Case 12: Realtor Reward Plans Gone Haywire
Frank is the lead broker at a real estate firm that is located in one large city. The company has a nationally known real estate training program that costs $2,000 to attend. The program motivates real estate agents to sell more, gives tips on how to get leads, and recruits more agents to Frank's brokerage firm.
Each real estate agent in his firm grosses a 3% commission with each transaction involved with buying or selling a house. After the broker's cut, most agents net a commission of 2.1% with each transaction.
Frank's motivation is to build his training program and the size of his brokerage firm by adding real estate agents. To do so, he decided to provide his real estate agents some incentives.
At noon on the first Monday of each month, agents sign up for four hours of floor time for the month via computer. Floor time at the downtown office allows each agent to be the sole person to accept phone calls, answer e-mails, or visit with walk-ins to get possible listings and generate more business. Floor time occurs from 6 a.m. to 10 p.m. each day. Agents love floor time so much that by noon each Monday sign-up day, all floor times for the month are taken.
There are other ways to get real estate leads such as contacting people who have de-listed their houses or are showing "For Sale by Owner" signs in front of their houses. But floor time in this firm accounts for a third of all leads.
Here is the new incentive policy:
Realtors can receive up to four hours of floor time per month if they have had a transaction in the last three months.
Realtors receive one additional hour of floor time per month for exceeding three transactions in a three-month period. If there are four transactions in a three-month period, Realtors receive one additional hour. If there are five transactions, Realtors receive two additional hours. Six transactions lead to three hours and so on.
Realtors receive one additional hour of floor time per month for referring one person to Frank's training program. They receive two hours for two people, three hours for three people, and so on.
The system worked well for two months after initiation of the program. On the third month, floor time ran out. Agents who had rights to floor time but could not get it were promised extra floor time the next month. The real estate firm added 16 real estate agents (while losing only two) and brought in 18 agents to the training program due to referrals from other agents. The superstar real estate agent Trina was involved with nine real estate transactions during the three-month period.
Frank decided to change the standard one week before Realtors could sign up for the next floor time. Realtors can now receive up to four hours of floor time per month if they have had a transaction in the last two months (effective next sign-up). All other aspects of the incentive program will continue.
Stacey has been a Realtor with Frank's brokerage firm for the last 15 years. She had been on vacation in February and was gone in late March, so she did not get the e-mail on the new incentive policy. She thought she could sign up for floor time because she had a transaction in the last three months. She went on the computer to sign up for floor time as usual on Monday, April 3, at noon. She was locked out. The computer said she had insufficient transactions over the last two months.
Stacey immediately called Frank at 12:05 complaining that she couldn't sign up for floor time. Frank said that she should have been keeping up with all e-mail correspondence from the firm. She said it wouldn't have made a difference. "I went on vacation knowing I was safe for floor time. Now you surprised me. The firm is going to get bigger and bigger, and it is only going to get tougher to get floor time."
She was disgusted by the fact that her friend Trina received 20 hours of floor time in April. The incentive plan was also unfair to newcomers who get no floor time. Stacey said, "Trina is a machine. She has a staff that helps her get sales. She even hired a person to find Realtors to go to your training seminars. How can I compete against Trina who will capture all the floor time in the firm?"
Stacey also wondered about the training seminars. She got into the business of real estate to sell houses, not seminars.
Frank stated that he wants to give the spoils to those in the firm who produce the most. Trina happens to be one of the most productive Realtors in the city and state. Trina also nets 2.5% with each transaction because she passes the magical $3 million threshold each year. Besides, said Frank, floor time is only a small piece of the pie.
1. What were Frank's strategic purposes for the incentive plan? Did the incentive plan accomplish his purposes? Why or why not?
2. Which incentive option is Frank choosing?
3. Do you think that high-level performers should get the bulk of the rewards in an organization, or should the rewards be meted out in a more egalitarian fashion?
4. Let's say Stacey represents most of the Realtors of the firm. How could Frank have improved the cooperative development of incentives with Stacey prior to incentive initiation?
5. Given Frank's strategic purposes, what alternative incentive plans would be appropriate for this real estate firm? Consider incentive plans mentioned in the chapter.
Gundars Kaupins, Boise State University
1. Frank's strategic purposes for the incentive plan was to develop and build his training program, as well as to increase the size of his brokerage firm with the addition of an increased number real estate agents. The incentive plan accomplished this purpose due to the fact that Frank increased the number of individuals within his training program by 18 agents, and Frank also increased the size of his brokerage firm by the addition of 16 real estate agents, with a loss of only two agents, which resulted in an actual increase of 14 real estate agents. In addition, Frank's top producing real estate agents became even more productive, which added to the profitability of Frank's organization.
2. Frank is choosing a production-based incentive option, in which real estate agents are rewarded based on their sales and production for the organization. ...