Are you skimming the cream?

Here's a situation we have been running into a lot lately…

A 100-person real estate firm – the number one company in their region for many years – loses a dozen top people. Profit drops by $350,000. Other sales representatives start to talk about leaving. The company is in turmoil.

What happened?

The management team had become comfortable, as often happens when you have been successful for a long time. They were making good money and were reluctant to rock the boat by making changes. In the back of their minds, they knew there was a problem. But they were hoping to hold onto a good thing as long as possible.

The company had been offering a high level of support and a multi-faceted compensation plan that included splits, bonuses, assistants, marketing dollars, trips, even 401K contributions. But the sales force didn't fully appreciate the value they were receiving. It was taking years to recruit experienced people, so the company focused almost entirely on recruiting individuals who were new to the industry.

To make a long story short… The company is now in great shape. We came in and worked with them to develop new plans that have helped them re-balance their recruiting to focus more on experienced people. They have recruited nine experienced agents in the past six months and plan to hire nine more over the next couple months. They are not at risk of losing sales representatives they want to keep; in fact, they are so confident that they just let a number go for non-performance. And profit is back on track.

In this case, the management team took action and was able to turn things around. But it might not have ended so well.

Could your company be at risk of having the same thing happen?
Have you been skimming the cream a little too long?

The telltale sign that your company is at risk is that you are not able to recruit experienced agents. Are almost all of your recruits new?

Typically, we will hear brokers say that they are going to focus on new recruits. They bring new people in and teach them their system because experienced agents "don't understand our value."

The ratio to look for is that you should be able to recruit experienced sales representatives proportional to your market share. So if your market share is 20%, you should be able to attract about 20% of the experienced people who change firms each year. If that isn't happening, it's a danger sign.

You need to ask yourself if the value your company offers is worth what you are charging the sales force. For example, if a representative brings in $120K a year in GCI, and receives $75K total compensation with virtually no expenses while the firm down the street offers $90K with about $7K in fees, does the sales representative see the value?

Many people will look at those choices and take the $90K, partly because there is a natural tendency to focus on the larger number and overlook the fees, and partly because in a downturn they can earn the same amount on lower revenue simply by cutting costs.

The real measure of whether the value you offer is perceived by your sales force is whether you are able to recruit experienced people. If you can't recruit them, you're not offering real value.

And it's worthwhile to recruit experienced sales representatives. Each experienced representative typically drops $20-30K straight to the bottom line in the first year. New recruits don't usually add anything that first year. A good rule-of-thumb is that firms should be attracting about 1/3 experienced reps, 2/3 new.

Brokers have a very hard time identifying the right time to make an investment in changing compensation plans. This one indicator – the inability to recruit experienced people – is the best sign that it is time to make a change.

If you delay, which most brokers do, by making exceptions for sales representatives who are unhappy and threatening to leave, you destroy the trust you have built up with your sales force. As soon as you play favorites, someone is going to get their feelings hurt. It costs a lot more to regain that trust than it would have cost to be fair in the first place.

Additionally, once a number of people have left, the remaining sales representatives have the upper hand in any negotiation. You are going to have to give away more than you would if you had been proactive, invested a little now, and restructured compensation before they started leaving.

The key is to balance your plans: first, to make sure that you are not overpaying or underpaying relative to the value you provide in the market – as compared to your competitors – and second, to treat everyone fairly.

This way you can keep your existing sales force and then get recruiting going so you can grow your firm from a position of strength.

If you think your firm is at risk, call and talk to one of our experienced consultants. We can do a competitive analysis and make recommendations to help you adjust your plans so that you provide greater value to your sales force and can be more competitive in your market.