|
CompensationMaster Newsletter Article, March 2005
Whenever we talk about the success one of our clients has achieved with our
compensation strategy, invariably people want to know the details of the
compensation plans we designed for them. They want specifics: "So the split
started at 55% and then went up to 80% after $50,000?"
Sometimes the people who ask are just curious. But other times, they want to
copy the plans and use them in their own company.
This is almost always a bad idea.
We design unique compensation plans for each client. Our plans take into account
the market, the company's expenses and desired profitability, the type of agents
the company already has and the type they want to recruit, the competition, and
a variety of other factors. These circumstances are different for each company.
We tailor each set of plans to meet that company's particular needs.
Companies that are very similar can have quite different results from the same
compensation plans. We've even seen branch offices from the same company have
different results because there was a variation in one of the factors—one
office faced a different set of competitors or had a greater number of
experienced agents.
Here is an example of how this can happen. We created a model of a residential
brokerage in our software, then changed the revenue distribution among the
agents. Everything else is the same—we didn't even change the number of units
sold—we only changed the amount of money each agent brought into the company.
You can see that with one distribution the company is making a 5% profit. With
the other distribution, the company has a 1% loss.
Here you can see the business summary for the company. Total revenue is
$988,000, and the company is making a 5% profit.
|
Here you can see the business summary for the company. Total revenue is
$988,000, and the company is making a 5% profit. |
Click image for larger view. |
|
Here you can see the revenue distribution among the agents. You can see that two
people (John and Mary) are bringing in most of the revenue, which is fairly
typical in a small office. |
Click image for larger view. |
But if we change the revenue distribution from what we have above to what we
show below, the company's profitability is drastically reduced.
In the example to the right, John has formed a team, which has increased the revenue he
contributes substantially. Mary is still the second highest producer. Frank,
another top producer, has joined the company. The mid-level people from the
previous example have been replaced with agents who are not contributing as
much, perhaps because they work part-time or are new to the industry. |
Click image for larger view. |
|
The result is that while the company's total revenue stays the same, its
profitability drops. Instead of making a 5% profit, this firm is now posting a
1% loss.
This example relates to a small firm. Just imagine the
revenue impact on a larger organization! |
Click image for larger view. |
As you can see, simple factors, such as the number of experienced agents in an
office, can have a major impact on the way compensation plans should be
designed.
You'll get the best results if you tailor your plans to your company's unique
situation. And always analyze any change in commissions thoroughly before
introducing them to your agents. |
Back
to Newsletter Archive
|
