There are several different types of bonus structures common to commercial real estate. I've listed 4 below and added commentary, including when we see it most and my thoughts on the structure.
1. Discretionary Bonus
This is the most common compensation structure at large commercial real estate firms. Typically, a target bonus range is provided in an offer letter with the caveat that the actual bonus will consider personal and company performance.
Most employees expect to be paid at or above target each year. If you pay under target, you'll start to turnover employees.
Bonuses typically range from 20% - 100% depending on the role. The closer you are to the deal, the higher the discretionary bonus you can expect. Acquisitions and capital-raising employees often receive 50% - 100% of their base while supporting team members will typically be slated for a 20% - 30% bonus.
My opinion - I'm a big fan of the discretionary bonus. It sets clear expectations with a new hire in the offer letter, and in an emergency, it doesn't contractually require a company to pay a bonus.
2. Target Bonus + Multiplier on Performance
This structure is common in asset management roles in both large and small companies. In this structure, a target annual bonus will be established in the offer letter (typically 20% - 40%) and a multiplier will be applied to the bonus based on a KPI. In asset management, this is typically NOI vs. Budget. I've shared an example structure below:
Your employee will receive ...
90% of their target bonus if their portfolio is within 90% of budgeted NOI
100% of their target bonus if their portfolio is within 95% of budgeted NOI
110% of their target bonus if their portfolio exceeds 100% of budgeted NOI
My opinion - This is a great structure for asset management roles, but I don't like it for most other positions. The key to success with this structure is having a very KPI on which the multiplier is based.
3. Bonus for Large Capital Events
This is a common bonus structure at small to mid-size commercial real estate firms for acquisitions, capital markets, and other deal-related roles.
For acquisition team members, some companies will provide a bonus for each deal that is acquired. Typically this will escalate based on the size of the acquisition.
In capital markets roles, some companies will bonus on the completion of a fundraise. Be careful here - there are strict rules for the compensation of fundraisers, and you don't want to find yourself on the opposite side of a lawsuit with the SEC.
In either of the above scenarios, employees in production roles with this bonus structure will typically expect to receive 100% of their base compensation in bonuses.
My opinion - This is a great structure for companies with cash constraints because bonuses are paid at capital events when cash is readily available. Additionally, it scales well as your team grows.
4. A percentage of promote
This is common with executive-level positions in small real estate firms. In some cases, receipt of the promote will be conditioned on the continued employment of the team member. Other companies will vest the promote over 4 to 5 years (similar to how startup options vest).
We typically see between 1% and 3% of the promote paid per executive who participates in this bonus structure.
A helpful rule of thumb - You don't want more than 10% of your promote allocated to team members.
My opinion - This is a good strategy when you have a young company, without a lot of cash, and you need to hire talented people. However, it doesn't scale past 10 to 20 employees. As soon as you're able, switch to one of the above structures.
Additionally, this is a very emotionally charged way of compensating your team. The numbers can get big, and you need to be careful this type of compensation doesn't bring unwanted drama to your organization.
