Remuneration: salary versus commission

Mr Lewis’ question is at the heart of the quandary currently facing the broking industry: is the traditional remuneration model causing it to fall behind? Can brokerages in the new regulated environment adapt to a new structure?

With a notable shortage of new blood entering the industry, some have suggested that a salary structure may help attract quality loan writers.

BENEFITS: SALARY AND COMMISSION

From a business perspective, the primary benefit of using the traditional commission-based model is cash flow.

Brokers are responsible for generating their own income and so business owners don’t have as many immediate overheads. The flipside, and an attraction for brokers, is that the more loans they write, the more they increase their income.

Annual leave is also less of an issue, because they can simply slow down their loan writing, take some time off and rely on existing trail for income while they are away.

“Obviously, the benefit for us is cash flow,” says Jim Henwood, director of brokerage eSelect Finance, which uses the traditional commission model. “We’re not paying wages or anything on an ongoing basis, so that’s a positive.

“It’s also a bit of an incentive to brokers to make sure that they’re working to their capacity, because if they’re not working hard, they’re not earning any money.”

Andrew Mirams, managing director of Intuitive Finance is a sole operator and works on a commission basis, but he also has a salaried PA. He believes the primary benefit of the commission model is seen by business owners.

“The reason they do it is because there’s no responsibility or onus on the business owner,” he says. “People have to earn their own keep.”

Salaries, however, provide certainty for the broker and make budgeting and cash flow management more consistent. Mr Lipkiewicz believes the salary model also means lower costs over the long term.

“With the salary model, people understand that you supported them in the beginning, when they weren’t bringing in any money,” he adds.

Brokers on a salary are therefore less likely to demand unreasonable increases because they understand their position within the industry is due to initial support and consistent, reliable income from their employer, Mr Lipkiewicz says.

FrontRunner Consulting’s Doug Mathlin adds that even brokers working on their own should aim to pay themselves a salary rather than basing their remuneration entirely on commission.

That way, they know exactly what their payroll obligations are each month.

Will Foster, director of Property Planning, tries to pay himself a monthly salary and sees several advantages to this approach. “It gives you a number to shoot for in terms of loan settlements and your income generation,” he says. “It gives you a bit of financial discipline.”

COSTS AND COMPLICATIONS

Both remuneration models carry with them a risk – that brokers may become complacent.

Salaries ensure they have a consistent income, even if they’re not working hard; commissions and a consistent income from trail may also cause brokers to take their foot off the accelerator.

“Once some brokers are earning a decent trail income, they do relax and become a little complacent,” says Mr Henwood. eSelect Finance is therefore considering introducing bonuses to motivate staff as well as to keep loan volumes high.

“It’s all about the motivation,” he says. “If we can dangle another carrot, then obviously that always helps.”

“It would be good to have an extra income incentive there to get them to make a little more money for themselves – and for us obviously.”

According to Mr Mirams, the main downside of the commission model is that sometimes good brokers realise they can be earning more.

“The problem with the commission model is that anyone that can earn enough commission working under a brand or another broker can probably go out and do it on their own,” he explains.

“Anyone on a commission model that stays employed by a business is mad, because they could earn more doing it themselves.”

Leith Wickstein, general manager at Choice Home Loans, Berwick, uses a salary model but concedes it may not be the ideal one for newer businesses.

“Certainly for newer businesses, cash flow can be an issue,” he says. “We’ve been established now for 10 or 11 years, so it’s a bit easier for us because we’ve got that background there.”

Despite potential cash flow concerns, however, Mr Wickstein went ahead with a salary model to ensure staff had a consistent income.

The need to boost recruitment and attract quality professionals also prompts some brokerages to shift from commissions to salaries.

ATTRACTING NEW BLOOD

The biggest drawback of the traditional commission model is possibly its lack of appeal to new brokers. The industry overall is ageing, and being able to attract quality young loan writers is now paramount.

“The current model is not working,” says Mr Lipkiewicz. “There are too many average people in the industry.

“There is a significant increase in the pool of potential workers when you implement a salary model,” he says. “By opening up the offering to more people, you’re more likely to attract more quality advisers.”

Salaries are particularly appealing to new brokers in their first 18 months in the job, according to Mr Lipkiewicz, who notes “it takes about three months for people to get moving in this industry”.

After six months, they start settling loans and once 18 months have passed, new brokers can start earning back on their salary.

Mr Wickstein agrees that the profession needs refreshing: “I think the industry definitely needs some new blood,” he says. “The average age within the industry is fairly hefty and that’s generally because of earning capacity in the early stages.”

Commissions, notes Mr Wickstein, don’t offer a buffer for new brokers and this financial insecurity keeps people away from the profession.

Mr Henwood, who uses the commission model and sees its benefits, nevertheless concedes that recently, recruitment has been difficult.

“I think I might have to consider a salary model purely because we have found it pretty tough to recruit at the moment,” he says. “People are probably more likely to join up under a salary model because they can start earning money straight away.”

Mr Lipkiewicz believes the salary model may also help to attract quality bank workers – who would be unwilling to leave a secure income for a commission structure.

Mr Mirams, however, argues that salaries won’t necessarily attract quality employees: “The industry is diminishing because the big are getting bigger and it’s harder to get in at entry level,” he says.

“That’s good though – because we don’t want just anyone.”

WHICH WAY NOW?

Paying salaries, therefore, is a risk. You could end up paying a broker who doesn’t bring in any money.

“If a broker on a salary doesn’t succeed or falls off the perch early on in the process, then you’ve invested a lot of money for pretty much no return,” says Mr Wickstein. “You’re taking a punt on someone until they start settling some loans.”

With pressure on the industry to renew itself mounting, and the average age of brokers climbing, new remuneration structures may need to be considered.

Mr Henwood suggests that if you’re a business owner and unsure which model is the best cultural fit for your business, try implementing a two-tiered model in which existing brokers who are earning comfortably remain on commissions but newer recruits start on a salary.

“I think deciding which model to use going forward is our biggest hurdle at the moment,” he says.

“Brokers have the potential to earn more money under commission, but we may need to address the salary issue to get some quality prospects in the door.”