Understanding the KW System of Profit Sharing
As much as KW passionately rejects the characterization of their system as a multi-level marketing system, it is! Conceptually it is a product of the 1980s when Amway and a host of new sales ventures thrived by becoming that generation’s form of viral sales (person to person – sphere of influence). At KW you qualify to receive profit-sharing money based on how many people have come into KW and identified you as the reason they are there. In other words, profit sharing is a reward for agents who help grow the company by recruiting others. Then in an admittedly random system of 7 levels of connectivity, to those directly recruited by you and those recruited by your recruits (and on and on), you get a piece of their commissions if brokerages realized profit for that year.
As former Keller Williams real estate brokers, we (the founders of Bella Casa) realized that this benefit was far too complex to recreate, but we still liked the idea that if the brokerage was profitable, then the reward would be shared by those who caused the success. In wrestling with this we came to understand some weaknesses of the KW system, identified features we preferred more, and what evolved is what we believe to be a better system for our brokers.
A Critique of KW Profit Sharing
At every conference where profit sharing is promoted, there will also be a revelation which is astounding: in spite of the fact that KW agents can make an enormous amount of money off this system, only about 20% of the KW agents nationwide are participating in profit sharing! How can that be? Why?
Built for Mega Agents:
Because it is the top 20% of the KW agents who are the very successful ones (‘Mega Agents’) and this system primarily benefits them. I will make the larger case that the KW model is all about Mega Agents. In the same way, the business model for traditional brokerages is revolves around the the success of their Principal Brokers (their centerpiece).
Mega Agents Have The Best Recruiting Opportunities:
To whom do agents go to learn about KW? It is to those who are visible and successful in KW and who know the system best. I am not going to go to a novice agent or an agent who produces modestly to find out about KW, I want to interview or learn from the successful icons. Therefore, the top 20% of the KW agents get the 90% of the profit sharing money because they are the ones credited for recruiting the newer agents. The Mega Agents also have the experience and past connections with so many more agents than the rest of us.
They also have developed businesses that allow them the luxury of time to spend time recruiting in order to build another income stream. They also are the only ones who can successfully recruit the already successful agents of other companies. The practical reality of life is that people relate to, and have credibility with, their own peers. Would a successful Re/Max agent go to a ‘lesser’ KW agent to inquire about joining? They would go to their equals who are as successful or more successful. The KW agents get to showcase their success and therefore get more successful people into KW, which increases their incomes.
What About the Rest of Us?
What about the ‘common’ agents? Do they not have opportunities to recruit and make some of this money? They do but their connections are limited and their credibility is suspect. KW wants them to recruit and their model needs them to recruit but it is rarely easy or profitable for the ‘common’ agents. After the idealism of profit sharing wears off, you can talk with many of these agents and they have no excitement about a system which is open to them, but doesn’t work for them, unless they become part of the super-achievers. I have seen many newer agents leave KW without fear of losing profit share money because they realize that it may never come. It is also illusive because the kinds of agents they recruit may not survive (a real problem recently) or may go somewhere else soon. That money is gone. For many others, they just do not want to evangelize for KW in order to get a few dollars each year.
Profit Sharing is one of the KW Hooks and Handcuffs:
For the successful top 20% of their agents, profit sharing is an effective hook to recruit them. It tickles issues like retirement and the desire for ‘passive income’ added to what is earned. For the Mega Agents in particular, it is also serves to handcuff them. The claims are not hollow. However, like all multi-level marketing companies, it is always the people at the top, who have been involved the longest, usually the ones who initiated the system, who make all the money. The people at the bottom of the pyramid are just a vast networked sales force of fresh people who come and go. Yet while they are around, their sphere of influence can be plundered perhaps by the ‘mega-agents’ of their office.
Keller Williams is a Company of the Mega Agents for Mega Agents:
My conclusion after being forced to take a hard look at KW is that it is a company of the successful for the successful. While numbers are crucial and growth is wide, it is the top 20% of the company which is the ‘customer’ of the national entity in the same way that the national traditional brokerages are committed to the principal brokers of their offices as the customer. KW is a newer model which now serves the top tier agents instead of the top broker who owns or manages the brokerage. This is the key structural difference between KW and the traditional brokerages. Gary Keller was ahead of his time for seeing the evolution of our industry from centralized power in the hands of a few towards that power in the hands of many agents. He was also genius in realizing that the Mega Agent is the key player in winning in the new age. Take care of them and they will take care of you. Recruit the successful and they will build the company. Gary Keller’s first and seminal book was, The Millionaire Real Estate Agent and it showed where his focus was. Yes, its intent is to learn all the principles of the most successful agents of North America and how to become one, but it also reveals that for Keller, it is not the principal who is the superstar, it is the Mega Agents. Previously it was to take care of the local principal brokers and build good managers and you will keep the corporate office and brand alive and well. Now it is about building and recruiting Millionaire Real Estate Agents!
More Benefits for the Mega Agents:
These same top 20% agents also are the ones who get the opportunities to own KW Market Centers (brokerages), and the cream of the crop even own KW Regions! New Market Centers are opened by encouraging Mega Agents to buy ownership. My former partner and I owned 10% of the first office in Oregon (Lake Oswego) and 5% of the Tualatin/Bridgeport office. The successful have the money to own offices and they are encouraged to buy into their own office, but also into many other KW offices. In doing so, KW gets people who are motivated to work for the success of the brokerage and help others because they have self-interest in doing so. They are hooked by being able to own some of the office and they also get handcuffed because as owners they receive about 50% of the profits of the Market Centers.
Mega Agents also have most of the decision-making power. The Agent Leadership Council is responsible for all decisions which affect the agents. They have one significant limitation; they have no power to spend the owners’ money. They can form and fashion life for all the brokers and work together to build more successful agents. The council is made up of (you guessed it) the top 20% of the agents in the office. Additionally, if these Mega Agents are also owners then they, with usually less than 12 other owners, make all the rest of the decisions including spending decisions. As owners, they are the recipients of approximately 50% of the profits of the Market Center. The other 50% goes to Profit Sharing, which also goes primarily to the Mega Agents.
Mega Agents often have teams. In KW the team members pay a reduced cap. We were paying only 25% of the cap for our team members. This not only encourages utilization of teams (and a fair amount of abuse) but also lines the pockets of the Mega Agents with more money. I never understood the fairness of this even though we were the beneficiaries.
KW is a company that is big on coaching. As you would expect, it is the Mega Agents who get to become coaches and receive significant money for 30 minute conference calls with hopeful agents. The program is managed by the national office that promotes coaching as a key to success and necessary to break through and become a MA. It is not inexpensive and it is another income stream for the Mega Agents and the national company.
Am I Attacking Keller Williams?
Absolutely not. My intent is not to disparage Keller Williams. I have said elsewhere how much I appreciated my time there and how much I learned. When forced to consider other alternatives, I had to thoroughly understand their model in order to fashion our own. Much of what we have built at Bella Casa is a reflection of the models and values I gained from Keller Williams. I have been to countless conferences of theirs from Seattle to Austin (the KW Mecca) and I have been through the complete training to open a KW Market Center in Yamhill County. The above comments are only my conclusions after seeking to understand the model better to emulate it. That was my personal purpose in 2006 and 2007.
My current purpose is to help Realtors® understand our industry and be able to think critically about it and all it has to offer. I always recommend to new agents to interview all the options, learn everything you can about any brokerage, be suspicious of all, and read all the primary documents of the different companies. But you have the right to know it all, and evaluate it all accurately so that when you make your decision for what is right for you, there will be no regrets. You should be able to go into any company with your eyes wide open.
Keller Williams is a brilliant system for competing and beating the traditional brokerages – it worked! It focuses on agents rather than principals. That is good! It seeks and serves the successful, for it is they who will build the company make all the money in the various market places. KW soaks up money from all the agents but gives its perks and bennies to its favored few, the top 20% of agents, the Mega Agents. They will never leave; they are too well taken care of. New agents will come and go, but if they become successful, KW will insure there are strong enough handcuffs to keep them in place.
Bella Casa’s Model of Profit Sharing
After seeking to understand better, we then realized we could improve on the model if we did it at the local level. We chose to have our local agents, all of them, as our centerpiece. I think this is the natural evolution of our industry as it decentralizes. Since we were not looking to build a massive enterprise, we could adapt it for smaller and local application. Because we were not looking for a model to enrich either the centralized principal broker, or the top tier successful brokers, we could think about what we ALL would like if we could have it our way. The result was a similar model modified to become a Professional Cooperative.
What if we could create a model that offered profit sharing for everyone and they would receive back directly in proportion to what they contributed in commissions? Sounds like equality!
What if it did not depend on recruiting or any other activity except the very activities we were all committed to, which is selling real estate? Sounds like fairness!
What if we actually did not take so much from each agent up front in order to give it back to a select few later, but actually took less from each agent and each sale instead? Instead of profit sharing after the fact, what about profit sharing right up front with lower costs? Sounds like genuineness!
What if we then built a system where there was a mechanism to reward each agent directly according to their contribution when we are profitable and in years when we are flush with cash in spite of our low caps? Sounds hopeful and something we can all achieve together!
What if we kept things simple and did not focus on finding more income streams to pan for gold? Sounds understandable!
How Does it Work?
Our ideal is to have all our brokers receiving 100% of their commissions and just paying their part of the monthly expenses to cover the brokerage for our cooperative expenses. This money would be like paying any business expense.
In the housing depression which ensued immediately after our genesis, this became intimidating and unworkable in most situations. With few sales our Realtors® could not risk paying when they had no income. So we modified the ideal! We can do that because we are local and nimble. The safe route and the more profitable route…
Our brokers have a choice to be on a no-risk plan which caps at $15k per year. You only pay your split when a closing occurs. There is no obligation for anything else or any back payments for anything. This is a still a kind of profit-sharing for our model, in that the most basic form of profit sharing is to not take so much from these agents in order to give it back later. We have some of the lowest costs in our industry. The value is immense because what we get for those costs is not matched by other companies which offer very low costs but almost no benefits.
Our expectation is that all of our brokers will get to the point where capping is a predictable accomplishment and they can save even more money by paying monthly. When we have recovered from this recession and we are profitable beyond that, there will be even more to share with everyone- equitably, fairly- as together we all are all responsible for our success and its attendant income.
Randy McCreith, Principal Broker Bella Casa Real Estate Group