|This article was published on: 01/01/2004|
FOR BROKERS: Compensation plans
Calculating costs: as easy as e=mc2
Janice Grupido, CRB, GRI, would like to rely on a little less art and a little more science in setting compensation plans each year for the 40 associates who work in her two offices in the Troy and Rochester areas of Michigan. Ideally, the broker-owner of Countryside GMAC Real Estate would look at what each salesperson consumes in brokerage resources to generate revenue.
Those are strong figures when pegged against comparable industry figures, Cocks claims. Anecdotally, average company pretax profit industrywide is 2 percent to 3 percent, according to David Colmar, head of Colmar and Associates in Rancho Santa Fe, Calif., a real estate research firm. Average pretax profit tends to be higher, near 6 percent, for the country’s top performing companies, Colmar says.
Limiting brokerage costs to just fixed costs can also produce stronger brokerage profitability.
At Keller Williams, average brokerage share of gross commission income is considerably less than in the 500 largest brokerages in the country—16.8 percent at Keller Williams offices compared with 29.2 percent for other companies—according to Dave Jenks, vice president of research and development at Keller Williams Realty International, based in Austin, Texas. Jenks compared Keller Williams figures with industry figures compiled by REAL Trends, a residential real estate information provider.
But Jenks says the company’s pretax profits are higher because its brokerage expenses are lower. For the 500 largest companies, brokerage costs average 25.7 percent, leaving a 3.5 percent pretax profit. Costs at Keller Williams offices are 9.6 percent of GCI, which leaves a 5 percent pretax profit after 2.2 percent of income is taken off the top for a company profit-sharing program.
The analyses suggest that accounting for variable costs is the key to setting compensation plans that maximize brokerage income. So, whatever mix of art and science you use to set your plans, make sure you have a clear picture of how much your associates cost you.