22 June 2010

Operational and Compensational Implications of Reducing Office Size

As is true with everything in business, the issue of reducing office size cannot be viewed in a vacuum. If you decide that reducing office size is an important initiative for your company, first consider all operational attributes that are impacted by changes to the physical plant. Keep in mind that both business and culture are at play here and it is important that sales associates feel there is benefit to them as the company makes this change.

Ask yourself a few key questions about how reducing office space would impact your culture.

  • How will consumers be best served?
  • Will compensation structures for virtual agents differ from brick and mortar agents?
  • How will the expense savings on the physical plant be put to work?
  • Will you create new and useful tools, services and programs that will attract top agents?
  • Will you pass on some savings to agents by helping them set up virtual offices?

Strategically visit potential changes that may need to accompany office space reduction. Things such as marketing plans, advertising, agent bonus structures and incentives must be taken into account before any action is taken.

Brokers who choose to induce change toward smaller offices by motivating agents through compensation incentives might consider the following examples:

(a) Give 5% more across-the-board if agents work virtually, or

(b) Make the ‘in-house’ plan 5% less than current practice and pay out at current splits only if agents work virtually (we prefer choice b)

(c) Consider introducing commission indexing by CPI or another metric in order to assure that margins will be maintained over time despite the higher payout to agents working virtually (see below).

Indexing of Commission Plan

Each year, increase the dollar thresholds that make up the different bands of your commission plan by some multiplier (e.g., the consumer price index).  For example:

Before: XYZ Company has only one commission plan that resets every January 1st and is structured as follows:  each agent gets a 55/45 split on the first $50k of GCI, 65% for everything between $50k and $100k, and 75% on everything above $100k.

After: What occurs if the thresholds are increased by only 4% each year?  The first band (agent gets 55%) now runs from $0 to $52k (not $50k) while the second band (agent gets 65%) is now from $52k to $104k.  Fast-forward another year and the targets are now at about $54k and $108k and after three years they’re at about $56k and $112k, and so on.  It’s not too dramatic a change from one year to the next but the cost of not doing this is ever-shrinking margins that become uncomfortable over time.

10 thoughts on “Operational and Compensational Implications of Reducing Office Size

  1. Very interesting topic. It really is hard for a brokerage to have a "one size fits all" plan as each agent can have vastly different business practices than that of his/her associates. For some, a "virtual office" makes sense while others may have clients that are not impressed with meeting at a Starbucks to discuss their contracts and negotiations.

    1. Exactly. Flexibility is the key here. If we have a one-dimentional business model, we will attract only one type of sales associate. Since we know that our sales people must reflect the broader population in the marketplace, a diverse appeal in the business model is of paramount importance.
      Thank you for your comment, Bob

  2. First, you're expecting a lot from a broker to even consider such concepts…not the most innovative bunch of people. Secondly, it's one thing for agents to want higher splits from the house, but are they (agents) willing to accept performance standards that mandate sales quotas every quarter or their split decreases.

    If you've ever run a business that relies solely on it's sales people to create the profits, then you'll understand the need for performance standards…as well as incentives.

    Agents always want it their way…sellers to lower their prices so the home is easier to sell and for brokers to give then a larger piece of the pie, even though they have zero risk.

    I'm all for performance incentives…produce more and earn more, but if you don't produce then you make less or worse…you're out. To me the best way to create a balance is to make the agents buy into the company so they're forced to have risk, and with that risk will come the work ethic to earn enough to make their investment back. Agents only want more, but they need the incentive to produce more.

    And btw…it's the brokers fault that it's this way. The business model is horribly outdated from top to bottom. Not only don't the large franchises not understand consumers, they don't even understand their agents.

  3. I have no argument about performance standards and incentives, but these points are not really the focus here. You seem to be of the opinion that brokers are not an innovative bunch, but having run real estate companies and consulted with Brokers for years has not led me to the same conculsion.

    The point that I am making is that the business model has to address business realities. It must respond to consumers sentiments, support sales associates and promote profitability for the broker. Without these three ingredients, the system at some point simply breaks down and no one would be well served by the result of that situation.

    Thank you for your comment


  4. Bob, the system is broken and outdated, and it's been that way for decades. The problem you write about has been out there for as long as the industry has been around. We blow so many opportunities to improve our business, because of an old mindset that refuses to change. Only when brokerages fail en-mass and outsiders with a fresh approach come in will we move into the present, and maybe into the future.

    1. Brad, I appreciate your comment. The only thing that I would add is that we should avoid"throwing the baby out with the bath water." Certainly there are some things in our industry that are working well and the key is simply to make strategic change when change is called for. The problem that businesses run into is usually the cumulative effect of many such missed opportunities, over an extended period of time. Regards, Bob

  5. The NAR stats show that buyers search for homes for up to 10 months before contacting an agent, which tells us that they don't want to talk to agents. It's a scary number, and as it starts approaching 12 months what do you think will happen…one day they won't even call. We've needed strategic change for decades, and as long as we insist that most is going well, we're missing the opportunity to change. Just ask anyone who has looked for a home how inefficient and ineffective our system is. In a technology driven world it doesn't have to be as hard as we make it for someone to find their dream home.

    Take a page out of the Apple book, and lets modernize our industry before Apple does it, and walks away with our business. It's only a matter of time before it happens.

  6. Brad, I have no argument with modernizing but I do think that the two of us hold differing (not completely different) views of the future. Certainly there are changes that need to be made to the structure of our real estate businesses and this fact was the motivation for my having written this blog in the first place.

    However, I believe that when all is said and done, the professional real estate agent will still be a critical part of the equation. We will be better trained and better versed in subject areas [financial, technology, social networking, auctions, short sales, forclosures, etc], but in the final analysis the fact that "people buy people, before they buy tools and serivces" will not change.


  7. Bob, suddenly we’re going to be better trained? By who, the same exact people who think there’s nothing wrong to begin with…sorry it’s not going to happen. The same people who have let the industry deteriorate to what it is won’t be the ones who can bring us into the future. The brokerages are run by people who learned an outdated concept don’t realize what’s needed to make the a valuable asset going forward. The same self made obstacles still exist as they did decades ago….only a new crop of visionaries can make it happen. It’s going to take people who see the business form a different perspective to make real changes. It one thing to say we’re a valuable asset, but self serving talk is cheap and is only good for cheering up the troops, but it’s the consumers who we need to impress. When you get down to the nitty gritty and cut through the industry chatter…there’s nothing new in brokerage that consumers can point to that proves that we have solutions to their problems. I for one hope that someone from an other industry comes in and kicks our butts, because until then nothings going to change…and we need change

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