Salesperson Splits Killing Profits?

An expert offers help.

August 1, 1996

Are you one of the unlucky brokers who, to remain competitive, has increased your salespeople's commission so much that you're struggling to make a profit?

If you are, you're in good company. Most companies of yesteryear kept close to half the commission from each sale and paid salespeople the other half. But those days are long gone. The result is that in some cases, compensation has swung so far in favor of salespeople that brokers can't earn a fair profit.

Smart brokers have reengineered their salespeople's compensation to keep that compensation attractive but the overall company profitable. With that reengineering have also come more commission arrangements for salespeople to choose from (incremental, retroactive, the rolling average, a basic plus, 100 percent chargeback). The development of more alternatives paves the way for compensation customized to each salesperson.

If you re-engineer your compensation plan, you can help protect your company's profits by offering plans that start off with high splits only to salespeople who've consistently demonstrated they can earn enough money for your company to recover its expenses. For new salespeople or those who haven't shown they can recoup their share of your break-even amount, smaller splits help preserve your company's profits by allowing your company to recover more expenses with each closing.

Here are a few of the unique compensation plans I've recently seen:

Company A determined its true break-even amount based on fixed expenses, including a profit. Each salesperson who reaches a company's break-even amount is considered a fully productive equivalent. And if it takes the production of two salespeople to bring in the money you need to break even for one year, you haven't truly affiliated two salespeople but rather one fully productive equivalent.

Company A created a program that let salespeople pay their total annual break-even expenses in the first month of the fiscal year. From then on, the company would pay salespeople all the commissions they earned, less variable expenses of 8 percent of gross income per unit closed, and charge no other expenses. There were, however, some limits placed on the use of company resources, such as photocopies and postage, without charge.

Take a little off the top.

Company B wasn't a franchisee, but most of its competitors were. So it was able to stay competitive by adding a few benefits, such as increased advertising and more promotional materials, and securing a profit by charging an "off the top" fee, deducted before the commission schedule kicked in, on all commissions. The company's move hasn't caused a major problem with salespeople and has dramatically improved its bottom line.

Don't mind us. Just recouping some losses.

Company C needed to curb its losses, but it couldn't change its compensation plan. So it determined its average loss during each of the past three years and then divided that amount by the average number of transaction sides closed each year. The company took that amount, which turned out to be $100, and added it as a fee on each side closed. Since that change, the company has shown a profit and hasn't experienced increased turnover or a loss of salespeople.

Commission splits were once uncontrollable. But many brokers now realize that they're simply company expenses that they must manage if their company is to be financially successful.

Commission splits are freely negotiable by both salespeople and brokers, and the NATIONAL ASSOCIATION OF REALTORS® endorses no particular compensation structure between brokers and salespeople.

Drexanne Evers, CRB, is president of Drexsells Inc., a consulting company that specializes in company audits, compensation, and profitability. You can contact her at 513/289-3119.

Notice: The information on this page may not be current. The archive is a collection of content previously published on one or more NAR web properties. Archive pages are not updated and may no longer be accurate. Users must independently verify the accuracy and currency of the information found here. The National Association of REALTORS® disclaims all liability for any loss or injury resulting from the use of the information or data found on this page.