Commission Splits of Real Estate Agents with Affiliated Firms

By Winkler, Daniel T.; Gordon, Bruce L. | Journal of Housing Research, July 1, 2013 | Go to article overview

Commission Splits of Real Estate Agents with Affiliated Firms


Winkler, Daniel T., Gordon, Bruce L., Journal of Housing Research


Abstract

The commission split between real estate agents and their affiliated firms represents an important incentive mechanism. A study of 1,477 agents indicates that total commission revenue generated during the year affects the subsequent commission rate more than volume of residential sales or transactions. Profit sharing and independent franchise firms offer higher ending commission splits while larger firms offer lower commission splits. The ending commission split for commission agents compared to agents on a 100% payout contract, however, is not influenced as much by profit sharing, firm characteristics, and the economic environment.

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The real estate brokerage industry has received considerable criticism for not acting in the interests of their clients and more generally, in the public interest. The potential sources of this problem can be categorized into three areas: (1) state legislation with regard to the real estate agency relationship; (2) the presence of fixed commission rates in Multiple Listing Service (MLS) transactions; and (3) split commission arrangements between agents and their affiliated firms. Miceli, Pancak, and Sirmans (2000) suggest that problems with state legislation make buyers underrepresented, sellers unintentionally liable for actions of unknown subagents, and dual agency status often imposed after the fact.1 The second problem has been extensively examined in studies such as Yinger (1981), Crockett (1982), and Miceli (1992); most of this research indicates that fixed commission rates appear to be above an equilibrium rate.2 The third problem represents a potential conflict of the principal/agent relationship. The agent/firm split affects the willingness of the agent to expend effort in listing and selling processes and perhaps the quality of the agent's work. Agents who do not receive an adequate split relative to their employing firm will certainly be less productive.3

Several empirical studies have investigated the factors that determine whether an agent decides to work on a split commission or 100% payout contract. Zumpano, Johnson, and Anderson (2009) and Chinloy and Winkler (2010, 2011) have identified determinants of choosing between these contracts. The broader question of relating an agent's split commission or 100% payout provision in one period to the next, however, has not been investigated in any detail. This research study investigates this question, controlling for agent and firm characteristics and market influences. The findings partially explain the basis for agent reward and success and the importance of factors that firms must consider for retaining and rewarding the most successful agents.

Literature Review

The underpinnings of split commission contracts versus 100% contracts are based upon the agency theory in economics and finance literature. Alchian and Demsetz (1972) describe a similar relationship of shirking and monitoring in the context of team production. Unlike Coase (1937), Alchian and Demsetz consider team production, organization, monitoring, and shirking problems as fundamental to their explanation of the firm. Jensen and Meckling (1976) describe the problem of shirking by employees of a firm, as well as the mechanisms to monitor and control shirking, which often result in higher costs to the firm. Aligning the interests of agents as managers and shareholders as principals through effective incentives and contracting can reduce shirking.

The concepts of principal-agent relationships have been examined in the real estate literature for more than 30 years. Yinger (1981) develops a search model to explain the market for broker services, the role of the MLS, and broker commission rates. A primary conclusion is that the brokerage industry is not efficient, and that fixed commission rates contribute to this problem. Wu and Colwell (1986) and Zorn and Larsen (1986) suggest, however, that a commission rate contract partially overcomes the problem of not being able to monitor an agent's activities. …

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