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CompensationMaster Newsletter Article, November 2006 In
most parts of the United States, the real estate market has cooled. Houses are
no longer selling for $20,000 over the listing price after a frenzied bidding
war, having being on the market for one whole weekend.
We're not in a downturn yet—we're just returning to a more
normal and balanced market--but this is the time to prepare, just in case.
Proactively making adjustments at this point will strengthen your company,
putting you in position to thrive, regardless of whether the market heads back
up again or takes a nose dive.
Let's take a look at the three components of running your
business that might need adjusting: people, processes, and profit.
Is your sales force made up of the right people?
In good times you tend to get a lot of people entering the business. It's easy
to make a sale when you're in a seller's market--real estate looks like an easy
way to make money—so most firms find they are recruiting a fair number of
inexperienced sales representatives.
There is a tendency in our industry to set up commission plans
to give new sales representatives higher splits so they can earn some money
early on. That's fine in a good market. You're getting a smaller margin and just
a few sales per person, but the total number of transaction is high so it works.
When the number of transactions drops, you can get in trouble.
Usually, more experienced representatives can still make money in a down market.
But people who are new to the industry struggle. Some will drop
out. Others will threaten to go work for a competitor who offers a higher split
or more advertising. (It's a lot easier for them to blame you rather than
acknowledge that they need to start working harder to make the same money.) If
you start making exceptions to keep them, you can get into another whole set of
problems.
What should you do?
The first thing to look at is whether you have a balanced group
of sales representatives: top producers, mid-range people, and new recruits. If
one area is much larger than the others, it would be worth trying to get some
balance.
You also want to look internally and think about who you are and
what your company represents.
Maybe you're out of sync with the market. Maybe you have a lot
of bricks and mortar, but that's not where the industry is going.
Maybe you're not doing as much as you could with technology. You
might be able to recruit people who are very into technology and could do a lot
for your company, but who want to be on salary with a bonus rather than a
traditional split.
You need to look at who you want to have in your company, and
think outside the box about how you can recruit and retain them.
Do you have good processes in place to recruit and retain
your sales force?
First, you want to hire the right people. Start by making sure the people who
want to join your firm are suited for sales.
We have seen companies get good results with a program called
Real Estate Simulator. Whether you use their system or another, taking a
scientific approach will help you find out ahead of time if someone is likely to
work out or not.
Then you need to make sure your new recruits have clear and
appropriate expectations about the cost of doing business and what to expect as
they grow their business.
You want to set up compensation plans that allow you to recover
the costs of providing the training and services they need to get started, as
well as the resources they need to excel in the business.
This can be hard to do in a downturn. The natural tendency is to
simply cut costs and get rid of many of the goods and services that you provide
to sales representatives. But you can end up with corporate anorexia. You don't
want to starve your company.
Instead of just slashing costs, find out what your sales force
really wants and needs. We often see companies that get so caught up in the
day-to-day aspects of running their business that they don't notice that the
world is changing around them. They keep the same systems and processes in place
for years, not realizing that the sales representatives no longer need or want
them.
So step back and ask what your sales representatives are looking
for from you. Then put that in place, along with compensation structures that
allow the sales representatives to contribute their share, feel a sense of
accomplishment, and go for the gold.
Is your source of profitability secure?
We're seeing a number of companies that have been losing money on their core
real estate business and relying on profit from ancillary services. But with a
downturn, a lot of the ancillary income disappears.
We are also seeing a lot of people in the industry getting into
trouble with a compensation system that has become popular. It's a stepping
program that accelerates people as they become more productive. At the beginning
of the year, instead of going back to a lower split, sales representatives
continue at the level they earned the previous year.
If plans like this are not designed correctly, the starting
point won't provide enough margin for you to recover your costs. Each year you
lose more money, and can get into the red very quickly. Here's an example:
While the commission plan in this example may look innocent, the
table below shows the true design flaws and impact to the company.
The numbers in red show how much money the company is
losing—per sales representative—at each level. (Click on the table below to
see a larger image.)
As long as the sales representatives move above their initial
split levels, the company recovers its costs. But if they don't, the company
loses money.
You can see how this kind of program would be particularly risky
in a down market.
The more services the company provides to help people get
productive and reach higher splits, the more dangerous it is. When the market
turns, the company is still spending at a high level to increase productivity.
The sales representatives continue at the higher splits while volume drops and
the profits get sucked out of the company.
In this situation, it's hard to see what is really happening. So
the brokers institute fees and chargebacks to try to recover their costs. The
sales representatives feel nickel-and-dimed, and start leaving for companies
that don't have those fees.
You need to adjust your plans so that sales representatives are
compensated in a way that motivates them and makes them happy but still ensures
that the company has enough money to pay its bills and make a profit.
The bottom line is that if you are overpaying or underpaying
anyone, you're going to get in trouble.
It's not about market share. It's not about the number of people
you have. It's about getting enough margin from every sales representative to
pay your bills and make a profit.
If you do that, your company should be able to withstand a 30%
downturn in the market without going into the red.
Then you're being efficient. Once you're effective and
efficient, your profit grows and your market share grows and your people are
better.
If you take advantage of this opportunity to make adjustments
now and correct problems now, before we get into a low market, you will lose a
lot less than your competitors. Then you'll have the opportunity to do mergers
and acquisitions—not just of
companies but of individual sales representatives, because they want to be
someplace where's there's stability.
Everyone recognizes that there are going to be good times and
bad times. In bad times, good companies always acquire other
companies—sometimes for just pennies on the dollar. They can do that because
they've got the profit built in. So make the adjustments now and you'll be the
profitable one in your market, in position to take advantage of a downturn to
grow your business rapidly.
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