5 Unique Commission Split Plans for Commercial Real Estate Brokerages to Consider
Turner Levison | May 24, 2019
When considering ways to organize and structure a commercial real estate brokerage, one of the most important factors to consider is how to compensate your agents.
Agents bring in the commissions by brokering deals, and the brokerage house makes money either by keeping a percentage of those commissions, by charging agents a “desk fee” to hold their license and give them a place to work, or some combination of both.
How brokerages structure those “split plans” with their agents is critical to recruiting and retaining top talent in the industry. If an agent feels they are not making enough money from the business they generate, there will always be another brokerage willing to hold their license and negotiate a more favorable split plan to entice a top producer to move.
CommissionTrac has analyzed hundreds of unique split plans being used across thousands of commercial real estate agents. Having now processed over $125,000,000 in gross commissions and distributions to the house and agents, we have found 5 common structures that are all worth consideration.
Flat Rate Plans
Flat rate plans are commission plans that have a fixed percentage share between the house and each agent on their gross. These are often used because they are easy to calculate and forecast for the brokerage, but often can leave top producers frustrated that no matter how much they produce and cover their desk cost, they still always give the brokerage house a percentage of their gross commissions.
100% Commission Plans
The 100% Commission Plan was popularized RE/MAX. It’s gives the broker 100% of the gross commission they earn. This can sound great on the surface, but it limits the upside for the brokerage house. They collect expenses and desk costs either as an annual or monthly fee from each agent at the brokerage, but never participate in the actual share of the commission.
50/50 Split Plans
The 50/50 split plan is popular because it’s incredibly easy to calculate. For every dollar of gross commission an agent produces, $0.50 goes to the house and $0.50 goes to the agent. Typically with these plans, the agent does not pay for any of their desk costs and the brokerage covers their expenses like signs, marketing materials, administrative assistants, etc.
Other Flat Rate Plans
Brokerages often use different rates than the standard 50/50 plan. Some will heavily incentivize bringing in top producers by offering a better flat rate than their current brokerage. We’ve seen these plans range from 60/40 all the way to 90/10.
In the latter example, if a broker brought in $100K in gross commissions, the broker would keep $90K and the house would keep $10K. Typically, if you are considering offering plans with that high of a percentage, you may do well to consider the desk cost for each agent and whether or not you’ll need to bill your brokers/agents for expenses, etc.
Tiered Commission Plans
To stay competitive, brokerages today have become more and more sophisticated with the structures of their split plans. Tiered commission plans will have a reset date (typically January 1st) and throughout each year, as the broker earns more and more commissions, they get to keep more and more of the gross.
These will typically start off with the broker keeping 50-60% of their gross and move up as they hit new tiers/breakpoints. The most common break-points are based on either the overall gross production by the agent or the agent’s net they keep. Both are unique.
These plans allow for a brokerage to keep a high percentage of the commission until the broker has covered their desk costs and then give more to the broker as they create more and more commission income for themselves and the business.
Let’s examine using a 4 break point plan, with the same dollar amount breakpoints … but using the break point tier unit as gross vs. agent net and see how it all plays out:
The most common break point is using the agent’s gross commission created. Each dollar that comes in for that agent will go through their split plan, and based on what tier they are in determines what they get in agent net vs what the house keeps. If a broker brought in a $750K gross commission deal, here’s how it would pay out:
The house net plan is set up the exact same way, but you achieve different break-points based on how much net you produce for the house as opposed to based on the overall gross of the deal. This can have a huge impact when seeing how $750K would get distributed:
As you can see, when using the agent net as the break-point tier, the brokerage house will keep more of the commission over time.
Impact of Tiered Split Plans
It is worth note, tiered split plans can be a great way to keep agents incentivised, but they can come with operational challenges. If you have 15 agents and a different tier structure for junior agents, senior agents and principals of the firm, you may find yourself in excel hell trying to keep up with calculating distributions and updating agents on where they are in their split plan, etc.
Other Ideas to Consider
It’s never one size fits all, and brokerages still have more options to stay competitive. Some use manager overrides, bonuses and more to keep their brokers motivated. We even see plans where if a broker recruiters another, they get a bonus whenever the broker they recruit brings in commissions.
Bonuses can be painful to manage, especially when you need to give agents transparency on every agent statement. They want to know what they are being paid and how all of the calculations worked out.
Expenses are the same, no matter what plan you choose to use, there may be times when you are reducing an agents commission earnings by expenses. Agents need transparency when it comes to their money. Giving them a statement, or a portal to view past statements and income will do well for them to know they’re getting paid the right amount, especially when you have tiered and complicated split plans in place.
Here’s an example of a fully transparent statement for an agent to know exactly what they’ve earned in commissions, bonuses and what expenses have been taken out of their check:
Transparency For Your Agents
Some brokerages take it one step further and use a technology platform to give their agent’s a place to view all of their statements, receivables and more. These types of platforms will also do all the heavy lifting and automate calculations and distributions. This can be a huge time saver for the brokerage’s operational team:
When upgrading your technology stack, always remember to ask the hard questions of your potential vendors. This is especially true when you’re dealing with your agents commissions. Always be sure to consider your accounting requirements and that whatever software you choose fits your operation’s needs.