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Tuesday, April 9, 2013

New Business Or Sales People - Commission or Salary?

                           

I often hear from successful new business and other sales people who have done well - so well that their company lowers their commission rate or finds some other way to cut their compensation. They come to see me because they have lost faith with their employer. I hear stories about this frequently.

The argument against pure salary is that commissions give sales and new business people incentive to succeed.  Salary merely makes them comfortable. I have come around to an opposite point of view.

When sales people are on some kind of commission, if successful, their commission checks can be significant. And that is when the problems begin.

 I can think of one case where a business development person brought in an account which generated a quarterly commission check of close to $60,000, payable for two years; this was on top of a fairly high base..  This made him one of the highest paid executives in his company. Someone from the holding company reviewed the payroll and his checks stood out like a sore thumb.  As a result, his employer unilaterally changed his deal, which, in effect lowered his commissions going forward.  His choice was to take it or leave it.  He took it because he wanted his commission checks, but it left a very bitter taste in his mouth..

When any company hires a sales person, it is done with the best of intentions.  But while the company is thrilled with am account win and the new revenues it generates, what often happens is that someone sees the money going out in commissions and realizes that it is a lot of cash.  It doesn't matter that the employee's salary was intentionally low to give them incentive to get new business. And it doesn't matter if that new business person's base salary is $40,000 or $250,000 - the base is generally relevant to their experience and track record as is the amount of commission.  It is no one's fault. It is just built into this form of compensation.

I spoke to a lawyer about the issue of companies changing compensation arrangements with employees.  His comment was that there is little that can be done when the company changes the package because the company controls the purse strings.  It almost doesn't matter what the original offer letter or contract says. The company inevitably has a much larger pocket book and is therefore not susceptible to a law suit.. More than that, since most agreements state that the commissions are only payable if the sales person remains an employee, it means that as long as commissions are due, the sales person is essentially a captive. If the executive should leave, future commissions are rarely paid, whether that clause is there or not.

I have come to the conclusion that experienced new business people with an excellent track record, rather than being on salary plus commission, should be on a relatively decent salary with the possibility of a year-end bonus based on their success.  The other advantage of the new business person getting paid a decent or even high salary, is that it gives them a seat at the executive table and then they are not seen as a “hired gun” by prospects or other employees.  And most of all, it avoids huge problems for both the employer and employee.

Commissions are fine for sales of one-time items - a single assignment that generates a specified amount of revenue or a sale of x number of widgets at a specified price.  Commissions end up getting confusing when there is profit and loss or third parties involved.  In any case, a detailed pre-arranged agreement needs to be spelled out in an offer letter or contract.  But with commissions, there are always gray areas.  With salary there is little room for doubt from either party.

I would love to hear from new business people to share their stories.  Is my conclusion correct?

33 comments:

  1. Such an interesting, and for me quite timely, blog post. I've just put out an offer for a new business guy which is a mix of salary and commission. I've been struggling with how to structure the deal so we don't end up having a commission that is 3X the base salary, but still sufficiently incentivized as to encourage the employee.

    The stark reality for a small agency is we can't always afford the higher salary, so to get a strong, senior, new biz person we need to establish a commission with a revenue and profitability floor and ceiling that creates incentive as well as manages cost. I guess that is the third way. Also, I've put in a clause that we will reevaluate at the end of FY 2014 to ensure we are all still happy with the arrangement.

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    Replies
    1. Michael: Just be aware that if your hire is successful, you may be seeing significant money going out. My thought is that once the thrill of the win is over, the check, although well earned, may weigh heavily on you. I also understand your reality.

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    2. It is my dearest hope that I have this problem! I'm just trying to get a little ahead of it by putting in place a cap and a renegotiation; we may decide that a higher base is the way to go long run, but for now this is what we can reasonably afford. I don't want to have to drop a change on anyone without their input and I really don't want to disenfranchise a valued member of the team who is responsible for driving sustainable growth.

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    3. I am really pleased to see that you are thinking this through. The person you hire should know of your thinking and then I think he or she will be very content.

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  2. Paul, I am glad to hear there are such things as successful new biz people. To me they are as hard to find as Sasquatch and elusive as a Quark. If you know any, send them my way regardless of salary scheme.

    Livingston Miller
    President
    Seiter & Miller Advertising

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  3. Your conclusion resonates with me; also your point about having a seat at the executive table: there's nothing more stressful or differentiating than being viewed as a hired gun.
    My experience is that great new biz results are dependent upon playing as part of a team and when all involved are salaried there's nothing between a united front and a best effort.
    Love your blog as ever!

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  4. Paul … A great topic and your usual excellent commentary. Straight base salary + bonus vs. base + commission remains a never-ending debate. In my experience:

    Large agencies, typically of the holding company type, don’t do commissions because they don’t need to. Unlike smaller independent agencies, the big guys get plenty of opportunities to pitch; what they want from a CMO or new biz person is more “wins”. Hence, process is more important than prospecting because they already have an on-going outreach program in place and a loaded "opportunity" pipeline.

    For smaller agencies it’s just the opposite. They’re all convinced that they have “winning” pitch teams, they just need more opportunities to get up to bat. Hence, their primary emphasis on prospecting … especially if they don’t have sustained outreach programs like their larger brethren noted above. Many think it’s just a question of “cold calling” from a list or what I call “Dialing-for-Dollars”. It’s not – ever!

    So the question about compensation for a new business professional really depends on what you want them to do and how to measure their success. Keeping in mind that prospecting is a lonely individual sport like golf; whereas, pitching is a team sport like football – each player knowing their assignment; bringing their A-game to every room; and working in concert with the rest of their team.

    Having successfully done new business for large, medium, and small agencies for many years, I can tell you that all of the above is true. What remains a mystery to me is just how much any agency principal thinks one person can do; how soon they expect it to “rain”; and how much it’s worth to have somebody do it for them. For sure, there are no short-cuts to success in any case!

    As to certain new biz execs not getting paid their commissions due, it’s a mixed bag in my view. I’ve had some agencies honor their commitments to me and others not. In the end and no matter what an upfront contract or work agreement might say, it’s always about the integrity of the principals. Bill Crandall

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    Replies
    1. @Bill: I appreciate your articulate description of the issues. I am sure my readers do, too.

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  5. Paul ... You're welcome! I post a lot of commentary on the internet and sometimes I do it just for my personal amusement. But 95% of the time I'm trying to provide your "readers" and others, with something of possible value to them. So, glad you liked my post on "View from Madison Avenue". BC

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  6. This is an endlessly debated topic, close to my heart!

    For "hunter/prospectors" at mid and small size agencies who are getting the agency invited into reviews or introductory client meetings but NOT leading pitches (or even attending them) it's frustrating when the agency is not winning. Our compensation and evaluation by management at year's end is tied to wins, not reviews or opportunities opened.

    I think your suggestion to offer new business professionals a decent salary and year-end bonus is a reasonable and viable solution.

    Also, if management believes commission is needed as incentive to succeed, wouldn't that mean none of their other staffers - copy writers, account execs, estimators, planners - are motivated to succeed?


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    Replies
    1. Your comment about other employees' motivations is interesting. I think the issue is that it is very difficult for agencies to win new business. Winning, as you point out, often has little to do with the person who opened the door, but it gets blamed on the biz dev person, so lowering salary and raising commissions is relatively less expensive investment.

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  7. As a business owner of a major sales consulting firm, I know it can be a challenge to figure out what type of performance incentives to give employees. I am currently building a comprehensive team sales training program and these tips will come in handy! Thanks!

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  8. @D Lew: Thanks. It is a difficult balancing act.

    ReplyDelete
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  11. Is there any further reading you would recommend on this?

    Amela
    Business Development

    ReplyDelete
  12. Any way I'll be subscribing to your feed and I hope you post again soon. Big thanks for the useful info.
    www.apart-data.com

    ReplyDelete
  13. Paul, this really gets you thinking as to what the best way to pay a new employee is. My father-in-law has a smaller sized firm that's starting to grow. He likes the idea of commission only, but he understand it can be hard to recruit the best talent for commission only. He's looking into getting a business loan to get some things in place that would allow him to pay initial salaries & possibly a new place. I agree with you, there's really not a right or wrong way, it all depends on the situation. https://www.banktr.com/business/business-banking

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    Replies
    1. Sam, it is always a tough call. I wish I had the answer for your father-in-law. I wish him well.

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