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Compass ends recruitment incentive program amid growing losses

Despite its highest quarterly revenue haul on record, Compass lost $101 million in Q2

Compass’s financial challenges continued in the second quarter, as the brokerage failed to turn a profit despite recording its largest quarterly revenue haul yet and a 2% increase in transaction sides.

Compass generated $2.02 billion in revenue in the second quarter, up 4% year over year, but also recorded a net loss of $101 million, up from $7 million a year ago. The firm attributed the net loss to “higher expenses related to strategic business initiatives, non-cash stock compensation, depreciation and amortization as well as restricting costs.” The brokerage’s largest expense was for “commissions and other related expenses,” which came in at $1.62 billion.

In an effort to curb expenses and steer the firm toward profitability, CEO Robert Reffkin announced on a call with investors Monday afternoon the start of what he termed Compass’s “Zero Incentive Program.” In the past, Compass attracted and recruited agents to the firm through favorable commission splits and cash incentives, but according to Reffkin those days are now over.

“We are no longer recruiting agents with equity or cash incentives. Our ability to do this is a reflection of the value the platform provides,” Reffkin said. “Over time, we have invested over $900 million to build an unprecedented platform of tools and services to support our agents. We believe we have created a large competitive mote, with an enduring advantage over competitors that are unable or unwilling to build the tools that benefit agents.”

In addition, executives also said they plan on cutting technology spending. However, COO Greg Hart noted that the brokerage plans to announce several new features as part of its platform in September, enabling agents to go “from first contact to close on one platform.”

“We are confident that the solution we have built is the best in the industry for agents to grow their business,” Hart said. “It is also what helps make Compass unique and helps us retain agents. It helps in recruiting them as well.”

Reffkin shared Hart’s certainty that cutting technology spending and ending agent incentives would not impact the brokerage’s agent retention, which was above 90% during the second quarter. Additionally, the brokerage added 405 new agents to its roster during the quarter with a combined sales volume of over $2.25 billion in 2021. Overall, Compass agents recorded 66,846 transactions in Q2 and the firm’s market share rose 50 basis points from a year ago to 4.6%.

The brokerage also told investors that it is continuing to explore ancillary services as a way to improve revenue. As noted during its first-quarter earnings call, Compass has paused its merger and acquisition activity, however, CFO Kirsten Ankerbrandt told investors that the brokerage is focused on building out title insurance solutions and eventually homeowner insurance solutions through organic growth. In June, as part of the firm’s cost reduction program, Compass shut down Modus Technologies, a Seattle-based company that it bought in October 2020, viewed as its entry point into the title and escrow space.

Looking ahead, Compass executives said the firm is committed managing its expenses and improving profitability.

“We are now in a position to pivot in these uncertain market conditions when revenue is under pressure,” Reffkin said. “Since our Q1 earnings call in May, we have been taking more aggressive action to achieve positive free cash flow.”