Thursday, September 23, 2010
In Praise of Commission Sales
Its seems that every few years someone comes along with a concept or a business model to improve on the tried and true compensation method that has worked best for the Real Estate Industry over the last hundred years. The means of compensation paid for the services of a Real Estate agent has been based on a ‘payment for results’ model. When the sales representative for a Brokerage is successful in putting together (and keeping together) a transaction, they receive a benefit for their efforts. If their efforts fall short, in that a completed sale does not occur, they do not receive any compensation for their time or expenses. Under the common business model in the industry, the degree of success speaks for the degree of financial reward a Brokerage receives annually.
Although this method has been ubiquitous for almost a hundred years in Canada, it has existed in some form or another since the advent of commerce in society. Some within the real estate industry have experimented with different models of compensation to less effective results.
In England during the Middle Ages King Alfred ordered every man to give his allegiance to a lord in exchange for mutual benefit. This benefit included the right to protection from raiding parties, and the right to occupy and cultivate a piece of land in the Serfdom. In turn the lord was allowed to collect taxes in some form and turned them over to his king. The King would then pay a commission based on the results of the lord’s efforts. This commission was a percentage of the taxes as well as gifts of land or other items of value in some cases. The idea of performance based pay grew from these types of models.
When society emerged from the Middle Ages and shook off some of the elements of the Feudal system, the lower class was elevated in that they had acquired rights to the land they farmed. As the market economy evolved and the middle class established itself, the need for a good negotiator acting as a middle man between various interests grew. When the Black Death and the Bubonic Plague thinned out the body of available workers, all wages increased. In spite of the efforts of the kings and lords, change continued and serfdom ended by the 1500's. The economics of the times continued to encourage the development of a middle class and land ownership beyond that of the lords and crown. Pulled along with this fundamental change the idea of commissioned wages continued to grow.
Historically commission wages based on results have brought the most creative and entrepreneurial to the top. When a Seller decides to dispose of land holdings, they look for a combination of the highest market price, the least risk on their end, and the most efficient process. Any other compensation model will not address these desired elements as effectively as a commission based model.
When a compensation model has a pay as you go component, it inadvertently creates a lack of urgency on the part of the agent. The longer a product is listed, the more compensation is earned. Any type of compensation model that offers a flat fee or ala carte type of formula removes some aspect of motivation or creative thinking on the part of the agent. It is not a question of the dollar value of the outcome, it is a motivational incentive that is of the greatest import.
If a Seller wants to feel totally comfortable that an agent is working to gain the highest possible price for their home, and not just make a sale, then a percentage based on the sale price offers the best protection. If a Seller wants to have the least up front risk, or out of pocket expense, then a results based model is the most desirable. When a payment can be made out of the proceeds of a successful transaction, the actual impact on the Seller’s cash flow is minimal.
If a real estate agent was paid on an hourly or service based model, the performance would not compare to the success achieved under a results based model. It is little wonder that the real estate industry has not moved from commission based compensation despite the other forms of business models that have come and gone over the years.
There is no doubt that commission based sales provide both the Client and the Agent the best solution for the complex territory that real estate industry covers.