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Creative compensation: keeping employees on board.

Contrary to the popular view, compensation is not the only, nor even the primary, motivating factor for most people in real estate. That is not to downgrade the importance of compensation. Indeed, more objective, performance-based compensation is one of the reasons many people gravitate towards real estate. However, other factors, such as job challenge, autonomy, and organizational culture, all play key parts in retaining employees in real estate firms.

Autonomy

Our research has shown that the more entrepreneurial individuals, such as those typically attracted to real estate, want to be decision-makers and assume a breadth of responsibility for a particular project. For this reason, many outstanding real estate professionals have become generalists rather than specialists. Today, this translates into a combined responsibility for leasing and management.

Fostering autonomy becomes more difficult as real estate companies grow larger. A more sizable firm requires more formal communications channels and more levels of management. However, many successful real estate companies, such as LaSalle Partners, Ltd., and JMB Realty, have worked to retain organizational

structures that keep each employee closer to the decision making.

For example, a real estate company will combine the property operations/ management and the leasing functions under one vice president, rather than having a VP for leasing and one for management, each reporting to a senior vice president. This produces an organization structure that is more triangular, rather than a pyramid of different supervisory levels. By eliminating a level in the hierarchy, each property manager and each leasing specialist has more direct contact with the top and thus more impact on decisions.

Job challenges

Closely linked with autonomy is the ability to provide new job challenges to the employee. New challenges may be . created by extending the scope of an employee's job to encompass more areas of responsibility. Thus, an experienced property manager of a building with perhaps only 15 to 20 percent vacancies should be given responsibility for leasing as well as building operations. Such an assignment broadens the employee's value to the company, while the necessity of mastering new skills keeps employees satisfied and creative.

A major frustration we find in recruiting is that a person is ready to grow, but has no real opportunities because of the company's structure. Providing this flexibility to good employees helps to retain them.

A further extension of these efforts to provide job challenges is cross-functional career development. This technique allows the long-term employees which the organization views as having overall leadership potential to move from one area of the company where they have succeeded (e.g., management) to another area where they have no experience (e.g., acquisitions). Moving high-caliber employees in this manner not only assures that they will be challenged, but begins to build employees with enough breadth of experience to assume senior leadership roles with the organization. General Electric and IBM have been doing this for years.

Many organizations are reluctant to implement cross-functional moves because of an initial loss in employee productivity. However, during a period when real estate companies are growing larger, the need for experienced senior management is an area that must be addressed.

Most successful real estate companies were started by a deal maker, who was charismatic and able to negotiate, but not always skilled at administration. However, when a company employs 100 to 150 people, it needs more sophisticated management. And a sophisticated manager needs to know all components of the business. For this reason, it is very important to groom a select number of people for those top slots. Of course, not that many companies are thinking in this long-term mode, but more of the larger firms are beginning to realize its value.

The uncertain market of the 1990s is also contributing to a growing recognition of the need for long-range planning. Companies will not be able to make money the same way in the 90s that they did in the 80s. The smart firms are already re-evaluating their strengths and weakness and what they need to do to compete.

This long-term planning can require a strong chief operating officer. Enlightened CEOs who like to do deals have begun bringing in qualified operating heads to run their firms. In some cases, the chief operating officers come from outside real estate, but most have a real estate background. Real estate knowledge is important both to establish credibility and to help ensure success in today's competitive market.

Organizational culture

Creating an organizational culture which nurtures creativity and autonomy is vital in hiring and retaining the best entrepreneurial employees. The manner in which a firm treats its employees influences an employee's view of and commitment to the firm. The firm's integrity and ethical standards are also important factors in creating a positive organizational culture.

Organization culture is also effected by intangible compensation issues, especially as an employee moves higher in the company. Factors such as work environment are probably more important at a higher level, when salary is not quite as critical. At higher levels, compatibility with the CEO of the company and his or her philosophy and style of work is also more important.

Often real estate CEOs have become successful by being very dominant and detail-oriented. They have a tendency to feel that their way is the only way. This type of attitude may frustrate a good employee and create a climate that does not encourage long-term commitment.

The role of compensation

Real estate has always been an industry that has paid individuals according to the size and volume of the deals they consummated. Although a competitive salary base is important in attracting high-potential people into an organization (Figure 1), a strong bonus structure becomes more important as employees gain experience. An employee reaches true productivity after five to seven years with a firm. At this point, incentive bonuses should begin to play a bigger part in compensation (Figure 2).

As firms work toward holding property managers more accountable for property performance, bonus compensation will begin to play a bigger role. In some firms, bonuses may contribute anywhere from 50 to 300 percent of an individual's salary.

A significant percentage of a competitive bonus program should be based on objective criteria such as revenue generation, lease signings, and reductions in operating expenses. However, bonus packages should also retain a subjective component to reflect good performance in tenant relations, employee supervision, and other important factors which are difficult to quantify.

There is an increasing trend toward rewarding top property management executives within institutional companies with bonuses based on the profitability of the real estate portfolio. In a recent survey conducted by our firm with 100 commercial developers, we found that the top management and leasing executive received annual bonuses equivalent to 75 percent of his or her salary. This figure is a marked contrast to a survey conducted seven years ago, which indicated that management executives received a bonus of only 15 to 20 percent of salary.

Typically, these executives oversee both leasing and operations, as it is virtually impossible to reward someone for the profitability of a real estate portfolio if that individual has no control over leasing decisions.

A bonus plan may be structured to benefit all key members of the management team. For example, internal rewards may be established so that a property manager is rewarded directly for passing a tenant on to a leasing broker who then successfully completes the deal. Such a structure clearly influences the team orientation of the firm and the quality of service it provides. In addition, because property managers at larger properties are becoming generalists, getting more involved in the leasing decisions, it is easier to structure bonus programs tied to overall property performance.

Implementing a profit-based bonus structure is more difficult within a fee management company than with the in-house management of properties owned by a developer. Even if the same fee management company handle both management and leasing, as 1 more often the case, the two functions are often separate within the fee management company itself.

Equity participation is also playing an increasingly important role in the real estate compensation mix, especially for more experienced managers. Equity may take a variety of forms, including both equity in the firm and in projects developed by the firm, if any.

Organization equity is probably more valuable if a company owns assets that may be sold. Equity in a service firm can be less appealing, as its principal assets are its employees. However, equity in service firms can be attractive if key principals participate directly in company profits. Widespread profit participation not only encourages employees to do their jobs well, but to look for opportunities that benefit other departments of the company.

In our compensation study of commercial developers, over 70 percent of participants offered equity participation in every project to the key members of their management, leasing, and finance teams. This percentage represents a definite change from earlier surveys, where only development personnel were offered equity participation.

Conclusion

In short, a successful firm recognizes that it must invest in its people and develop an environment that is rewarding-both financially and psychologically-if it hopes to retain top performers. Unlike many businesses, real estate is still an individualistic industry. The consequent challenge is to establish a team-oriented environment that still allows room for individual autonomy and frequent challenges.

Property management is a field that has really come into its own in the 1990s. The growing emphasis on tenant retention and improved profitability presents tremendous opportunities for property managers. The companies that will be able to seize these opportunities are those that give their managers the climate to expand, to become generalists capable of overseeing all parts of the asset. This is really the key to employee retention and successful business operations.

(Figures omitted)
COPYRIGHT 1990 National Association of Realtors
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Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Ferguson, William J.
Publication:Journal of Property Management
Date:May 1, 1990
Words:1626
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