Enquiries regarding commission splits have well and truly jumped in the last couple of months. Many commission arrangements reset on 1 January each year, so now is a good time to reflect on the effectiveness of your current commission structure to drive your strategic objectives.
JUST WHEN I thought I had seen it all with commission splits, another variation comes up. It seems the options are endless when it comes to sharing profits, and motivating and rewarding your team.
First and foremost, when reviewing the splits on offer make sure you are comparing apples with apples. Comments like ‘Johnny across the road is on 60 per cent’ should be taken with a grain of salt until you understand all components of the structures within that particular office.
The most common variables with a remuneration structure for sales agents include:
- Commission rates
- Inclusive or exclusive of super
- Thresholds for bonuses or rate increases, usually expressed as Gross Commission Income to the office
- Debit or credit retainers
- Base wage
- Percentage of what? – 90 per cent is common within franchise groups
But then you have the less common variables, like:
- Fixed bonuses – quarterly and/or annual
- List versus sell splits
- Payable on settled or written sales
- Capped super – maximum required guaranteed contribution
- Independent/Conjunctional Agent options
- PA wages contribution, or part thereof
- Quarterly or annual thresholds
- Marketing allowance
- Consumable allowance
- PM referral fee splits
- Threshold indexation
- Timing and impact – for example, performance in one quarter impacts the rate applicable in the next quarter
- Funding and recovery of VPA and/or non-VPA
- Marketing/BD levy – more common with independents
- Fee per contract, sale or listing
- Profit share
- Share of team commissions
Altogether, we have 23 potentially different variables within commission structures – and that’s before some of those other ‘deals’ commonly agreed to on the spur of the moment.
So what is a fair commission split? It of course depends on the level of performance and the level of risk each party assumes in the relationship.
I take a fairly pragmatic view to commissions. If the principal is taking more risk in the arrangement, they should benefit from a greater share of the upside. In practical terms, this means a lower than average split paid to the agent if they have the luxury of receiving a wage or retainer. However, if an agent is willing to back themselves and go on a commission-only basis then they should be entitled to a greater split of the gross commission to the office.
Irrespective of what variables are agreed between the principal and the salespeople, both parties should focus on the average rate of commission (ARC). Your ARC should include, in my mind, everything that is part of the commission structure: superannuation, wages, retainers, PA support cost and so on. This way we can draw meaningful comparisons.
I usually express an office ARC as a percentage of 100; the business owner then knows their business formula and can make smart decisions on the go. I have seen an ARC as low as 40 per cent and as high as 65 per cent. There is no one-size-fits-all when it comes to commission structures. You need to focus on the value you provide as an employer; your brand, reputation, support, training, credibility, mentoring and so on.
In my experience, I would suggest that the more typical range of ARC is between 50 and 56 per cent. Below 50 per cent there tends to be a lot of support to the agent; above 60 per cent you generally need to be a big-volume business. That doesn’t mean it can’t work at either end of the range; it just needs to match the value provided and the strategic objectives for the business.
Of course, different locations have different competitive forces that also need to be taken into account – the Gold Coast, for example, tends to pay higher splits then Melbourne – but then the average sale price in Melbourne is higher too.
Remember, paying your team more when they contribute more is not a bad thing! Focus on the incremental profit contribution by each team member and each additional sale, and you will be surprised by how much it simplifies the process.
TIPS FOR PRINCIPALS REVIEWING THEIR COMMISSION SPLITS
- Focus on Average Rate of Commission; I usually express it as a percentage of 100 to make it comparable.
- Staff mix is key. Where will your team sit?
- Every dollar counts – focus on incremental profits.
- Culture is still king, and splits should reflect the culture you are striving for.
- Have one transparent structure; avoid confrontation by clearly communicating the structure applicable for everyone.
- Minimum performance expectations at each level. Use performance benchmarks to determine when agents graduate to a higher level.
- Remember the acronym K.I.S.S. – keep it simple!
- Avoid bracket creep with automatic indexation, where thresholds can be indexed annually against something like average house prices
- Expected. Good. Great. Determine thresholds for rate increases and/or bonuses based on expected, good and great performance.
- You want to pay your team more: if it is a good commission structure, everyone should win.
TIPS FOR SALES AGENTS
- Make sure you are comparing apples with apples: know the variables in different offices.
- What other support are you provided? For example, brand strength, training, culture, team support – these should all be taken into account.
- Culture is still king. Commissions are only a small component of the mix.
- Of course, the different states all have their own rules on the mandatory commission and remuneration requirements, especially for newbies to the industry, and these must be taken into consideration.