PAYING A PROPERTY MANAGER a percentage of income generated by the properties they manage seems to have some obvious benefits and is discussed often. But is it all plain sailing? Brock Fisher looks at the pros and cons.
FROM THE BUSINESS perspective, paying a revenue split allows the wage-to-gross-income ratio of the business to be optimised and managed effectively. From the property manager’s perspective, it is the ultimate in performance-based pay, with a potentially lucrative upside over the plain old salary.
However, there are challenges with successful implementation, and also some unintended consequences that are discovered once you are treading down that path.
Anyone who knows Rental Express well knows we measure everything. Upon review after a year, we can definitively say that all property managers earned more money under that structure than under our previous ‘wage and bonus’ structure.
I have also worked under the structure as a property manager, and loved that it allowed me to earn more money in a number of different ways.
I could manage the same number of properties but generate more revenue out of my portfolio by providing excellent service. I could then focus on things like fee increase programs, signing up managements at a particular rent and management fee to replace lower-fee, lower-rent properties as they dropped out of the portfolio. There were also rewards for working on increasing rents at renewal time, and reducing vacancy when it came time to market properties for rent.
In short, it seemed to align my interests with those of the property owner and business owner, as the more money everyone made the more money I made.
But it also allowed me to make more money simply by managing more properties. And each new property I received was not just more work; it was a pay rise. Having property managers welcome rather than repel additional properties is a critical aspect of running a growth-oriented business.
I’ll cover what I think are the most important points when implementing a structure like this:
CAN YOU MEASURE IT?
If your trust accounting software does not allow you to quickly and accurately break down all the various revenues generated by each individual portfolio, the job will be very difficult. There is no point having a fancy remuneration system if it is highly manual and takes you a whole week every month to work out; it’s just not practical or scalable.
CAN YOU EXPLAIN IT?
It is different to ‘the norm’, so if you can’t simply explain your structure in a compelling way to a prospective employee, your recruiting will be harder, not easier. I’d encourage you to have data from the actual portfolio to demonstrate earning capacity, to give credibility to your pitch – otherwise it may sound too good to be true and be discarded as an over-promise, likely to be followed by an under-deliver. The security of a simple wage at a rival office may be more appealing to a prospective recruit if the explanation is mediocre.
WHAT WILL YOUR PERCENTAGE BE?
Every office is different, because the cost of running each business is different. The cost of living and wage expectations for staff vary everywhere, even from outer to inner suburbs of the same city. It is important to be competitive, with ‘upside’, while remaining financially viable. There is no point having a proposition that results in a likely $50,000 package if your competitors are offering $60,000. Equally, there is no point paying such an attractive revenue split that it is unsustainable and will bankrupt the business.
HOW WILL YOU TIE IT TO KPIS?
People generally do what they are incentivised to do. An unintended consequence of many bonus and incentive structures is they inadvertently result in behaviours that are not beneficial from a business perspective. If you want to encourage your team to go big, this absolutely cannot be at the expense of quality and service.
If a property manager is not meeting minimum performance standards, they should not receive any more properties. While it is true to say that if they lose a property they take a pay cut, a portfolio bleeding properties does far more reputational damage to the business, and results in a far higher loss in asset value, than any pay cut to the team member can ever balance out.
A MINIMUM OR BASE LEVEL?
Having a pure ‘commission only’ arrangement can be complicated from an employment law and licensing perspective and very daunting for the employee. It can also have very practical repercussions for staff outside the office, such as if they wish to get a home loan or any other kind of finance; being paid ‘commission only’ is perceived as a higher risk by lenders and requires far more financial documentation.
Having a guaranteed minimum base each month can assist to solve this. In this way, the team member has the security of a minimum regular amount each month, and then receives their ‘bonus’ amount once revenue calculations are complete.
HOW TO ACHIEVE PARITY?
As rents vary considerably from suburb to suburb, one of the biggest challenges for businesses that cover a broader area is ensuring all your team get paid fairly for the work they do. Lower-rent properties, in lower socioeconomic areas, are often far more labour-intensive to manage due to the social challenges and maintenance issues that can present. Therefore, if the percentage is the same, that property manager has to look after far more properties in those areas to earn similar money to a workmate who may have higher-rent, more modern inner-city properties.
Portfolio churn is one of the industry’s biggest problems as a whole. Having particular portfolios within each office that can be viewed as the ‘designer’ or ‘desired’ portfolio to manage because of the fees it generates can encourage movement within your own office, and amplify the perception of churn to your clients. This needs to be avoided.
A GRACE PERIOD?
As a property manager coming into a new portfolio paid based on how much revenue it generates, how do you really know what you are walking into? Also, as a business owner with a potentially problematic portfolio, do you want the incoming team member to suffer financially because of your structure while they are sorting out issues, re-establishing client relationships and generally giving you their best efforts? An initial grace period while a property manager gets up and running in a portfolio may be a strategy that needs to be considered, dependent on the circumstances.
HOW DO I START A NEW PORTFOLIO?
For businesses content with consolidation and maintaining numbers, this presents no issue. But for growth-oriented businesses this one can actually be the hardest proverbial nut to crack. Once you start looking at each individual portfolio as a mini-business or profit centre, you quickly become aware of the financial loss a very small portfolio can make.
Splitting a portfolio and scooping properties from another property manager is akin to giving them a pay cut, and will generally be met with considerable resistance and discontent.
Starting a portfolio from scratch takes time to build numbers. How fast is your business growing? How long will it take to break even? Are you happy to sustain the loss the portfolio is making for as long as it takes? How do you pay a team member a percentage of virtually nothing?
Perhaps acquiring a small rent roll to plug straight into the new portfolio and instantly have it generating income is the best strategy.
I am yet to find the perfect pay structure, but having worked under this model as a property manager, and also having been a business owner where the structure has been implemented, I have had the chance to consider it from both sides of the equation. I am convinced of the merits of paying a revenue split, but it can certainly be a challenge to implement and does have some notable obstacles that need to be planned for.