By Jay Holtzman. The less-than-superstar sales person who suddenly makes $400,000 is something of an urban legend in the home building industry. It's one that causes some CEOs and sales directors to shudder and fuels those who worry that industry sales compensation has gotten way out of line, propelled by new home prices that have risen 53 percent in 10 years.
Like most urban legends, it contains a grain of truth, although grossly overpaid sales people appear to be pretty rare. One consultant tells of a Houston sales person who earned $425,000, much to the surprise of management. "This was on a tract like any other. The sales person got into a groove and you couldn't beat the market down if you wanted to," says Jeff Shore, of The Shore Company, a sales management consultant firm based in northern California. "Then next thing you know, management looks around and asks how this could happen.
"This issue is on the CEO's radar screen at a number of big builders. About now people are reviewing the numbers from last year and I think a lot of jaws are going to drop when they see what people made," Shore says.
There are different opinions in the industry about what the real sales compensation issues are. Business consultant Bill Carpitella, CEO of The Sharrow Group, in Rochester, N.Y., says builder attitudes toward sales compensation are more of a problem than the compensation itself.
"There are builders out there -- probably the majority -- who are saying that something is wrong. The reality is, that's the builder mentality," Carpitella says. A sales person's big earnings aren't out of line, "as long as the individual is driving the organization to some kind of production excellence," he contends.
Compensation must be designed "so that there is equilibrium in the organization that doesn't penalize a sales person who falls into a fast-moving community," Carpitella explains. Builders need to consider a community's projected absorption rate, but if the sales person exceeds expectations -- if the absorption rate is faster -- then "that sales person should be able to go north of the target compensation without the owner having heartburn."
Others say sales compensation problems are really sales management problems.
"If you have sales people making $300,000 to $400,000, you are not appropriately managing and manning the project," says David Weekley, CEO of David Weekley Homes, in Houston. Responsibility for a runaway community is shared, he maintains. Sales people, the land buyer, the product designer, the whole team makes that success possible. Commissions that reward sales people disproportionately just sow discontent throughout the team, he explains.
Shore agrees. Sales management with "a head-in-the-sand approach to commissions" makes the problems worse. "I think there are a lot of sales managers who think they will write their own death warrant if they mess with the commission rate," he says. They're reluctant to tackle a difficult issue and risk disturbing "the sales that are keeping the machine running." But it's one of those issues "that boils and boils until it suddenly explodes, and I can see a time coming when everybody is going to deal with this issue," Shore asserts.
Change is needed because the traditional, "straight commission" approach is what can cause runaway sales compensation problems in the first place. It simply may not be up to the challenges posed by a market with rising home prices and high absorption rates. "These plans are inherently flawed if everyone gets the same commission rate, but everybody doesn't have the same absorption rate," Shore says. "The biggest problem is the single-mindedness that says 'here is the commission rate, there is the price, and therefore this is what you are going to make,'" he adds.
The solution isn't necessarily to lower commission rates. Many builders and consultants agree that, instead, it lies in the strategic restructuring of sales compensation to support the business plan.
"You start with what you are trying to sell, how much work it will take, and how much coverage you'll need to accomplish that," explains Tony Green, managing partner of Pine Hills, a multi-builder community in Plymouth, Mass., that includes production and custom homes. "That gives you an idea of what you'll have available to pay [for sales]." The basic reason to approach sales compensation this way is "to make it clear to the person selling and to us what the goals are," he adds.
Expanding Sales Commission Goals
(% of companies using sales metrics)
|Type of target/goal||1996||1998||2000|
|Number of units sold||100%||93%||100%|
|Customer satisfaction rating||27||27||44|
(Multiple responses permitted) Source: Eliant, formerly national survey systems
|Sales metrics: Multi-year surveys of sales commission schemes among southern California builders, though not projectable, suggest the growing roles satisfaction and sales-to-traffic conversion play in determining sales commissions.|
In fact, a number of big builders now set sales compensation strategically to account for a growing number of factors. This, in turn, leads to several practices that appear to be gaining ground in the industry: setting target sales compensation; restructuring compensation packages; creating sales career paths; and using a cooperative, team approach to selling. By taking a more comprehensive broad-based approach to sales compensation that recognizes the environment in which new homes are sold and the changing role of sales personnel, these builders have largely headed off the problems of skyrocketing sales compensation.
At John Laing Homes, in Newport Beach, Calif., Bill Probert, executive vice president of sales and marketing, says the company looks at "the community and what results we expect it to achieve." Then they combine this with an evaluation of "what we think the individual is worth based on experience, skills, how long they have been with the company, etc.," to come up with a program for that individual.
Today, many sales people aren't just being paid for results; they're being paid for specific activities and behaviors. For example, Probert also considers "the ability the person demonstrates to do the activities we measure, which include prospecting, follow up, conversion rate, the lender capture rate, and customer satisfaction scores," he says. About 10 percent of compensation is based on the measurement of these activities, and Probert says he expects that percentage to increase. "If these activities are done in the proper manner with the proper attitude and the proper frequency, they will translate into the sales we want and possibly more revenue."
Although other builders recognize and measure such activities and stress their importance to sales people, they don't compensate directly for them. "The sales managers that I have and want to keep know that customer satisfaction is a key part of their job security. It is a performance I expect although they don't get bonuses for it," says Robin Johnson, vice president of sales for Lakewood Homes, in Hoffman Estates, Ill.
Creating sales career paths goes hand in hand with targeted sales compensation, many builders find. A career path adds a measure of stability for sales people -- they can see beyond next month's sales. This is important because builders appear to be placing more importance on holding sales people as long-term employees. Career paths also enable builders to more uniformly scale sales compensation to an individual's skills and experience and exert more effective management control over compensation.
Someone new to the industry starts a sales career as a sales associate at David Weekley Homes, explains Weekley. This is a training position, and for three to six months, the associate is mentored by an experienced sales person in the same office. Later, "they become a full-fledged sales person, at which time they move to a sales person's compensation structure," Weekley says. From there they can become a lead sales person and then move up to a senior sales person.
"At each one of those levels there are increases in the base salary and/or in the commission rate. They reach those levels based on a combination of sales rates and customer satisfaction scores," Weekley says.
Providing a more stable financial and employment environment for sales people is one reason why more builders have turned to salary-based compensation plans.
"We pay a pretty decent base salary and commission on top of that," says Green. "We want people who will be with us for a long time, so that means we have to be there for the ups and downs." A salary plus commission "is a way of smoothing out the ebb and flow of sales. The highs aren't as high and the lows aren't as low," he adds.
A series of surveys done since the mid-80s in the southern California market shows that salary-based plans were used by 80 percent of the builders responding to the most recent survey in 2000, up from 47 percent in 1993.
Bob Mirman, CEO of Eliant, formerly National Survey Systems, the firm that conducted the studies, points out that because the research applies to only one market, "it would be hard to draw national conclusions" on these studies alone. The results may not be projected nationally, but they offer a snapshot of how compensation plans have changed in one major market and some indication of why.
"Builders are recognizing that selling a home is a process and that the sales person is a vital part of that process," Mirman explains. "They see from the data we provide how important the sales people are in customer satisfaction. They can't over promise about service and quality, because if the builder can't deliver, they just killed the deal."
Builders also are using compensation plans that include salary or draw plus commission, plus bonuses. The number of companies using this three-prong approach nearly doubled from 1993 to 2000.
"Commission-only plans, and salary-plus-bonus plans seem to have almost disappeared over the course of the four studies," Mirman says. "But plans that include salary or draw plus commission, plus bonus doubled from 21 percent to 40 percent in the same time frame and they've increased in northern California and Nevada, too, but not by as much. Clearly, there is more flexibility to have all three of those possibilities engrained in the system," he says. "They present a little more motivational structure."
This flexibility also enables builders to encourage a wider range of activities -- like customer follow-up, communications, and the paperwork necessary through what can be a lengthy home buying process -- that the job of a sales person has come to include.
"I believe the sales techniques have changed," Weekley says. "Being able to come up with just the right words and get someone [to sign the contract], at least in the $300,000 price range, isn't nearly as important today as having a high knowledge base. It's much more of a consultative process rather than a telling and sales process. There's much more listening involved, much more finding out what the buyer's needs are and trying to satisfy their needs."
Salary-based plans also tend to support the cooperative, team sales approach that some builders are using to replace the traditional, competitive "ups" system.
"If I typically have two sales managers in an office, they split the commissions, regardless of who writes the contract," Johnson says. This helps keep them focused on customer service. "I find it very difficult to put people on an 'up' system, create that competition for buyers, and still keep that customer service a top priority," she says.
"My job is to match two people who are really good and support one another so that they might be able to produce more together than they do individually because they back each other up, and they aren't spending time worrying about who took what sale," Johnson continues.
At John Laing Homes, the sales floor is also cooperative. "A lot of builders think that a competitive floor doesn't make much sense because you want both of those counselors to be treating that customer the same way, no matter who they are," Probert says. Commissions in a given community are shared. When a house closes, all the people involved get paid according to their specific compensation packages, he explains.
The broad changes many builders are making in sales compensation are one aspect of what amounts to a more thorough integration of sales personnel into the overall builder team. For years, builders viewed the people performing the sales function as somehow apart from the rest of the organization. Many were treated as independent contractors, didn't receive employee benefits, and had little assurance of continued employment when a project ended. But that is changing now.
Builders emphasize teamwork today, and "clearly there is an awakening in the industry of the long-term value of employees and of a long-term commitment by employees to this team element," says Mirman. "They see that sales has an important role and that everybody has to work together."
"To me it's a problem in the industry when the folks who build the homes and the folks that sell the homes don't speak in one voice," Weekley says. "Our project managers run both sales and construction so our sales people and our builders are dependent on one another. They're both measured and held accountable for customer satisfaction scores."