One of the things I’ve been struggling with in my business lately is the fact that to our tenant clients, brokers are seen as “free.” Yes, we earn a fee when the deal closes, and yes, those fees are considered part of the transaction expenses that are baked into the lease rate, but our clients never actually write us a check. This system is entrenched in the market and everybody understands how it works.
The system has worked as expected up until recently because tenants were always acting as brokers, helping their tenant client acquire an asset in an opaque market. But as the market has become more transparent, brokers evolved from deal makers to consultants. The level of expertise now has to extend beyond market knowledge to touch everything from accounting standards to workplace innovations, to construction costs.
Brokers now have to guide the process and deploy their intellectual capital on behalf of their tenant clients while operating with an at-risk compensation model. Tenants want all of these services, but they are unwilling to pay for them. This perpetuates bad behavior within the brokerage industry, with deals getting poached, corners getting cut, and deals getting slammed home rather than executed thoughtfully.
There was an academic paper written the same year I was born titled “On the Folly of Rewarding A While Hoping for B” that takes 14 pages to lay out the case for why the structure of the reward system matters.
I predict that over the long term, tenants are going to recognize that they are rewarding their brokers incorrectly and shift to a compensation model that aligns with their needs. It will allow Tenants access to even more resources to make their facilities more efficient and productive.
P.S. Its worth thinking about every relationship in your life, whether it’s your children, your subordinates, vendors, or clients. Is your reward system aligned with your desired objective?