Broker’s Debate: Commission or Salaries

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RISMEDIA-NRRE VOL 16-2 March 2000

Broker’s Debate: Commission or Salaries

By Noreen Seebacher

Paying real estate agents a salary rather than a commission could increase the profitability of real estate companies, provide agents greater economic stability and attract more sales people into the business.

But it could also take away one of the greatest incentives for real estate agents to perform, and reduce the freedom they have as independent contractors.

Nationwide, real estate brokers and owners are grappling with significant changes in the industry and weighing the merits of continuing to pay agents a commission or offering salaries instead.

According to the 1999 Membership Profile by the National Association of Realtors?, a total of 7% of all Realtors are paid a straight salary or a salary plus a share of profits.

That represents about 11% of all brokers and assistant brokers, and 3% of all sales agents, the survey says. NAR credits the trend of allowing brokers and agents to chose from a menu of compensation plans, including salaries, for an overall rise in annual incomes.

The income of full-time real estate practitioners rose 19% from a median income of $46,400 in 1996 to a median income of $55,300 in 1998, the NAR found.

More than 55% of practitioners with 16 years or more experience and 50% of practitioners with 11 to 15 years experience earn at least $50,000 compared to 25% of those with fewer than five years experience.

At issue is whether a shift away from commission to salaries or hybrid salary and commission plans would further boost incomes or simply cost top producers their upside potential.

Greg Rand, vice president of operations at Prudential Rand Realty in Rockland County, N.Y., not far from New York City, says companies are looking at the salary issue from a number of perspectives: the effect on the company, the effect on agents and the possible necessity to change as a result of IRS regulations.

The IRS, long suspect of those who work as “independent contractors” rather than employees, may review the classification of real estate agents, Rand explains. Paying agents a salary could ultimately be an inevitability, he says.

Rand says salaries could make companies more profitable and eliminate the “roller coaster” some agents live on since their income depends entirely on their level of sales. “If I’m a new agent and I sell a house today, I won’t see a paycheck for three months,” he explains.

However, he’s concerned a salary system would create dissension from top producing real estate brokers and agents who profit from the current commission structure. Prudential Rand has about 300 agents at 11 offices ? all work on commission.

James Dougherty, director of marketing at Carlson GMAC Real Estate, in Woburn, Mass., not far from Boston, says there are so many pros and cons that his company has yet to take a position on the issue. It has 1,350 agents who work at 72 offices. All of them work on commission.

Dougherty defines the big advantages to making agents employees as the ability of the company to “more closely oversee the transaction process, and more clearly define responsibilities.”

But he notes that the real estate industry is traditionally slow to change. “The con is merely the inertia the industry has to change an essential business model to another with a lot of unknowns,” he says.

Some real estate company owners express concerns that a gradual shift to salaried agents would cause top producers to jump ship to companies that still offer commissions. However, Dougherty cautions that would be a short term effect, and that in the long run, agents would chose relationships based on management, benefits and other market factors, including salaries and commissions.

Peter F. Hunt, president and CEO of Hunt Real Estate in Buffalo, N.Y., says salaries have a place in the industry, especially as a recruitment tool. Hunt Real Estate, which has 13 offices and nearly 500 agents, has developed a unique compensation structure that includes paying new agents a salary and smaller-than-typical share of commissions.

“It provides us with an additional, attractive element to our recruiting efforts,” he explains. New agents can receive a salary for up to one year before shifting to a commission plan.

It’s just one of several compensation ideas Hunt is pioneering. He says salaries for agents are appropriate “when you can identify a fairly specific role for them as opposed to extremely general roles.” That’s already happening, he adds, and the “amorphous blob” of real estate is slowly becoming very function-specific.

Hunt, for example, offers agents a chance to parcel out some of their responsibilities to salaried employees, some of which are licensed. “Face it,” he says. “Good agents are good at selling. Agents who are good with computers and paperwork should focus on what they do best.”

Most agents get paid on a tiered commission structure, depending on productivity and longevity. They can keep all the commission for themselves, or they can allocate some of the commission back to the company to provide support services.

Hunt offers centralized advertising, appointments to show properties and other marketing efforts, which sellers have the option to select at the time the list their properties. Commissions to sellers typically range from 6 to 7.5 or even 8%, depending on options. “We aren’t the low cost provider. We’re the value-added provider,” he says.

Fees, commissions and other issues will continue to change as a new business model evolves, he predicts.

“We’re not going to uproot and change the current system overnight. The old real estate industry business model is not completely broken. But what we are doing is running some parallel paths to see how we can do,” he says. “We’re offering choices.”


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