Conquer Compensation Conflicts

Negotiate commission splits that let everyone walk away happy.

February 1, 1997

More than five out of six owners and managers of real estate companies feel they need to modify their salespeople's commission splits or desk fee programs to stay profitable, according to an ongoing survey conducted by the Rocky Mountain Consulting and Training Group Inc., Denver, an industry consultant that helps real estate companies improve profit performance and agent productivity.

Of nearly 1,100 brokers and owners who responded to the group's 1996 questionnaire, more than half said their real estate company failed to produce a profit last year from residential brokerage business. That number excludes company owners who generated commission income on their own. The lack of profits was attributed primarily to higher commission splits and lower monthly desk fees for salespeople.

A NATIONAL ASSOCIATION OF REALTORS® survey--Real Estate Brokerage: Income, Expenses, Profits, published in 1995--showed that a significantly smaller number of members' companies, 25 percent, weren't profitable. But the bottom line of both studies is the same: The more salespeople demand, the more difficult it'll be for unprofitable brokers to pull themselves out of the red.

If you're a salesperson who's unhappy with your split, what does your broker's slim or nonexistent profit margin mean to you? It means you'll need to prepare for more steps in the commission renegotiation dance. And if you're an owner or manager anxious to improve your company's profitability, it means you'll need to find the key to increasing profitability while attracting and keeping top talent.

What Do I Get for My Money?

One of the chief challenges facing both brokers and salespeople during compensation negotiations is a gap in the way the two parties perceive profits and commissions.

For example, Robert Aldana, a salesperson with Contempo Realty, San Jose, Calif., who has worked on both sides of the negotiation table, says salespeople often wonder what they're getting when they pay desk fees or share a commission with their brokers. ''A lot of times salespeople don't realize what a company does for them. Brokers are providing a facility, the latest computer technology, a support staff to help them, a full-time receptionist, paper, copiers, coffee--all of it costs money.''

According to Gerald Warner, president of Rocky Mountain Consulting, compensation at many real estate companies tends to be an us vs. them scenario.

''Company management generally isn't willing to share with salespeople what it feels are confidential numbers--what dollars need to be coming in for the company to pay the bills and break even,'' he says. ''But there needs to be open communication, and those things should be shared. Both the salesperson and the company need to be on the same bandwagon and totally familiar with what the other one needs. The salesperson tends to think the company is making great sums of money, but that's rarely the case.''

Satisfy Profitability Needs First

The key to a successful compensation plan, says Hal Kahn, broker with Kahn Inc., REALTORS®--Better Homes and Gardens, Newburgh, N.Y., is to create a compensation schedule that's fair and satisfying to each participant--one that covers the fixed expenses of the broker and provides a level of profitability.

Brokers need to analyze each salesperson's annual performance, calculate the company's annual per person expenses, build in a per person profit expectation, and then develop the compensation plan around a target company dollar from that salesperson, according to Warner.

''If the salesperson is completely happy with the program but the broker is unhappy, it's going to be a short-lived relationship, and vice versa. You have to find a balance that satisfies both parties,'' Kahn adds.

Compensation Facts

  • Nearly 75 percent of REALTORS®are compensated by a percentage commission split. In 1996 the typical split started at 55 percent and increased to 63 percent by year-end.
  • Almost 17 percent of REALTORS®receive 100 percent of their sales commission.
  • Other measures of compensation include commission plus a share of profits (3 percent), straight salary (2 percent), salary plus a share of profits (2 percent), and a share of profits only (1 percent).

Source:NAR Research Division, An Executive's Guide to REALTORS®, 1996

A Quick Guide for Your Negotiations

Regardless of which end of the negotiation table you're on, you may want to consider the tactics some of our experts have used to reach compensation agreements acceptable to both parties.

If you're a salesperson:

  • Come armed to show how much you've actually produced. If you're interviewing with a new broker, bring your 1099 form to prove how much you've made at your current company.
  • Outline your goals and demonstrate how you intend to achieve them. If you sold $500,000 last year and say you're going to sell $1.5 million next year, you should identify specific steps--such as marketing, networking, or learning a new technology--you're going to take to boost your productivity.
  • Suggest a new commission split for a six-month trial basis and commit to bringing in x amount of business. Then say to your broker, ''If after six months I don't meet my production goal, we'll return to the old split.''
  • Show that you're up on the latest technology and illustrate how that's helping your broker's bottom line. Maybe you just learned a new mail merge program and you've been sending out all your own letters, eliminating your need for some of the secretarial services your broker's providing. Perhaps you've designed your own home page and you're bringing in new business from cyberspace. Try to estimate the amount of man-hours and money you've been saving your company.
  • Demonstrate that you support the company and your colleagues, and show that you're providing services and benefits outside the requirements of your job. Attend meetings, help other salespeople in a crunch, volunteer to do training and marketing, and offer to work one-on-one with rookies. ''Show your broker that you're working, not just sitting around drinking coffee and eating doughnuts,'' suggests Robert Aldana, a salesperson with Contempo Realty, San Jose, Calif.

If you're a broker:

  • Emphasize the benefits your salespeople aren't paying for. Maybe you offer free postage, copying services, training materials, and research tools.
  • Ask salespeople for their input before you implement a new compensation structure.
  • Assess the psychological profile of your salespeople and try basing your compensation package on their personality. Some people just want to feel as if they were making 100 percent of their commission and cutting a check for monthly business expenses. Others don't like to feel they're paying for things in advance and prefer working on a split. ''The fact is, you have a certain universe of total dollars to deal with, and how it's split up or how we see it split up doesn't change that total universe,'' says George Stephens, broker-owner of ERA--Stephens Properties, Houston.
  • Be honest about how much it costs to run your business. Make salespeople aware that you're paying for the facility, insurance, advertising, and secretarial services. ''The less information that people have about something, the less trusting they are about what's occurring and the less they feel there's a sense of fairness. Everybody has to have an understanding of one another's needs,'' comments Hal Kahn, president of Kahn Inc., REALTORS®--Better Homes and Gardens, Newburgh, N.Y.
  • Increase a salesperson's commission split on a trial basis if you agree to the increase, and revisit the situation after six months.
  • Don't panic and give away the store when a valued salesperson or top producer threatens to go to a competitor. ''The mystique of having a top producer representing your company may not have a tangible value,'' comments Rich Rector, president of Realty Executives. Be prepared to show the differences between your company and the competitor. Maybe after all the numbers are crunched, your salesperson will realize you're a better deal.

Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.

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