The Entrepreneur's Guide to Pay-for-Performance Consulting
As an entrepreneur, you have to pay for work even if it does not produce results. In contrast, a pay-for-performance agreement means you give a cut of the results to your collaborators instead of paying up front -- neither of you profit unless you produce bottom-line results.
Yet entrepreneurs too often fail to make pay-for-performance agreements enticing enough for consultants to bite. Here are some strategies and tactics you can use to come to a pay-for-performance agreement with your consultant.
Do your own math.
Figure out the results you want and project what you think they’ll be worth to your company. This takes away much of the resistance a consultant may have to this type of agreement.
For whatever outcome you are looking for (sales, for example), look to your leading indicators that give you that result, such as traffic, subscribers or conversion rates. Use the numbers you have from your sales funnel to determine milestones. You’ll also want to determine your customer lifetime value (CLV) to calculate how much value each new lead is worth.
Remove the barriers to an agreement.
You can bring your key performance indicators (KPIs) and projections to your consultant as a way of selling your proposal, or you can simply ask the consultant to give you numbers that he or she can commit to. If the person believes he or she can deliver results and you’re willing to pay the individual to meet those benchmarks, you can create a win-win agreement.
If the consultant is wary of relying on the numbers you provide, give the person access to your financials and analytics. Both parties should sign a mutual NDA.
From here, you can structure the deal in variety of ways. You may need to lure the consultant in with a larger cut of the sales the person drives, or you can give him or her a base fee plus commission. This helps lower the risk for the consultant (the person will be getting paid something regardless of outcome), while still providing him or her with incentives. If sales are too risky a metric to reach an agreement, you can go up the funnel and use other leading indicators such as leads generated as your metrics for performance.
Remember the consultant’s perspective.
When a consultant is doing a pay-for-performance deal with you, the person is putting his or her trust in your company and taking part of the risk with you. The consultant might end up doing work that isn’t supported and not get paid for it, so that’s why the person would want a higher reward. Just make sure you trust the consultant too -- after all, he or she could end up doing little substantive work and you still have to cut the person in on your profits.
From a consultant’s perspective, a pay-for-performance deal can mean making the most of the company’s momentum. If you’re hiring consultants to grow, you’re probably also starting other initiatives to drive growth as well. The consulant could be in the position where he or she is being hired to help you grow by 10 percent, while you simultaneously roll out other plans to grow a total of 15 percent. The consultant could get a piece of that difference.
If you lack the infrastructure to support the growth you want, are unresponsive to the consultant or lack the bandwidth to provide the individual with the resources to do his or her job, your consulting agreement won’t work. To mitigate these risks and provide some extra motivation, you should create benchmarks, structure your workflow and make a list of deliverables.
Consider a middle ground: The piecework fee.
Keep in mind that the alternative is paying a flat fee. If you structure your pay-for-performance agreement correctly, it shouldn’t be that different from a flat-fee arrangement, except that you’re pricing in more upside into the relationship. For example, if you were going to pay a consultant a $5,000 flat fee for a job, total possible compensation for a performance deal should range from $5,000 to $10,000.
In the end, it is important to think of pay-for-performance deals as a way to align your incentives and create the best possible relationship to achieve results. Remember, you’re both entrepreneurs. Your grit and creativity got you where you are today, the odds are that together you can find a way to make it work. It might take a few more hours to hash it out, but it will be more than worth it when you get the results you want and your consultant goes home happy.