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CompensationMaster Newsletter Article, January 2007 A
perennial issue for real estate firms is compensating the sales force in such a
way that sales people are highly motivated, and the firm can recruit and retain
the sales staff it needs.
Australia and New Zealand have real estate markets that are
similar in many ways, but reflect different approaches to compensating sales
people: Australian firms primarily pay salaries while companies in New Zealand
offer commission-based compensation.
Comparing Experiences in Australia and New Zealand
Ross Hedditch, director of Thomson Real Estate, spoke with us about the real
estate market in Australia. Graham Crews, formerly Senior Lecturer in Real
Estate with Massey University and currently a consultant with CompensationMaster,
shared his views on the state of industry in New Zealand.
Compensation
In Australia, salaries are mandated by law and set to a minimum of $25,000 per
year. "This has been reinforced recently with government legislation that
allowed the principle of debit and credit to apply," states Hedditch.
Salary payments are considered a debit against commissions. At
the end of each period, the sales person receives a commission on the amount
earned above what was already paid in salary. For example, say an agency
receives $100,000 gross commission income over the course of a year from sales
one person made. At a typical split of 40%, the sales person would receive
$40,000 in commission. The $25,000 salary would be subtracted from the $40,000,
so the sales person would receive the $25,000 salary plus $15,000 additional
commission.
The sales person could also expect to receive a car allowance,
which is generally around $5,000 a year. That amount is not considered taxable
income to the sales person nor is it subject to the debit-credit system.
Superannuation would be paid by the real estate agency on behalf
of the sales person. These payments to the government-run pension fund reflect a
levy of 9% on the base salary (or on gross commission income, if the company has
been in business long enough to have the older laws apply).
"As a result, the minimum package that the employer is paying is
based around $32,000-33,000. This has the effect of making employers awfully
careful about cash flow and budgeting," says Hedditch.
In New Zealand, the predominant form of compensation is
commission-based. A typical compensation plan would give sales people a split
that starts at 50% and goes up to 60% or higher as they sell more. Some firms
offer high split plans that go as high as 80% or 95%. "Over the past two or
three years we’ve also seen firms experimenting with the RE/MAX model, offering
100% plans with desk fees," says Crews.
About 10 years ago, Crews noticed that some firms were
experimenting with salaries. "In most cases, salaries did not work," according
to Crews. "The companies were unable to attract top producers and make the
salary system pay."
But there are a few exceptions. "One company that has done well
with the salary model as good processes in place," explains Crews. "The
principal moved away from the commission system because he was worried about the
lack of control he had over the sales people. He had a healthy business but
wanted to improve standards of behavior and service delivery. The company has
been successful because the principal is a very capable manager who can put
systems in place and manage effectively."
Recruitment
Both countries are experiencing very tight employment markets. While this is
good for the sales people it calls for great creativity on the part of agency
managers. It also requires some risk-taking if an agency wants to grow.
In New Zealand, companies are experimenting with a range of
recruitment strategies, including cadetship programs. "Generation X and Y are
now home consumers. The industry needs to recruit younger people who can talk to
those buyers," says Crews.
Firms are targeting candidates just out of university with an
offer to pay a salary for up to three years before they transition to
commission. "When proper profiling is done and the appropriate person employed,
in almost every case it is working out," states Crews.
It would seem that this strategy would be even more common in
Australia as a result of the mandated salaries. But the salaries are not
competitive with other industries. While even minimally experienced sales people
(with 2-5 years on the job) can make substantial amounts, incomes during the
first few years of employment tend to lag.
As a result, agencies try to attract successful sales people
from their competitors by offering more attractive compensation packages (read:
higher splits).
"We have also seen principals paying their own sales agents an
amount of money to recruit a competitor’s staff. Some are paying 24% of the net
wage in the first year of the person they bring over," says Hedditch.
One recruiting strategy that both Crews and Hedditch say is
becoming increasingly popular is to lure sales people from other industries into
real estate by guaranteeing their salaries for a set period of time.
"It can be difficult to get a candidate to leave a secure sales
job outside real estate when they have commitments such as a home mortgage,"
says Hedditch. "If we are to get people outside the industry to consider real
estate as a career then we need to be creative."
"In one case, a firm approached a group of six car sales people
and promised to meet the salary they had made the previous year," says Crews.
"This company needs another 30 people to meet their growth plans over the next
couple years so they have to be aggressive about recruiting."
"Only the very strong agents can afford to take this level of
risk," adds Crews. "If you’ve provided the security and the person is
unsuccessful it will be difficult to dismiss them."
Future of the Industry
The bromide "change is the only constant" is nowhere truer than in the real
estate business. In Australia, the result of these changes has put the mid-sized
agency on the endangered list. Of the 8000 real estate agencies in Australia,
only 6% employ more than 50 people, according to Hedditch. The typical agent
employs seven sales people.
"We’re seeing a trend towards amalgamation—supersized agencies
with 30-50 people—as well as an increase in the number of boutique agencies with
three or four people who work with a select database and charge a higher fee.
Anyone employing 10-20 people is finding it very difficult to compete," says
Hedditch.
Mid-sized agencies don’t have the level of business required to
support their marketing and recruitment expenses. Some agencies have tried to
deal with this but recruiting a few super consultants with a large bonus or
near-100% commission deals, and using the name recognition to recruit new
agents. This has the effect of reducing profitability of both the high producers
(who are receiving all the commissions) and at the low levels (because the new
recruits aren’t making many sales).
The future of the New Zealand real estate industry is harder to
predict. More business models in the market place make for more potential
candidates. Crews feels that a move to the salary model would be in the
industry’s best interests. "More control over the agents results in a more
standard, higher quality product," he says. But that control requires a
different kind of manager than has been typical in the real estate industry in
the past. Most real estate agency managers are former sales professionals who
have started their own agency. But the salary model requires managers who can
put systems in place, monitor those systems to determine who is producing, and
motivate sales people successfully.
Salary Issues in the United States
In the United States, an increasing number of firms are considering the move to
salaries. Let's take a closer look at some of the issues involved in the salary
vs. commission debate here.
Guaranteed Income
From the agent's point of view, the main benefit to having a salary is the
guaranteed income. However, typically, those agents most interested in having a
guaranteed income are relatively new. More experienced sales associates,
confident in their ability to generate sales, prefer to maximize their income
with high commission plans—witness the success of 100% plans.
More Control Over Sales Activities
Firms that have been successful with salaries have put systems in place to
monitor and measure the activities of sales people. However, many sales
associates, particularly experienced ones, chafe at that level of control. As
professionals and independent contractors, they are accustomed to directing
their own activities. They have their own system and prefer to handle their
workload in the way that works best for them.
Productivity
With the activities of salaried sales people carefully monitored, it is easier
to measure and improve productivity. However, commissions give people an
incentive to work just a bit harder – because there is no safety net. The net
effect to productivity can vary from one office to another, depending on the
personalities of those involved and the skill of the managers.
Recruiting
Salaries can be an advantage in recruiting, in that they make real estate an
option for people who might not be able to go without an income for the time it
takes to get up to speed in the profession. However, they tend to appeal to a
risk-averse person, who may not be as productive as a more aggressive sales
representative.
Lead Generation
One of the reasons a company may want to move to salaries is that most of the
leads are being generated through the firm's efforts, rather than those of
individual sales people. For example, leads may come mainly from corporate
advertising, the firm's web site or relocation partnerships. In that case, the
company may not feel that it needs to pay as high a commission.
If a company offers salaries and commissions in the same office,
there is naturally going to be suspicion that any leads coming into the company
will be given to the salaried personnel to avoid the payment of commissions.
That can lead to resentment and hard feelings. For this reason, most companies
do not mix salaries and commissions in the same office. Or if they do, they give
the two groups different responsibilities. For example, the salaried people may
handle relocation business only.
The Key to Success
If your company decides to consider salaries, the key to success is designing
the right pay plan. You can't copy a plan that works for another company. It is
essential that your plan be based on a thorough and accurate analysis of your
company's financial structure. Otherwise switching to salaries can be
tremendously risky.
The first thing you need to do is understand the difference
between fixed and variable expenses. Fixed costs are expenses that do not
increase as business increases. Examples include office space, utilities and
support staff salaries. Variable costs are expenses that vary with the amount of
business you do; commissions, telephone charges and transaction fees are
variable expenses.
Variable costs are tied to revenue—if you don't make any
money, you don't have those expenses. But whether or not you bring in any money,
you still have to cover your fixed expenses. So you want to keep fixed costs as
low as possible.
The problem with salaries is that they take the largest expense
for most brokerages and move it from a variable expense to a fixed expense. This
drastically increases the risk of doing business. If production falls, the
company can fall into the red very quickly.
The best way to lower the risk of offering salaries to make sure
your payment plan is based on a solid analysis of your company's financials.
Here's how it works. Prepare for a paradigm shift in your
thinking…
A Completely New Approach
The first issue you need to consider is your breakeven point. Most brokers leave
the calculation of their breakeven point to their accountant. But the method
accountants were taught in school is based on an old formula created for
manufacturing companies. It doesn't work for real estate. The reason is that
although each widget brings in the same amount of money, each real estate agent
doesn't. So the traditional method of dividing expenses by the number of agents
to find out where the first split should be will place that split too low.
What you need is something we call the "Optimal Fully Productive
Equivalent". That means that newer agents or other low producers are counted as
partial agents rather than whole agents. So at a branch where you have 16 agents
working, you may end up with an optimal fully productive equivalent of 13 1/4
agents.
Now add up all your fixed expenses, including salaries, to get a
total expense figure. Then add in profit as an expense. Don't be surprised!
Adding a reasonable profit – typically about 12-15% – into fixed expenses is the
most effective way to make sure the company is profitable.
And profit is essential. Without profit, there is no money to
invest in new technology and administrative staff. Without profit, there is no
long-term value built into the company which will allow it to be sold one day.
Without profit, why run a business at all?
Now divide your fixed expenses (with profit) by your optimal
fully productive equivalent number of agents. That's your breakeven point – the
amount of money each agent needs to bring in to cover the expense of having him
or her work for the company.
After that breakeven point is reached, all you need to cover is
your variable expenses. Without commissions, those are typically small. So after
the agent's contribution to fixed expenses is paid, you can afford to set up a
bonus structure that lets each agent keep everything he or she brings in, less
variable expenses.
When you use this method for setting up commission plans, it
doesn't matter what payment plan the agent is on. If sales associates want to be
on salary, they can be. Large bonuses will be available after they have covered
their share of the company's fixed expenses. It just takes longer because of the
added expense of the salary.
If sales associates prefer to stay on commission, they can
decide how quickly they arrive at a high split. A very low commission on their
first sale can pay their share for the whole year, and move them right up to a
high split on the next sale.
Or they can choose a 100% plan with desk fees that pay their
share in a fixed amount each month.
Each sales associate makes his or her own choice.
When you take this approach, salaries vs. commissions almost
becomes a non-issue. You are able to do whatever works for each individual
associate.
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