Is it Time to Move from 100% Commission?

A recent MSN Real Estate article described the state of the industry for real estate agents and the picture is not pretty. Technological advances and more knowledgeable consumers who are demanding discounts have left real estate agents embattled. One New Jersey broker-agent observed, “There are twice as many agents pounding the street but in the future, large real estate firms might shift to a salary plus commission model in an attempt to weed out less-effective agents. After a long time operating the standard way, there’s a new way coming.”

One of the holy grails of mortgage banking is 100% commission pay plans. Mortgage banking followed suit with other industries such as real estate brokerage, automotive, insurance and stock brokerage disciplines in offering commission-only compensation plans. Management loved a variable-based pay plan under the belief that the company could control costs by only paying for sales employees who were successful. The reasoning was poor performers would not survive on commission-only pay plans. In my view, this fundamental paradigm is flawed.

What happens when underperformers are successful due to market conditions that have nothing to do with their sales skills? What happens when the industry is flooded with below-average sales professionals? Can any mortgage company make a profit with today’s originator average of 2 loans a month?

The reality is that the industry over-paid when business was easy because existing customers were refinancing. The role of the sales person is to bring new customers to a lender which did not happen. The problem was compounded by management’s failure to invest in finding new sales talent who could source new customers. When you don’t develop your own sales staff, you are forced to go to the free agent market and again, over-pay for supposedly established producers. (A similar scenario plays out in the sports world. Just look at the sorry state of the Phillies, not long ago a World Series champion but at the bottom of the league now). The free agent market is a costly approach especially when margins are as thin as they are now in mortgage banking.

In my opinion, the other issue with commission-only plans is that the individuals who are successful are not easily managed. What makes top producers successful (their intense drive) is exactly what requires an excellent manager to handle them. Average to poor managers cannot manage these individuals. Is it no wonder that top producers rule the roost at many firms and even senior managers are afraid of them?

I realize that sales compensation is one of the most sensitive issues for managers but the writing is on the wall not just for real estate agents but the mortgage industry. A sea change is coming and I would rather be riding the wave than be crushed by it.