It has been said that the highest paid people in America are in sales. It has also been said that the lowest paid people in America are in sales. What is the difference between the two? Most say that it is their performance. In many cases that might be correct, however in the title industry it has more to do with the poorly established methods used to design and pay out commission structures.
One of the largest problems in the title industry is that for most companies, salespeople make the same money each month in spite of the business that is brought in, or more accurately, not brought in. This article, based on my session at the 2001 ALTA® Annual Convention in Palm Desert, CA, will describe in detail how to deal with this issue and solve the fixed expense/variable revenue dilemma that has plagued the title industry for years.
There are a number of issues related to commissions. Some of which are more easily solved than others. It is more than just figuring out how many orders have come in. It is more about finding out how many came in because of the actual results of specific efforts of one of your employees. This is what commission is really all about.
First, let’s look at determining new business. Most title companies have little idea how many of their monthly orders are actually new. What is new? What is old? Great question. By my standards, a new order is an order that is directed or sent in by someone who has not sent anything for a minimum of six months. The second criterion is that this individual sent other business during this six-month window to another title company. In other words, this person’s behaviors have been modified by one of your salespeople. They have directed that client to your company instead of where they had been sending their business.
When you have determined that this is an order, and that one of your salespeople should be rewarded, the next step is to determine how to motivate positive behaviors while not damaging your profitability or morale.
Once business expenses are satisfied on your P&L statement, new orders have more of a gravity profit affect on them than the orders that were used to break even. You may say that only 15%, or so, of each order goes toward profit. While that may be true up to the point of breaking even, it is not true after that point.
When your expenses are satisfied, a greater percentage of each order’s revenue goes toward profit. As you obtain additional business, your expenses do not really go up until you reach the point where additional people or facilities are needed. Therefore, you have increased the potential to reward your people for bringing this new business in the door.
This can also present a problem. New business carries a different level of profit and commission pay out potential, while existing business is designed to carry your company monthly and has no built-in profit margin to pay a commission against. In other words, not only is it a bad idea to pay ongoing commissions on existing client orders, the worst part is that your P&L simply can’t handle it. It was never designed to.
I have a process of commissions that I recommend that companies follow. But, before looking at this process, let’s look at the definition of commission. I think that if people truly understand what the word commission means, many of them would not ask for it. The most common definition of commission is "money for someone being remotely connected or knowing the person connected to a transaction." In other words . . . "What is in it for me?" While this definition seems to be the most common, it is not accurate.
Webster’s dictionary defines commission as "authorization to carry out a task or a group authorized to perform certain duties." It is not money-related, it is responsibility-related. This is a new spin for most people and almost always a reason for some salespeople to take a new look at their desire to be on commission.
Before I can truly describe my recommended commission structure, it is most important to define the actual responsibilities of your salespeople.
Here is the nine-step process to establish these responsibilities:
Determine the roles of your
salespeople and their primary responsibilities.
Salespeople in our industry are trained improperly from the beginning, and it is this mis-training that keeps them doing things that are not their primary responsibility. They seem to be spending a disproportionate amount of their time servicing existing clients and not enough time prospecting for new business.
This is typical of salespeople for two reasons. First, they probably spent their first work week with another salesperson who spent the day calling on their existing clients, thus giving the new salesperson the wrong impression of the job. And second, salespeople are simply not trained on how to acquire new business from prospects. They have been led to believe that they should be paid a commission on the orders generated by your existing client base. This is where the problem begins.
Remove any misunderstanding when it comes to requirements of salespeople and their primary responsibility—which is new client acquisition!
Determine the specific results you want from your salespeople each month in relation to their primary responsibility of obtaining new clients.
This may be more clearly called "sales goals" or "new business goals." While most salespeople in the title business have no clearly defined new business goals, these goals are still a critical necessity in revenue and asset management and overall financial responsibility.
These goals should be met before any commissions are paid out. Some kind of minimum performance should be established as a breakpoint where commissions start. The best breakpoint in most cases is the P&L breakeven point.
Determine the overall affect on your company if your salespeople actually accomplish the goals determined in Step #2. In other words, are their goals big enough?
Modify the goals you have devised in Step #2 if the outcome of Step #3 is not acceptable.
Determine the secondary responsibility of your sales team.
Once again, the misunderstanding of how the business works and the role of salespeople, according to their daily behaviors, demonstrate that their current allocation of time is out of balance. The typical salesperson in the title industry spends less than 24 minutes per day effectively prospecting while the most productive spends more than 336 minutes per day in this endeavor. Why? Clearly, due to mismanagement of sales efforts and goal communication.
Make sure your team knows that servicing existing clients, while required, is clearly their secondary responsibility.
Determine the secondary results you want from your sales staff each month in relation to their secondary responsibility of servicing and retaining existing clients.
Determine the overall affect on your company if your salespeople accomplish the results determined in Step #6.
Modify the desired results you have established in Step #6 if the outcome of Step #7 is not acceptable.
Establish a compensation system to compliment the required activity and results of your salespeople in Steps #2 and #6.
Since adding new business is the primary responsibility of salespeople, it should be the primary focus of your new commission system. Money for added results! Not added money for existing business.
Last year I spoke with a county manager of a title company who had a salesperson upset because a certain closer was not able to get a couple of transactions closed in time for him to make commission. The problem was that it was not a new client, but an existing one. For some reason this sales team was being paid on every order closed by anyone on their list of clients. That means that they did not even have to call on them to get paid, just have them on their list of assigned accounts. Sound odd? It is more typical than you might think.
I told him that his company had given birth to, fed, nurtured, and pacified a huge monster. Getting paid extra income for all deals that close was not only the foundation for the "no need to prospect mentality," it also created giant morale problems with the inside closing staff who felt the salespeople were being, by their definition, grossly overpaid.
This is what we call "perpetuating commission." While this residual income mindset may be the foundation of multilevel companies, it is not even close to being good in an industry that requires continuing increases in revenue to maintain and feed this monster.
It is important to realize what a perpetuating commission system really is. It is a guaranteed continual increase in expenses while, by nature, decreasing the human desire to increase production or revenue!
Commission should only be paid on the first three orders received from a new customer and that amount should be split with the inside closing staff and even the support staff if wished.
Here is a sample of a simple breakdown:
Even though you can modify the actual percentage pay out, the motivations behind the system need to be understood and not modified. The system is designed to feed discipline to the sales team and closing unit.
While the percentage is more heavily weighted for sales in the latter deals, it is more heavily weighted in the early deals for the closing teams. The reason for that is because most closers are busy. They have little desire to work with new people and increase their workload; thus, the heavy early commission will help in overcoming that. Over the next two transactions, relationships are established reducing the need for weighty commissions. That money can be moved to the salesperson for an entirely different reason—motivation to follow-up and earn additional orders.
Salespeople are "newness chasers" by nature, which means that they like new challenges. It is this desire that causes them, by nature, to get their first directed deal and then move to someone else. This latter weighted system will motivate them to follow-up to earn the second and third transactions. Three transactions should be long enough for the closer to establish the needed relationship for effective and strong new client retention. Mission accomplished!
The rest of the story is simple. How do you compensate your team for accomplishing their secondary responsibility of servicing and retaining existing customers? You already do. It’s called their base salary.
Darryl Turner is the CEO of National Business Development, which specializes in the implementation of growth strategies for title companies nationwide. This article is an excerpt from Darryl’s presentation during the 2001 ALTA® Annual Convention in Palm Desert, CA. For more information, call 1-800- 551-2946 or visit www.TitleSales.com .