“Perhaps the most important rule in management is to get the incentives right.” – Charlie Munger
Right Compensation Model
I had no clue I would ever write a book on Inside Sales. It all started when I sat down and started thinking about the one thing I could do that would add the most value to someone in real estate who wanted to grow their business by getting more listings.
The answer was you needed to hire an Inside Sales Agent. However, most people fail with that hire because they don’t understand how to win before they start.
There are times to be thrifty in your real estate businesses and there are times where being thrifty isn’t a good choice. Your compensation or On Target Earnings (OTE) for your ISA is one of those times where being thrifty isn’t a good choice.
If you remember, an ISA is a highly skilled, highly trained salesperson who is as good as an outside sales associate…but excels at (and enjoys) selling and building relationships over the phone.
In order to secure the right person for the job and keep them over the long term, you need to offer the ability for your ISA to make a solid income for himself/herself.
The national average OTE for an ISA hovers somewhere between $55K and $65K, with a portion of the compensation coming from salary and the remainder coming from bonuses or commission on homes sold. That said, it would be beneficial for you to check www.salary.com to determine where in the ISA compensation range your area falls.
From my perspective, I like what Charlie Munger has to say about compensating team members. Munger is the Vice Chairman of Berkshire Hathaway and has been Warren Buffet’s right hand man for the last 56 years. He’s 92, currently worth $1.29 billion, and responsible for helping Berkshire Hathaway a company that churns out billions in profits each year.
Here’s what he has to say about compensation models when attracting and retaining top talent, “You also have to have a compensation system that’s satisfactory.... at Berkshire Hathaway, we have no [single] system; we have different systems. They’re very simple and we don’t tend to revisit them very often. It’s amazing how well it’s worked.”
In order to retain top talent, you need to do more than throw a number at a potential employee. To keep good people on board, you need a compensation model that provides depth and opportunity for your ISAs to earn a solid income for themselves.
A compensation model is a methodology of paying an employee that takes into consideration salary, bonuses, and incentives while helping you accomplish two things: provide your employee with a seat at the table that has significant upside, without leaving you on the hook for paying everything out of pocket, up front, to make it happen.
With a strong compensation model, you can limit your exposure on salary when you hire an ISA that underperforms. At the same time, it will help you retain the right ISA and reward him/her with serious money for a job well done.
The Power and Danger of Incentives
Your compensation model will need to have incentives in order to attract and retain a world-beater for an ISA. That said, providing incentives to your employees—especially your ISAs and OSAs—can be a double-edged sword. Yes, a good incentive can get salespeople to move mountains, but it can also be abused if your salespeople don’t use it properly to help you build your business to be the most profitable and efficient it can be.
Charlie Munger believes that people respond most willingly to what they see as their incentive or disincentive. Therein, he speaks of “human misjudgement” or more specifically, he wonders why we do what we do, and more importantly, why are we open to doing certain things while we abstain from doing others? The answer has a carrot-and-a-stick flavor to it, but the philosophy is not that cut and dry.
In situations where we need to come up with an appropriate incentive, Munger suggests we always ask: “What is someone getting out of this?” Asking this question helps us align our incentives with what will motivate our employees the most.
To demonstrate how vexing it can be to provide employees with proper incentives, Munger shared the following example in his Poor Charlie’s Almanack:
- FedEx: The company couldn’t get packages moved from plane to plane in a timely manner during the night shift. The challenge was that the workers were getting paid by the hour. There really wasn’t an incentive for them to move packages at an expedited rate. When FedEx changed to paying the workers per shift, the workers were motivated to get the job done faster because once they were done moving packages, they were done working (and they would still get paid for the entire shift).
- Xerox: At the time, Xerox was the big boy on the block and it paid incentives to its salespeople to move certain copiers. The problem was that the incentives were heavier on the older, inferior copy machines instead of the newer, better-performing machines. As such, sales of the older machines were crushing those of the newer machines. Company founder, Joe Wilson, who had already left Xerox, came back to resolve the problem by changing the incentive structure to favor the sales of the newer machines.
Through these examples, it’s easy to see not only the power of incentives, but also how they can be dangerous when not handled properly. To handle them properly, we must do first what Munger suggests: Ask what our people will get out of doing what we ask of them.
In short, all of our “radios” are tuned to our favorite radio station, WIIFM (What’s In It For Me). And with that as our internal driver, we usually do what we can to increase the pleasure we feel, while at the same time avoiding or reducing pain. In virtually any situation, we look at the carrot and the stick and act in a way that meets our needs in the best way possible. Knowing this, we need to provide incentives for our ISAs—and all our employees—that provides them with the impetus they need to perform at a high level while delivering what we need to the bottom line.
This is the only strategy that will provide a huge win-win for both you and your ISA.
Breaking Down the Incentives
The location, quality, and source of your leads will dictate how you incentivize your ISA.
For instance, when a prospect calls you—an inbound call—because of your marketing and advertising efforts (radio, television, postcards, home evaluation leads, etc.) that lead will likely convert more easily. As a result of that, you’re going to pay your ISA a smaller incentive when the listing sells. Additionally, the lead costs more, so you’ll also pay a smaller incentive on incoming calls because you’ll want to recoup your investment.
On the other hand, expireds, withdrawns, FSBOs, demand generation, and in certain cases, home evaluation leads—leads for which you make an outbound call—cost you less money to generate, but will require more work and diligence from your ISA. With these leads, your incentive for the ISA to help procure sales will be higher.
As well, if you have an ISA already, you can consider hiring a Sales Development Representative (SDR) to assist your ISA in identifying future seller opportunities, otherwise known as nurtures. Nurtures will be discussed in detail later in the book, but for now, just know that a nurture is a seller who wants to sell in the next year and is willing to let you stay in touch with him/her and is open to working with you down the road. Nurtures have a fairly high conversion rate and will become some of your best listing appointments, listings, and sales on a month-over-month basis.
If you do hire an SDR to cultivate listing opportunities, you’ll want to give him/her a small incentive for each nurture that he/she uncovers and then give your ISA a smaller incentive when he/she converts the nurture to a listing sale. By doing this, you can compensate two employees to generate more listing opportunities without screwing up your compensation and financial models to do so. Your cost of sale goes up by doing this, but you can balance it out by offering smaller, but competitive, incentives to your SDR and ISA.
ISA vs. SDR
An SDR performs a Demand Generation role. Demand generation is the focus of targeted marketing and calling efforts to drive familiarity and awareness of an organization’s products and/or services. This form of lead generation is the lowest customer acquisition cost (CAC) and here’s why:
Historically, an SDR’s skills are not as deeply developed as an ISAs and they don’t need to be. To that end, you can pay them less money. On a daily basis, an SDR is going to be calling into targeted areas and unearthing opportunities for both now business and more importantly, nurtures. The cost of doing demand generation to acquire a customer is much lower because it’s nothing more than what you pay your SDR. There are no marketing costs as it’s the SDR’s job to find the opportunities for you from the data you provide to them and introduce your company and its services to the prospects personally.
ISAs are also going to be making outbound calls, but they are also going to be handling inbound opportunities as well. If your ISA is amazing on the phone and converts your inbound opportunities at a high rate, your CAC can remain lower. That said, if he/she isn’t as effective, you’re going to be paying more for marketing and labor and experience a much higher CAC.
Your ultimate goal is to have a low CAC from both your ISAs and SDRs and hire them based upon their skill sets to do each specific job at its highest level.
All of this said, your salary needs to be enough to ensure your ISA can eat, pay bills, and afford gas to get back and forth from work. The bonuses and incentives need to be enough for your ISA to want to bust his/her hump to earn the other side of their compensation…and maybe even more.
Getting the right person for the job starts with a great headline, and the right job advertisement and ends with a solid compensation package that offers a competitive OTE.
