Reading a discussion on whether or not to tell a headhunter your current salary reminded me of a (at least in my mind) similar issue that I read up on years back: How do you incentivize a real estate agent to get you the best sale price for your home?
Wired Magazine has a great blurb on the problem we’re attempting to address:
What is the agent’s incentive when selling her own home? Simple: to make the best deal possible. Presumably, this is also her incentive when selling your home; after all, her commission is based on the sale price. And so your incentive and the agent’s incentive would seem to be nicely aligned.
But commissions aren’t as simple as they seem. First of all, a 6 percent commission is typically split between the seller’s agent and the buyer’s. Each agent then kicks back half of her take to her agency. Which means that only 1.5 percent of the purchase price goes directly into your agent’s pocket.
So on the sale of your $300,000 house, her personal take of the $18,000 commission is $4,500. Still not bad, you say. But what if the house was worth more than $300,000? What if, with a little more effort and patience, she could have sold it for $310,000?
After the commission, that puts an additional $9,400 in your pocket. Yet the agent’s additional share – her personal 1.5 percent – is a mere $150. So maybe your incentives aren’t aligned after all. Is the agent willing to put out all that extra time and energy for just $150?
See the issue? Now let’s talk incentives. Michael James has an interesting idea on how everybody can win:
Suppose that Rick [the real estate agent] were to get 10% of the portion of the sale price above $300,000 instead of 2% of the whole price. Now a $25,000 difference in the sale price makes a $2500 difference in Rick’s commission. This more closely aligns Rick’s interests with Hanna’s [the homeowner] interests.
The big problem with this idea is that it supposes that all parties have a good idea of a fair sale price. With this type of commission structure, Rick is strongly incented to convince Hanna that her house is worth less, say $350,000, and that way the deal will give him 10% of the sale price above $280,000. If Rick then sells the house for $375,000, he gets a $9500 commission instead of $7500.
As Mr. James alludes to, the main issue with this approach is at what price point to use before the 10% bonus system kicks in: Too low and you make even less money than you would have normally. Too high and not only do you run the risk of not selling your home at all, you may run off your agent. (Thankfully, real estate agents appear to be a dime a dozen.) Comprehensive research is recommended before employing this approach.
Can this bonus structure be used with a headhunter as well? Depends on the company you’re dealing with, but I imagine it would be worth a discussion about.