Success in any business requires a sound appreciation of the cost pressures that impact the bottom line.
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In agency practice, one of the major cost pressures relates to the employment of staff. Every real estate agency owner needs to understand the impact employment costs have on their bottom line and at what point a salesperson starts to add value to the agency.
The Real Estate Employers’ Federation (REEF) gets many calls throughout the year from our members who are considering engaging a new full-time salesperson on a wage plus an incentive arrangement calculated on a debit-credit basis.
The question that real estate employers must invariably ask themselves before they undertake the recruitment process is: “How much is my new salesperson really going to cost me?”
The answer might surprise you!
Direct costs of employment
Excluding those engaged on commission-only arrangements, when you employ a real estate salesperson, by law there are minimum direct labour costs that must be met. Direct labour costs are those expenses that your business incurs that are directly and entirely related to the employment of the salesperson. These costs will include:
• Leave entitlements
• Leave loading
• Motor vehicle allowance
• Telephone allowance
• Workers’ compensation
While the Real Estate Industry Award 2020 prescribes a skills-based classification structure consisting of four levels where employees are classified according to duties and responsibilities, we can safely allocate non-supervisory “salespeople” into the category of Real Estate Employee - Level 2.
With this in mind, let’s consider the direct labour costs of employing a Real Estate Employee - Level 2.
The REEF team has formulated the following assessment of the annual direct costs of employing a Level 2 salesperson:
|52.14 weeks wages @ $995 per week
|4 weeks annual leave (if accumulated and not
taken during the year)
|17.5% annual leave loading on wages
|Motor vehicle allowance
|Mobile phone allowance
|11% superannuation guarantee
|Long service leave (approximate)
Therefore, the minimum direct employment cost of employing a full-time Real Estate Employee - Level 2 salesperson is approximately $77,062 per annum.
*These numbers are current as at 1 January 2024 and are subject to some assumptions – see below.
Mistakenly, employers often remark that provided the direct labour costs are able to be recovered through commissions generated by the salesperson, [and that] the salesperson is delivering financial gain for the agency. Sadly, this is simply not the case because there are other significant and unavoidable costs which have an impact on your agency’s bottom line.
Indirect costs of employment
To truly appreciate if a salesperson is “adding financial value” to your agency, you need to consider an extensive range of additional indirect costs associated with having a salesperson occupy a desk in your office. Indirect costs, also referred to as overhead costs, are general business expenses that must be met in order for the agency to keep its doors open.
Indirect costs include things like:
• Cost of office space
• Financing and interest expenses
• Franchise fees
• Administrative support
• Accounting, legal and other professional services
• Training and development
• IT and software support
• Telephones, internet and subscriptions
• Office amenities, stationery, printing and postage
• Depreciation of office equipment
• Business and personal promotion
The list of indirect costs can be extensive and will obviously vary from business to business.
Break-even or productivity point
Keeping the above information in mind, to properly and accurately assess the salesperson’s actual total cost to your business, it is critical to undertake a review of both the direct and indirect employment costs. When combined, these figures will represent what is commonly referred to in our industry as the salesperson’s “desk cost”, or “break-even” or “productivity point”.
For absolute accuracy of a salesperson’s break-even point, each individual agency would need to prepare a detailed assessment of the direct and indirect costs applicable to its particular circumstances. However, for reasons of simplicity it’s often more convenient (and realistic) to simply use a standard percentage.
It’s widely accepted that direct labour costs account for between 40 to 60 per cent of the total costs of employing a salesperson. If we take the mid-point between these figures– that is, 50 per cent – then the salesperson is costing your business twice the direct labour costs – approximately $154,124 per year (or $12,844 a month).
The 50 per cent figure could certainly vary depending on the size of the sales team, operational arrangements and cost configurations within your business. If you have a large sales team, then you would be spreading your indirect costs among more salespeople and the percentage might fall. If you have a small sales team, then the portion of indirect costs attributed to each salesperson might actually be more than 50 per cent.
However, as a “rule of thumb”, 50 per cent provides a reasonable guide for budgeting purposes.
Understanding the actual cost of engaging a salesperson enables you to set realistic sales targets for them. If the salesperson’s break-even point is around the $150,000 mark, then any performance target should be set with this as the minimum gross commission income (GCI) expectation. If your agency incentivises its salespeople through a “target” commission arrangement (as opposed to the more common debit-credit arrangement), this break-even point will provide the basis for setting the salesperson’s monthly, quarterly or annual target.
It is safe to conclude that unless a salesperson is generating minimum GCI in excess of their break-even point, they’re having a negative cost impact on your business.
In calculating the total annual direct labour cost, REEF has made some general underlying assumptions to come up with the annual cost. These assumptions include:
• Personal/carer’s leave entitlements have not been included in the calculation, as for the purposes of the example it is assumed that salesperson has worked 52.14 weeks.
• The mobile phone allowance assumes an employer payment of $50 per month (though this may vary depending on the employee’s phone plane or if your business provides the mobile phone).
• Long service leave is a contingency provision and as such will not be payable in all circumstances. The calculation above is based on the salary component only.
• The car allowance is calculated on a vehicle up to five years of age.
• Workers’ compensation has been calculated on an industry rating of 0.494 per cent of payroll (though this may vary slightly in different states and territories).
• Payroll tax liability has not been included in the calculation. However, if your agency is required to be registered for payroll tax, the direct labour cost above will be higher by the amount of the applicable state payroll tax multiplied by the weekly wage.
Bryan Wilcox is the CEO of Real Estate Employers' Federation (REEF).
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