Hiring Commission or Base + Commission ?

I need some general advice on hiring sales reps. I've got a start up marketing firm and I'm getting ready to start the hiring phase.

Money is tight and I really want quality sales reps so I was thinking of doing the pure commission route but I've heard from more then a few that independent contractors can cause major issues.

A few friends in the biz told me to hire people at minimum wage or close to it plus commission so they are real employees. I could swing that now but won't it cost me a lot more in taxes? -Searchpl

Yes it would be more in taxes and paperwork.

From my experience, you have more control over employees who work directly for you so you may be able to offer more quality going that route. You can pay minimum wage and a commission so I would advise to also offer an alternative plan with an all competitive commission and see which plays out better. -Wonderboy

Hi, Searchpl,

It sounds like exiting times in your business!

"Straight commission" and "independent contractor" status are two different issues. It's possible, and even common, to hire straight commission employees who are employees.

Good luck! -Skip Anderson

Thanks guys. Skip could you point me to some information about hiring employees as straight commission? I thought we had to pay minimum wage if we do that.

Thanks! -Searchpl

Searchpl, the IRS has guidelines for "independent contractor" status. Certain States also have regulations or statutes that affect classifications. As an example, in Arizona although a manufactured housing licensee might perform similar duties as a real estate licensee he/she cannot be classified as an independent contract, even though a real estate licensee can, because licensing rules and regulations relating to direct supervision by a Broker.

Here is a link to more information on the IRS website:
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html -AZBroker

Hi Searchpl,
Straight commission is merely a way to pay someone based only on sales performance (as opposed to an independent contractor which is also paid only on performance, but also is not an employee), but they are an employee so must receive benefits that any of your other employees receive. Another factor is that it's sometimes more difficult to require certain office hours or other tasks if the employee is working on straight commission. I'm not an accountant, so you may want to check with an accountant regarding tax and financial implications.

Many straight commission salespeople earn a "draw against commission" which is basically a loan based upon future production. Usually, but not always, this is non-recoverable, meaning if the employee quits, they keep their draw with no obligation to you.

You can set up commission compensation many ways, as long as an employee understands what they're getting into when they join your company, and also that you are able to retain employees.

The best to you! -Skip Anderson

My thought is that both the commission and the independent contractor deal alienate your sales folks. If they are smart, they keep the best deals for themselves and broker them out to someone else for better money. After all, there is no loyalty between the parties. Only expediency.

My other thought is why a marketing firm needs salespeople. That's beyond me.

As Peter Drucker once said...

"There will always, one can assume, be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product and service fits him and sells itself. Ideally, marketing should result in a customer who is ready to buy. All that should be needed then is to make the product or service available; i.e., logistics rather than salesmanship, and statistical distribution rather than promotion." (Management: Tasks, Responsibilities, Practices - 1974)

If you have good marketing in place, people will come to you. Otherwise it becomes a credibility problem: Why should I hire you if I still need to hire an army of salespeople to dial for dollars and pound pavements to do "chase -> hunt -> hound -> pound" type mind-bending, soul-sucking bone-jarring cold prospecting grunt work. Which also means that the marketing part doesn't work. But proper marketing always work.

And one more thing, while I'm on the roll... Would you work with your clients on a 100% commission basis? I find it strange when people ask others to do something they themselves wouldn't do.

Cheers

Tom -Bald Dog

For any product at any time you coud say there are some people who will, some who won't, and some who might buy. Effective marketing might move the numbers in one group or another but it won't make selling (helping people with the buying decision) superfluous. -Houston

It may be just me because I suck at selling. So, I've created such good marketing that by the time prospects contact me they know I'm expensive; they know they get good return on their investment and the right ones buy without any selling.

The other day, after an exchange of about 20 short emails (40 total) over a 40-50-day period, I signed a deal for $93,000. And 8-month consulting engagement. We never even talked on the phone.

This is where I see how right Pete Drcuker was about making sales superfluous. Or think of the some the great marketers who make well over $1 million a year from their home offices without one single staff member.

But we have to use what we have. I suck at selling but can write pretty well, so people act on the message. I use that approach.

Thoughts? -Bald Dog

Assuming you have a good product that will entice salespeople to work for you! Maybe consider the following, establish how long it will take you to make sufficient profits to enable you to pay a basic wage. For now hire sales people on commision only. It means you will only have sales people who are confident in their own abilitys.

At the start of a business no one can afford to have poor sales people as its just a drain on resources and capital.

Lets say though you anticipate that after 4 months you will be in a position to pay a basic. Simply tell prospective employees that it is comm only for the "trial period" But thereafter if you deem them to be good enough they will have the option of a high basic clearly though you will reduce the comms respectively to make it viable.

If your salesman where good, they wont want a basic anyway! -adammead26

I've been hearing the opposite too. Good salespeople don't make on-sided commitments. They expect their employers to put a skin in the deal.

Selling for a company that doesn't have enough confidence to back its own products. hence the company expects salespeople to take 100% of the risk and a pittance of the reward.

One option I can imagine is that I from the company and then I mark up the stuff and resell it. I make both my commission and some extra.

Maybe. But this is how people start medical clinics, law firms or manufacturing companies. They have the confidence to invest in their own futures. They re-mortgage their homes and sell their furnitures but they don't sink to the level of begging people to work for free.

A start-up business has some 80% chance of going to the wall in the first five years. Why would anyone work for free for such a joint?

My belief is that the best salespeople do not accept 100% commission work. If I'm wrong, possibly, feel free to tell me. They want to see commitment from the company.

I like Jay Abraham's model. He's willing to take on 100% contingency work. He pays the necessary expenses, and then takes 50% of the gross revenue. Why Not? He did 100% of the work and assumed 100% of the risk. 50% is not that much for all that.

Thoughts? -Bald Dog

I have been hiring salespeople for close to 20 years and have hired and trained within each scenario.

These days, salespeople expect a base salary or at least some type of draw so they can pay the bills. The challenge with commission-only pay structures is the minute the salesperson is under financial duress they lose their ability to focus and you lose sales.

On the other hand, salespeople who desire a commission-only structure are usually more confident in their ability to perform and know that if they succeed they are more likely to recieve a higher commission percentage and thus make more money.

In the end, it really comes down to what you feel comfortable with and what you can afford. Either way you take the risk of the salesperson not performing. The best way to assure a successful return on your investment is to make sure you have implemented a solid training and support infrastructure for the sales candidates you hire! -robhalv1

Or they cut corners to make the instant sale with no regard for the long-term consequences of that instant sale.

Spot on. Great point.

My experience from the military is that if you put average people into a high-expectation, high-support environment, in 99% of the cases they step up to the expectation. I've found that with sales folks too I've hired over the years.

People love challenges and expectations of them. What they hate is demand. Actually, I believe...

Demand + Support = Expectation and Challenge

Peter Friesen has a great book on this, The 2R Manager. The 2 Rs are Request (Demand) and Relate (Support). -Bald Dog