Commission vs. Base Salary

Question:

We are a Glass and Glazing Subcontractor and have read many of your great articles in Construction Business Owner magazine! Currently, we are considering hiring a sales person on a straight commission basis. We have not tried this before as all of our employees have always been on salary. Any suggestions? We are trying to figure out the best methodology and strategy to determine commissions vs. base salary. One idea is to let the commission percentage float depending on the margin being earned by the company. The rate would also increase for sales over $1 million and over $2 million, etc. The commissions would get paid after money is collected. Any thoughts on this concept would be helpful and greatly appreciated.

Tim Marshview, Clearview Glass Contractors

Answer:

Sounds like the same old wishful thinking strategy that never works. Since you don’t like to get out of your office, go see customers and sell, you think hiring a salesperson will generate lots of new revenue. So rather than you, your project managers and your estimators calling on new customers, you think a straight commissioned salesperson won’t cost you anything and will fix your revenue problem during the slow economy. A salesperson will only be able to bring in more plans for you to bid. They will not close the deal or get contracts signed. Your price will determine your success, not the salesperson. Plus they will bring in every job they can get their hands on regardless of the number of competitors, project type, size or location. When you tell them you don’t want to bid a job, they’ll be upset that you are hindering their ability to make a commission and eventually quit.

Before you hire a salesperson, you must first determine what type of jobs, customers, location, number of competitors, private or public and minimum margin you want to go after. Next, determine if there are enough jobs in your market to justify hiring more overhead at this time?

Now the real issue. Who will come to work for you on a straight commission basis when your bid price determines their success and paycheck? And who will wait for months to get their commission checks. Once a sale is made, it is earned. It is the company’s job to get paid and make the margin, not the salesperson’s. Plus you will have to be ready to bid at least two or three times the number of jobs you are currently bidding to get enough to pay for the salesperson. Then you and your project team will have to go out and sell the jobs to customers. A salesperson can’t sell jobs without lots of help. They can only bring you jobs to bid. You still have to close them.

Now let’s get real. A better solution is to first make your list of what type of jobs and customers you want to go after. Then dedicate someone to make it happen. Pay them a fair base salary for implementing the sales and marketing plan, bringing in jobs to bid and representing the company in the community and industry. Offer them an incentive compensation based on the overall company results. I recommend paying a percentage of the estimated markup on jobs you are awarded they bring in. On repeat customers, you can reduce the compensation by 50 percent to insure they focus on new customers and new bid opportunities. For example, on a $1 million job with 20 percent gross margin, pay them 2 percent of the margin, or $4,000. Give them an annual goal to hit as well, and as they bring in more work, increase the compensation percentage. Now get out there and sell.

Question:

I had the opportunity to sit in one of your programs last month. I asked you at the end of the presentation if there is a way around this provision of Small Business Set-A-Side. At this time we are declared a large business because of annual sales for our industry. You mentioned there is an angle, can you again let me know what that is? Thank you for your help.

Larry Moser, AAA Construction

Answer:

Good question – I don’t have an answer but typically the government has quotas and set asides for small, diverse, women business-owned, minority, etc., types of companies when bidding government work. I recommend contacting your city, county and state Business Development office and talk to them for ideas. Good luck!

Construction Business Owner, February 2010