recruiting effort–to make it work. This year we’ll find out if it was the right move."

Do your homework, then make a plan

The struggle to create commission structures that attract and retain top-producing agents while allowing ample cash to flow to a brokerage’s bottom line is not a new one for brokers. Nor is the fact that many plans fail to strike the right balance between the two. Darla J. Scott, president of Philadelphia management consultancy Management Masters, LLC, says NAR statistics and related studies from the 1990s show that nearly two-thirds of real estate firms failed to produce a profit.

The biggest culprits? According to Scott, who has provided commission-plan analysis and design to several Texas brokers, they include poor business planning, outmoded commission plans, reactive commission-splitting practices, the "pay for everything" mentality, lack of consistent recruiting, and declining commission rates.

For example, to compete with the 100-percent brokerages–which are numerous in the Texas marketplace–Scott says traditional companies have gone to higher and higher commission splits in order to attract and retain good agents. At the same time, she says the 100-percent companies have gone to deferred payment plans (in which a new agent can defer their first six to 12 months of overhead and office expenses), the hiring of brand new agents, and a variety of traditional split programs to cover increasing expenses and improve their own bottom lines.

"The traditional companies and the 100-percent companies are not that far apart anymore," says Scott, adding that the trend isn’t necessarily a positive one for the traditional firms.

"With the rising agent commission splits, there is precious little profit left to run a real estate company, unless you have the volume of transactions to warrant having mortgage, title, and insurance operations," Scott says.

One simple solution, she advises, is to simply sit down and analyze your expenses and revenue streams to determine a break-even point. Knowing that point can help you create a plan that’s fair to agents and owners alike.

The problem is, most brokers ignore this step in their rush to compete for good agents.

"They don’t want to take the time and money to do the analysis," says Scott. "As a result, the quick-fix commission plans and ‘exceptions’ that are offered to agents exchange short-term gain for long-term pain."

What works?

Working from three locations, the 140 agents at Greenwood-King Properties Inc. in Houston brought in $760 million in sales last year and took home their cuts based on a commission structure that the firm has been using since 1984–save for a few tweaks here and there over the years.

Julie Greenwood, broker-owner, uses a graduated scale that starts at a moderate level, increases when that agent produces a certain amount in revenues, and tops out when the agent hits a target amount. When agents reach a set level of production, they can opt to pay for an assistant out of their own pocket and take a higher commission cut, or let the company pay for that assistant and stay at a predetermined split.

Greenwood says the company makes exceptions to the rule for relocation and referral-fee business. She believes her commission plans are good for the company and for the agent who is looking for more than just larger splits from their brokers.

"We can’t give away the house and be expected to run and grow the company at the same time," she explains, adding that the company stands out more on service and amenities than it does on high commission splits. For example, the company has four employees who show listings, a direct-mail program, a full-time graphic designer, and a public-relations professional.

"I’m sure that agents would like bigger splits," says Greenwood, "but we put the emphasis on our full-service offering, which seems to work well for everyone."

At Heritage Texas Properties in Houston, President and CEO Robin Mueck says the company uses a graduated plan with rolling quarters (each agent’s production for the prior 12 months is averaged each quarter to determine the split) for its 10-office, 300-agent firm that’s expecting $1 billion in sales volume this year. The plan rewards agents for increased production and offers splits based on performance.

Like Greenwood-King Properties, Mueck’s firm also emphasizes the marketing and administrative support that it provides agents. The company pays for productivity, she says, but is careful not to reward for a lack of productivity since it has its own fixed costs to consider. In other words, the company watches its agents’ performance carefully and avoids "giving away the house" to agents who are chronic underperformers or whose productivity has waned. But like many brokers, Mueck calls company profits "inadequate," blaming the dearth on the fact that today’s real estate firms use antiquated compensation systems.

"We’re operating in an old-world system," says Mueck. "To be in business successfully today, you have to compete hard and provide added services, like insurance and title. You can’t just be in the brokerage business anymore and have adequate profit."

What could bring relief, Mueck says, is the concept of salaried agents. She’s contemplated a way to make that happen over the last three years–particularly for agents who concentrate on relocation business. "With a specific team working relocation all the time, it’s possible that you could change the model to guarantee their income and add some employee benefits," says Mueck. "As long as you could keep the production coming on a consistent basis, a brokerage could in fact afford to manage those positions in a salaried format."

But don’t look for salaried agents to become the norm anytime soon, says Scott, who points out that productive agents, by their very nature, are motivated by their desire to achieve an unlimited income potential.

"Salaried agents trade this potential for the security of a base income with a small commission percentage or flat fee on their sales, which doesn’t generate the same motivation to produce high sales volumes," says Scott, who acknowledges that there are situations that warrant salaried agents. With an average agent age of 56 years old, for example, she says the industry could use an influx of recent college graduates and professionals from other fields.

"To compete with other industries that typically offer a salary plus commission and benefits, a broker-owner might consider a salary and smaller commission split on sales for the first six months to a year," says Scott, "giving the new hire the opportunity to transition into the straight commission method."

Plan of action

Linda Ferguson got her start in the real estate industry in the mid-1970s, when attitudes toward commissions were quite different. Today, this managing partner with WestMark, REALTORS® in Lubbock operates in a changed business environment. But while the industry has evolved, Ferguson says the basic tenets of a good commission plan have not.

"Our philosophy has always been to structure a plan that keeps agents here, even when they become top producers," says Ferguson, whose 35 agents sold $105 million last year. She says the company has tested a number of commission plans over the years, including one that included 10 to 12 different pay scales. Two years ago, it switched to a graduated commission split based on production.

So far, Ferguson says the company has "given its agents a raise," in exchange for a 1.25% drop in company profits. Still, she’s enthused by the new plan, mainly because it’s much easier to administer than the patchwork structure being used before. The plan helps the firm compete in a marketplace where commission pressure from customers and competitors is high.

In fact, Ferguson likens the agent-customer relationship to the broker-agent relationship and says most agents do understand that in order for their companies to stay in business, they must turn a profit. "If they don’t get it, then maybe they should be working somewhere else, and that’s OK," says Ferguson. "After all, how loyal are they if they can’t understand that their company has to make a profit to survive?"

Editor’s note: The Texas Association of REALTORS® does not recommend nor suggest any particular commission structure. All commission structures are negotiable. This article reports comments from the brokers quoted.

Photo © Corbis Images.

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