Real Estate Developer

Client
Commercial and Residential Real Estate Developer

Company Profile

The company develops, leases and manages commercial, industrial and residential real estate properties in the New York City Metro Area.

Project Objective

Design and implement an incentive compensation plan which would reduce the vacancy rate of the organization’s properties by creating a highly motivated Property Leasing Department.

Problem Analysis

  1. The current compensation structure of the Property Leasing Department consisted of a base salary and no provision for commission.
  2. The base salary of the leasing agents had increased in recent years to a point above market level compensation.
  3. The higher than market level compensation and the lack of an opportunity to earn commission resulted in complacency in the Property Leasing Department.
  4. Properties with competitive lease terms remained vacant beyond the benchmark of the company’s historical performance.

Project Approach

The initial focus of the project was to develop a commission compensation plan for the leasing agents. The plan incorporated the industry-wide commission of .5% of the value of the lease. The remaining provisions of the commission plan were new to the industry. To create a sense of urgency in leasing properties, a provision was added to the plan which tied commission compensation to the length of the vacancy. The provision provided for the .5% commission if the property was leased within three months of the lease expiration date. Where the property was leased after three months, but before six months after the lease expiration date, the commission was reduced to .375%. A further reduction of the incentive to .25% became effective when the property was leased at six months, or longer after the lease expiration date.

The greatest challenge was resolving the higher than market level base compensation of the leasing agents. This issue presented two problems. First, it encouraged complacency in the Property Leasing Department. Second, it diminished the potential motivation of the commission plan. The solution was to enact a gradual reduction in the base compensation of the leasing agents. A reduction of twenty percent enacted over the course of twelve months was chosen and implemented. This reduced the base compensation by 1.67% per month for the first twelve months of the commission plan. This gradual reduction was selected to provide the leasing agents with the opportunity to offset the loss in base compensation with commission.

The design of the commission plan was completed in late October with a planned implementation date of January 1. As a means to jump start the commission plan, a provision was included which provided that both commission and full base compensation would be paid from November 1 through December 31.

Project Results

The opportunity to earn commission compensation combined with the ongoing loss of base compensation resulted in a significant increase in the performance of the leasing agents. This is demonstrated by a 30% reduction in the vacancy rate from the lease expiration date to the occupancy by new tenants in the first year of the plan.

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