The brokers' guide to real estate commission structures
Paying for and motivating your team one of the major levers brokers can use to increase their agents and team's production. However, for many brokers, it is difficult to find information that is not agent focused.
In this post, we will outline the fundamentals of agent commission structures for brokers so that you can understand and optimize your sales agent structures, motivating your team to higher levels of productivity - and a healthier bottom line!
Generally, remuneration structures for agents come down to the three main types:
- Fixed splits
- Graduated or tiered splits
- Fixed fee / 100% commission
Including a variety of alternative variables and costs.
Let's look at each in turn.
Fixed splits are by far the most common agent commission structure, dividing the sale commission between the broker and agent. Splits can range from 100% of Gross Commission Income (GCI) in favour to the agent, towards larger shares in favour of the broker. Generally, however, common splits include:
The benefits of a fixed split is:
Simplicity. It is easy for both parties to understand the division of costs. This simplicity makes accounting operations more predictable in an increase of sales volume does not significantly impact your costs associated with the sale.
The disadvantages of a fixed split is:
Motivation. It does not provide additional incentive for agents to increase production. Fixed splits are not necessarily the most efficient for generating revenue, as higher volume agents may be persuaded to work elsewhere.
Most brokerages adopt a fixed split commission structure for their agents. This may be to take advantage of the simplicity of the model but also due to a lack in internal capacity to process more complicated commission splits.
Graduated or tiered splits
Graduated splits, also called tiered splits, change the split % based on volumes or targets set by the broker and agent for different levels of production. For example, agents who reach a commission income threshold may benefit from an increased split in their favour.
This commission structure aims to maximize the value of agents production by encouraging increased performance but also by retaining high performing agents who may otherwise be persuaded to continue elsewhere.
The other benefit of this structure is that enables agents to better accommodate junior agents who require more financial support in the forms of training and coaching in the beginning. With a tiered structure, a broker can still provide new and junior agents the pathway to regular or superior performance and income while ensuring their costs for training and low production are better covered.
However, the primary drawback of this model is that it creates additional administration. Accounting and calculation tasks can become more complex as the structure applies differently to each agent, including the multitude of additional costs such as franchise and marketing fees. This complexity can make managing the accounting and measurement tasks progressively more complex, depending on the size of your team.
- Motivate agents towards higher performance
- Retain high performance agents.
- Lower costs of new and training agents
- Increased administration
- Increased complexity
What are the other remuneration models?
Generally speaking, fixed and tiered commission splits make up almost the majority of sales agent payment structures. Other structures include a combination of fixed fees, salaries and profit shares.
Fixed fees are another broker renumeration model that brokerages may employ. Under this model, agents pay a fixed fee for certain events and services such as their monthly desk fee, advertising fees, and a single transaction fee.
Salaries and profit share only: In less than 5% of situations, brokers may provide agents a salary or profit share only remuneration structure.
Other variables and costs
Commission fees are not the only element of an agents remuneration profile. Other fees that may be included are:
- Franchise or royalty fees: Typically around 6% of GCI however these may also be charged as fixed fees per month or year.
- Advertising and marketing fees: These fees may be charged at a % of GCI, or a flat fee for each listing/transaction. Budget brokerages often charge less in return for lower sales support.
- Business cards and marketing collateral: For printing and distribution costs.
- Desk fees: To cover the office infrastructure for a particular agent. Often monthly.
- Errors and commissions insurance: Liability insurance costs taken out by the broker to protect them from issues created by the agent.
- Technology fees: To cover costs incurred by the broker in providing real estate technology.
- Training fees: Charged often to new agents or agents who require increased coaching and mentoring to improve performance.
- Transaction co-ordination fees: Covering transaction coordination costs incurred by the broker.
What is the best commission structure?
We appreciate that this is not a simple question and unfortunately, there appears to be no standard answer.
The variables which affect which profile you choose are complex. Though there are considerations that can be taken into account by your brokerage office in determining your commission profiles and also your split tiers.
Broker strategy and positioning
Different broker strategies can affect their commission profiles offered.
Some brokers may choose to target high performance agents by providing a mix of a supportive but competitive commission profile in order to maximize retention and revenue. Alternatively, other brokers may look to capitalize on their ability to develop agents and attract newer agents at less competitive commission profiles in return for greater support.
A major reason we have identified holding back brokerages from employing more motivating and advanced commission structures is that they do not have the technology infrastructure to accommodate more advanced commission profiles for agents at scale.
Offices can end up with difficult administration requirements trying to track, monitor and calculate complex commission structures, increasing in difficulty in processing data from multiple platforms, agents and teams.
A spreadsheet or software solution may be designed to handle a handful of agents, though more robust solutions are required to manage multiple hundreds of agents with advanced commission tiers and cost calculations. This is originally what led us to developing Zipi. To learn more about us, read more here.
Agent experience may be a consideration in setting tiered and structured commission splits. Generally, agents with more experience earn more whereas junior agents require more support.
(Source: McKissock.com / Real Estate Express)
This suggests that brokerages may consider more supportive renumeration packages for early stage, low volume agents while their experience and capabilities in the market improve. Meanwhile, they may consider more lenient profiles for high performance agents in order to maximize transaction volumes, even if at a lower split in favour of the broker.
Seasonality may be another consideration for tiered splits. Brokers may alter their commission tiers to maximize production during peak periods without penalizing agents during lower transaction times such as November, December, January and February.
(Source: HousingWire, 2016)
For example, a broker may not be best served by setting popular commission structures to be triggered by GCI targets which can only be maintained in just a few months of the year, leading to agent frustration and turnover.
Building a competitive commission profile is a strategic task. While the majority of brokerages will employ a fixed split model, performance and production improvements can be made by selecting the best commission profile for your office's strategy and internal capabilities.