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There's an old joke about the manufacturer who lost $5 on every $100 sale.
"Don't worry," goes the punch line, "we'll make it up in
volume."
Unfortunately, for many real estate companies, this has become a truism. NAR
statistics and other studies conducted during the 1990's show that nearly
two-thirds of more than 1,000 real estate firms surveyed failed to produce a
profit!
While high volume sales certainly can make up for a lot of ills, these same
sales can lull firms into a false sense of prosperity and mask opportunities
to increase company profitability. A sustained leveling off, or worse, a
downturn in the housing market, can become an unwelcome wake up call.
With few companies having a
contingency plan for a prolonged downward spiral, drastic expense cutting
usually becomes the first course of action. Some of the most important
business producing or supporting areas; i.e., advertising, direct mail and
support staff are often the first to be cut and cause leads to dry up and
sales associates to rebel.
In addition to poor business planning, the culprits affecting the bottom line
include outmoded commission plans, reactive commission-splitting practices,
the "pay for everything" mentality, lack of consistent recruiting,
and declining commission rates. Real estate companies of all sizes must
solve these ongoing problems and move on to the opportunities and challenges
presented by the technology revolution and by integrating compatible services
into their core business.
COMMISSION PLANNING…the Need for a New Approach
Many of the culprits mentioned can be handled by adopting a new
philosophy regarding the distribution of income and expenses between a real
estate company and its' sales force.
· Real estate companies DO deserve a fair profit, and · Sales associates DO
deserve the maximum compensation possible, after
covering their share of expenses and a reasonable company profit.
Providing innovative commission plans that reward sales associates for their
hard work, instead of having them subsidize "part-time", new and
non-producing associates, is crucial to attracting and retaining the best
sales associates. A variety of plans with varying degrees of
company-paid business support allow commission splits to rise proportionately
and eliminates the need for associates to go elsewhere to receive higher
compensation. Make no mistake…although top performers love
recognition; they are motivated by money. With 80% of the business being
done by 20% of the associates, their compensation issues must be addressed in
a way that creates a successful partnership between sales associate and
company.
The commission planning process begins with a thorough analysis and possible
restructuring of the company's operating costs, adds a pre-determined company
profit, and then condenses the sales force into "fully productive
equivalents" to reach the true financial "break-even point".
Treating profit as an
expense allows the design of maximum incentive commission plans, and all but
newly licensed sales associates become individual profit centers in much the
same way as each branch office in a multi-office company is expected to
realize a profit.
Once the "break-even point" is accurately established, a variety of
new commission plans can be developed to motivate sales associates to achieve
maximum performance in their own way. The plans can be rolling average,
accelerated commission splits with charge backs, home satellite, desk fee,
base plus, etc.; and all plans pay the same commission split for both sales
and listings sold. Qualifying levels at the beginning of each new anniversary
year with the company are based on the previous 12 months' Gross Commission
Income. GCI is a constant figure that eliminates additional income;
i.e., rental income and outside bonuses from the qualifying process.
Some plans can also be
adjusted using a "rolling window" to avoid the perception of going
backwards each year. To be most effective, plan designs should be
uncomplicated and easily understood by sales associates.
This new approach to commission planning also eliminates three of the top
offenders to the bottom line.
1) Sales associate exceptions…overpaying associates who don't live up to
their potential. Many companies have inherited poor schedules from
mergers and acquisitions or by "buying" experienced associates in
their zeal to recruit. This eventually creates havoc, as other
associates in the company become aware of the inequity in commission splits.
With the new plans, associates are informed up front that the company is
keeping a fair profit after expenses; and the balance is being returned to
them in the form of high commission splits to promote, educate and compensate
themselves. If they didn't produce it, it's not there to give! This
creates fairness, which is appreciated by those who have earned their levels.
2) Split commission schedules for in-house and co-operating sales…are a
lawsuit waiting to happen with the advent of buyer brokerage and the changes
in agency relationships. Sales and listings sold need to be paid at the
same commission rate.
3) The "pay for everything mentality"…erodes profit with every new
program, service and gadget the company provides associates. With the
new plans, there are a variety of ways to fairly handle the allocation of
expenses between company and sales associate.
As important as the elements of a new commission program are, the way a
company "sells it" to their associates can also make or break its
acceptance. Good marketing materials, a visual presentation, manager
training and a plan to deal with "high risk" associates are all part
of successfully communicating the new plans to the sales force and are well
worth the effort in improving and maintaining a healthy bottom line.
Commission plan changes are not for the faint of heart. It requires
skill in analyzing and projecting expenses and revenue, identifying potential
cost saving areas, planning future expenditures and evaluating the effects of
recruiting and possible mergers and acquisitions on company profitability.
However, the rewards are
many and include higher company profits, happier sales associates, a
long-range plan for dealing with new expenses and a variety of accelerated
commission plans that provide a competitive edge in recruiting.
Management Masters recently completed new commission plans for a five-office
firm in New Hampshire. The owner of the firm told me that after the
company meeting introducing the new plans, several of her associates came up
and suggested putting the new plan brochures in their office lobby to show
agents from other real estate firms how good they could have it with their
company. What better recommendation than having your own associates
promoting your company.
RECRUITING…"Today's Preparation Determines Tomorrow's Success!"
After all that's been written and said on this topic, I don't imagine that
there's much more to add…except that it still continues to be the #1
challenge for most real estate firms. With statistics showing only one
out of every ten new associates surviving after two years…not to mention the
experienced associates who move on to other firms…how can real estate
companies keep their offices full of productive sales associates?
This is a challenge that
needs to be solved…not merely addressed. Volumes have been written on
the "how to" of recruiting, so I'll share some thoughts on why the
job still doesn't get done.
THOUGHT #1: I suspect that the real reason most sales associates don't
make it in real estate is the lack of discipline in structuring their time.
Likewise, I believe that owner-managers and branch managers have the same
problem; consequently, recruiting falls to the bottom of the long list of
things to be done. For the most part, it's the sales force that
generates the company's profits from revenue of sales and listings sold and
referrals to the company's mortgage, title, insurance and other ancillary
service providers. Therefore, there is no better use of your time than
recruiting a quality associate; and if you won't do it, then hire someone who
will and hold them accountable to get results.
THOUGHT #2: Who would appreciate a carpenter arriving to build a new
house with no tools and no plan? Why then do we think we can recruit
potential candidates with no tools and no plan as to how we will help them
become more successful? There may be some people who can "recruit
by the seat of their pants", but it's usually how they manage too, and
their offices will be the ones that lose associates to other firms over time.
Therefore, fill your
recruiting toolbox, relentlessly follow a plan and make it a top
priority…your profits depend on it! A tool box should contain: A
variety of motivational commission plans with clearly defined company-paid
benefits and sales associate responsibilities, the incentives the company will
offer an experienced associate to join their firm, knowledge of competitors'
commission schedules and benefits, an office mentoring/training program,
company brochure, relocation referral information and policies, office
policies and procedures, independent contractor agreement, and year-to-date
office production and market share. You may not need all your tools but
have them available.
THOUGHT #3: People leave this industry disillusioned, and it's no
wonder.
For newly hired associates, being recruited is like the infatuation stage of
dating…a lot of attention and promises during the courtship and little to
no follow through after the marriage. The majority of people need structure
and consistent feedback to perform at their highest level. Therefore, set up a
system of responsibilities and on-the-job training experiences for new members
of your team, so their set-up period and learning experiences progress as
quickly as possible to bottom line results. This can be as basic as an
Administrative Assistant handling all the office set up functions and a senior
associate working a "well compensated", written mentoring program
with bi-weekly manager/new associate follow-up meetings.
THOUGHT #4: We forget to do the three R's of recruiting: 1) RETAIN your
own associates…meaning continuously re-recruiting your own sales associates,
giving them the same attention and respect you give potential new recruits,
and providing them with professional services and support, 2) RECRUIT
qualified new associates…meaning consistently doing the activities that keep
the pipeline full of potential new candidates…creative ads, bi-monthly
career nights, networking w/licensing schools and direct mail, and 3)
RE-ENLIST experienced associates from competitors…meaning a "high
touch" campaign…one-on-ones, telephone calls, social engagements and
involvement of senior management; recruiting incentives; a custom direct mail
program; and networking your current sales associates.
DECLINING COMMISSION RATES…You must solve the profit squeeze between
buyers and sellers!
E-commerce research analyst Gomez Advisors is predicting the Internet will put
downward pressure on real estate commissions, and most everyone in the
industry has already begun to experience this to some degree. They
predict as more home buyers and home sellers come online and become more
self-sufficient, "the standard" 6 percent sales commission will fall
to 5 percent or lower over the next 5 years…resulting in at least $8 billion
in consumer savings annually. The company further states that
travel agents and stockbrokers have already been experiencing this trend and
specifically, sales associates that don't provide expertise and insight beyond
access to listings will find it hard to compete.
This prediction, along with unbundling of services and the commission wars
produced by a scarcity of listings in many markets, will certainly wreak
havoc on the bottom line without a proactive approach.
Real estate companies today must provide a "circle of value" to
their clients and customers in the form of affinity and consumer-related
services; i.e., mortgage, title, insurance, home connections, moving and
inspection services, etc. and combine them with automated online technology to
make the process of buying and selling a home as seamless and efficient as
possible. To capture the related business opportunities, they will
need to take control of their client base, and hire service coordinators to
insure consistent quality service and follow through.
Sales associates must have access to good technology, high-speed Internet
access and multi-level technology training and e-marketing skill building.
Courses such as e-Pro should be mandatory for associates receiving
company referrals.
The companies that survive and continue to "create and sustain" a
healthy bottom line will combine innovative commission planning, consistent
recruiting and retention, vigilant monitoring of expenses, wise investment in
technology and technology training, and capture only those related services
that make sense to the real estate transaction. Avoid being
"Jack of all trades…master of none".
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