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The following Q&A comes from the HW+ exclusive Slack channel, where Steve Murray, senior advisor to RealTrends, and Tracey Velt, RealTrends editorial, as they give an exclusive first look at the 2021 RealTrends Brokerage Compensation Report. During the Q&A, Murray shared some of his biggest takeaways from the data, the trends he is watching and how executive compensation has changed over the years.
The full 2021 RealTrends Brokerage Compensation Report will be available next week, with this Q&A giving a first look at the data. For the study, RealTrends surveyed all the firms on the 2021 RealTrends 500 and Nation’s Best rankings, asking for annual compensation data for the 2020 calendar year.
The following Q&A has been lightly edited for length and clarity.
Tracey Velt: Hi everyone! I want to start out by having Steve talk a little about the report. We looked at 12 different executive positions at a brokerage to determine compensation based on region and size of brokerage. Why don’t you talk a little about the types of brokerages that participated?
Steve Murray: We surveyed all 1760 brokerage firms in the REAL Trends 500 and Nations Best brokerage firms and received 140 replies. These firms were both franchised and independent and ranged in size from $1 million in gross revenues to over $400 million. They were also generally spread regionally so it was a good cross-section.
TV: I know one thing we found in this new survey compared to the one we did in 2016 was that more compensation was variable for certain positions. Which positions changed the most over the past 5 years?
SM: The biggest changes were in the CEO, president and general, regional and office sales manager roles. A far higher percentage of their comp was based on performance-based metrics than back in 2016. Brokerage firms are obviously changing the way they compensate their leaders to make them more variable based on performance than in the past.
TV: Let’s talk about the history of performance-based compensation. Is there growing pressure to pay executives based performance plus salary, rather than just a salary and why?
SM: From both what we saw in the 2021 Brokerage Compensation Study, and from a variety of discussions and meeting with industry executives, it’s clear that with declining gross margins in all brokerage firms, they are shifting all of their costs to more variable than fixed whenever possible. This goes for all parts of their businesses including marketing, technology and even facilities and occupancy costs. After the costs of their agents, the two largest costs to a brokerage are employment costs and occupancy costs. So it makes sense that with margins shrinking brokerages want to change a fixed cost, like base salaries, into a more variable cost based on things like recruiting of agents, increasing their productivity and reduce marketing costs related to sales.
TV: Let’s give everyone a sneak peek at the data concerning non-controlling CEOs. From a national perspective, what was the median compensation overall, base and variable? And, how does that compare to 2016?
SM: The Median total comp for CEOs in this most recent study was $270,500. In the 2016 study, the median was $317,000 so there has been a decline from 5 years ago. Now without digging into all the data I recall the 2016 study had fewer larger firms that reported to us in 2016 than in 2021. For instance, when we look at the largest third of firms from the 2021 report, the median comp for CEOs is $465,471. And when we look at just the largest firms from 2016 the median was $537,818. So digging in a little bit, regardless of what size firm we look at, the comp has declined.
TV: Why do you think that is?
SM: Again it somewhat depends on the data we receive so I don’t want to draw too many conclusions other than it has declined somewhat. And it does go back to the fact that a much greater part of the comp is variable based on what each firm values and what it expects from its key executives. It could be profitability, capture rates on core services, recruiting and growth in agent count and production, etc. So depending on these factors, non-controlling shareholders of privately owned brokerage firms did not do as well as they did 5 years ago
TV: The positions that seem to be less variable are CMO, CTO and in-house counsel. With so much talk of brokerage technology over the past 5-6 years, one could assume CTOs would be getting a big chunk of compensation based on performance. Why do you think they don’t, at least according to the brokerages that answered the survey?
SM: There is not one answer. My view is that since brokerage firms have not yet moved to the age of AI and Big Data, the level of exec they need in their businesses are more related to integrating the tech into one platform and getting buy-in from agents than using them for data mining, for example, where the knowledge gained from access and interpretation of such data can lead to higher levels of productivity for instance. I think some of the same things exist for marketing executives. Brokerage firms are not seeking the highest levels of tech and marketing execs yet because they have them focused more on helping recruit and retain agents than customer lead generation, for example. We know of brokerage firms that are moving and investing in this direction, but that is a small number.
HW+ Member: One thing I’m curious about is that brokerage is — arguably — becoming a lower-margin business, with more of the commission going to the agent. Do you think this downward pressure on commission splits is at all causing diminished executive pay?
SM: Not much doubt about that in my view. Gross Margins on a national basis have dropped 5-6 points in the past five years with more and more lower cost brokerage firms entering the market. Given that, and a broker-owner desire to maintain profit margins, owners are reducing their two biggest expenses, employment and occupancy. Surviving firms will either get bigger or smaller – in between life gets very tough.
HW+ Member: Has there been any discussion of trying to recruit talent with stock options?
SM: We know that Compass and eXp are using stock options as part of their lure. Challenge with others who are publicly held like Realogy and RE/MAX and Berkshire Hathaway HomeServices is that it would likely be highly dilutive to the existing shareholders. For most all the others, they are privately held and there is no market for their shares unless or until they go public in some fashion.
VT: To wrap up, where do you see compensation trends heading over the next few years?
SM: I think for those firms that have integrated core services such as mortgage, title insurance and other settlement services, compensation will be level to up for the best leaders and managers because they can use the revenue and profit from all services to compensate those who cause capture rates, for example, to rise. I also think brokerage firms will move into raising the level of talent in the marketing and tech positions as they make use of some of the new analytic tools to improve all of their businesses.
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