Paying Commission

How to make a salesperson happy without me going broke.

[iJeep]

I have the first decent salesperson I have hired to date. He is now wanting to goto a commission based pay, which I don't have a problem with.

I am not sure on the best way to figure commission.

Should it be a percentage of sales or a percentage of gross profit from the item?

Are there any tax or employment issues I should take into consideration?

Any other advise on commission employees?

[takeover]

Heres a few important tips:

+ Only pay commision on the profit, never ever on gross sales.

+ If there is return, refunds, etc on a past order he sold. That sales person knows that they are paying for that. since you lost the profit from the return, so did he. If you do not, this can add up fast. Every 1and10 orders is returned.

+ Make sure to have them sign a non-compete agreement. This may protect you in the future - trust me.

That is all I can think of right now, I will post more if I can think of them. It works great, when it works. :-) Make sure you follow the above info, no matter how good of friends or how nice he is. Business is business!

[LBmtb]

The non-compete agreement is really important.

Since he's the one that has first contact with clients, he's the one that'll build a relationship with them first. If he's ever gone, the clients might go with him.

[iamlost]

Sales commission can be determined in several ways:
* Simple: a straight percentage of the value of the product/service sold. Example: $100.00(Total value) * 5%(Commission Rate) = $5.00(Commission)
* Accumulative: an increasing percentage of the value of the product/service sold. Two main versions:
Plateau: Example: first 10 items at 5% commission, next 15 items at 7.5% commission, all susequent items at 10% commission.
Ramped: Example: if number items sold in period total less than 11 then 5% commission on total value; if 11 to 25 items then 7.5% commission on total value; if more than 25 items sold then 10% commission on total value.
* Pyramid: (not applicable in your instance) used for sales managers who also get a commission for each salespersons sales.

Further commission can be a percentage of each items selling value, each items gross profit value, each items net profit value, each items selling or profit value plus percentage of company's annual improved profitability, etc.

I will say that I only paid (and would only work) for a commission based on actual gross sales. From an employers point of view item cost, overhead, etc. are confidential, period. From an employees point of view I do not want my employer fudging up "profit" or "cost" numbers (I have seen this done far to many many times). There is no dispute on the selling price.

You do definitely want a contract specifying the conditions: percentages, specified hold back period to allow for returns, etc. Ambiguity will kill a sales commission relationship faster than anything except non-payment.

Added: a non-compete clause is fine but hard/tricky to enforce. Regardless, as with all contracts please consult a competent attorney and for help determining type and rate of commission talk with an experienced accountant.

[iJeep]

I was planning on a non-compete agreement, but was going to leave that to the lawyers.

Thanks for the tips on the commission. I was thinking a straight commission on gross sales because it would be the most simple to calculate. I was also thinking about a bonus commission for selling any items off a list of high profit items, that way he wouldn't just recommend the most expensive items.

[etechsupport]

For high profit items you can also keep higher commission /incentives for particular items as well you can motivate them by offering some gift articles after achievement of certain level.Overall you should frame incremental commission structure for rest items.

[D_Blackwell]

I will say that I only paid (and would only work) for a commission based on actual gross sales. From an employers point of view item cost, overhead, etc. are confidential, period. From an employees point of view I do not want my employer fudging up "profit" or "cost" numbers (I have seen this done far to many many times). There is no dispute on the selling price.

'Profit' based deals are often corrupt to the core. To work, it requires either a huge leap of faith from the salesperson, or throwing your books wide open; bad ideas both from my view. Even if the 'profit' is legit, there are plenty of ways to skew the costs/books.