For a lot of brokerages, commission structures evolved and changed over time - they were set up many years ago and developed organically.
Most commission structures aren’t necessarily bad. In fact, most of them worked very well for a while. But then the business grew, agents started to make more demands and the commission structure was changed slowly -- bit by bit -- until it just didn’t make sense anymore and didn’t serve the business.
This is a scenario that has unfolded in many brokerages, and businesses are losing millions because of it.
As gloomy as this all sounds, there is a silver lining to this cloud - I’ll tell you why in a minute. But first, let’s look at a few common problems with commission structures.
Doesn’t Make Sense
Your commission structure probably isn’t fit for purpose anymore. It may have made sense a while ago, but it no longer does as your business has changed.
As a solution, you could review your commission structure. Try to understand what you want it to achieve. What are your priorities? Most importantly, with every fresh change you make to the commission structure, ask yourself whether it fits in with your overarching goal.
Too Hard or Unrealistic
If your commission structure is too strict and you’re not sharing enough gains with your agents, you might think you’ll end up with more cash, but this strategy could easily backfire. A 2004 study showed that workers who are paid more have higher self esteem and perform better.
So that means that agents will get disgruntled and anxious if they feel they’re not being rewarded fairly. And agents who are anxious and needy will find it very hard to work - let alone selling some of your higher value listings. This will negatively affect morale and - importantly - your bottom line.
Gives Too Much Away
This is the opposite of the previous point - you’re being too generous with your commission. Sure, high commissions help boost performance, but there are other ways to do this.
Besides, paying your agent well above market rate might seem like a good idea if business is going well. But, you might come to regret it later. Imagine someone wants to invest in your business and questions why you have higher overhead than other brokers. If you can’t justify this, investors will stay away no matter what.
If this sounds familiar, look at your commission structure and see whether you can rein it in a bit. Are you paying the local industry standard? If not, is there a clear justification why you’re paying more? A few percentage points off your agents’ commission could mean the difference between running a healthy profit or just scraping by. And you’ll always be able to back this move with hard numbers that show they’re necessary for business continuity.
Too Hard to Calculate
One of the most common things to happen to commission structures is that they become extremely complicated over time. Things get added and changed, and before you know it, almost every agent has a bespoke commission arrangement!
This often means mistakes are made when it’s time to pay out commission. As such someone’s losing money somewhere, which is inefficient and unfair.
To tell you the truth, every commission structure sucks at least a little bit - it’s just the way the industry works.
Of course, you could revamp your entire commission structure to fit the current state of your brokerage. But, since this will take a lot of time and resources, it may not be worth your while - circumstances change so quickly so work is never done!
Another way to make your business more effective and profitable without having to worry too much about your commission structure is to get the right tools. If you have systems in place that calculate, allocate and pay out commissions with minimal interference from you, you can focus on making your business more successful, without constantly having to rethink your commission structure.
Read more: Our brokers' guide to commission structures