Q: I recently hired an independent contractor as the advertising representative for my bi-weekly newspaper. I need clarification on commission issues. Should I pay him commissions on monies I have yet to receive, or should I pay commissions only on actually money paid to me? Are there any available resources to help me create advertising procedures and guidelines? Please help me because this issue is causing havoc at my office.
A: The question of sales commissions is always a ticklish one. The salesperson in question would probably prefer to be paid strictly for "getting a signature" and then let it be someone else's job to collect the cash, right? Such an arrangement is definitely possible, but only under certain circumstances.
We'll begin by examining the basic problems associated with sales commissions:
- While it's generally agreed that salespeople should be compensated according to their effectiveness, exactly where does a salesperson's responsibility begin and end? In the absence of a written policy that is reviewed with each prospective salesperson prior to that rep representing you on the street, this issue will continue to create havoc in your office because the average salesperson will naturally assume that his or her job is "to get a signature." But there are other important questions that must be answered.
- Does your system hold the salesperson accountable for any statements he or she might make during the course of making the sale? "Go ahead and do it. If the ad doesn't generate business for you, we'll work something out." Trust me, statements like this are made by salespeople all the time.
- Does your system require the salesperson to deliver what was promised to your client, or is that responsibility handed off to another person on the team? In other words, who is expected to get "written sign-off" on the ad? You don't have a leg to stand on when your client says, "But I never approved that ad."
- Is it your policy to pay "straight commission" only, or is it "base plus commission," or do you make available a "draw against commission?" Straight commission salespeople tend to be a bit fly-by-night and difficult to manage, since they feel they're doing you a favor. Base plus commission can also be risky when you hire someone who can live comfortably on the base pay. You'll be amazed at the number of things these people can think of to do rather than go out and make some calls. Paying a draw against commission gives your salesperson a guarantee of some income, but it's not a free ride since the draw must be paid back from future commissions.
- If a base pay is guaranteed, at what level does the salesperson start earning commissions? Is it from the first dollar, or is there a minimum sales volume that must be generated before commissions begin to accrue?
- Will commissions be paid on sales or collections? Paying on collections only requires a salesperson to have financial staying power, since most business owners aren't going to pay instantly upon receiving their invoice. Paying on sales only increases the risk of your salesperson bringing in high-risk contracts. This is why most advertising sales organizations will pay commissions on sales immediately, then deduct from future commissions any receivables that aren't collected within 90 days of invoice. In such a system, however, your salesperson will need to see a weekly report on who has and hasn't paid. That way, they'll have the opportunity to take corrective action before they lose their commission.
- Who covers travel and client entertainment expenses? Are these the responsibility of the employer or the employee? If covered by the employer, is there a daily, weekly or monthly limit, and how are these expenses reimbursed? Or is it a monthly flat rate? And who is providing liability insurance? Can you be held responsible if your employee, during the course of executing his or her duties on behalf of your firm (and travel is obviously a requirement), causes vehicular damage and his or her personal insurance has lapsed?
The percentage you pay in commission should increase with each responsibility you give to the salesperson. Likewise, commissions should decrease significantly if the salesperson is held responsible only for "getting a signature."
Although it's a bit reckless of me to do so, I'm going to offer you some broad guidelines for paying commissions in an industry such as yours, which has no direct "cost of goods" to be taken into consideration. (In other words, your cost of printing the newspaper is essentially the same regardless of whether or not a particular client's ad appears in it.)
- Base plus commission and expenses. The salesperson is guaranteed a subsistence-level base pay for working 40 hours as well as a stipend to cover his gas, vehicle maintenance and insurance. In such cases, the sales commission would likely be 8 to 15 percent on gross sales above an amount that is roughly double the monthly base pay and stipend.
- Base plus commission. The salesperson is guaranteed a less than subsistence-level base pay, but given no expense money. In such cases, the sales commission would likely be 15 to 20 percent on gross sales above an amount that is roughly double the monthly base pay.
- Straight commissions paid immediately, with no accountability for collections. The commission would be 25 to 30 percent of sales.
- Straight commission paid only after money has been received. This would be 40 to 50 percent of sales.
Whichever system you choose to implement, be sure to put it in writing and get your salesperson to agree to it in writing. Additionally, you need to get an agreement in writing that they're responsible for providing their own automobile insurance.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.