Is this teired commission schedule for referrals fair?

I'm an independent software consultant who is looking for referrals.

I've paid for referrals before and have noticed that sometimes I was happy with the price and sometimes I was not. For example, if I get a $20k project, paying 10% ($2k) seemed somewhat fair and the the referrer made a significant amount of money for making an introduction. But when the price goes into the higher 5 or even 6 figures, I kind of feel that I'm overpaying.

Here's my take on it; with a referral, you've basically split the sales role into 2 parts, the lead and post introduction (meetings, presentations, contracts, etc...)

So if the total sales role would earn say 15% (or even 20%), then giving the 10% for the referral seems ok when the remainder of the sale is simple, but when the project goes into the 6 figures, suddenly you're talking about a lot more post introduction work.

So having a flat percentage commision just seems wrong. But at the same time, I don't think it's appropriate for me to cap it, since I want to encourage 6 figure projects.

I came up with a sliding scale where the referral percentage would start at 10% and as the total increased, it would gradually slide to 1% for anything over $100k.

Like this:

Up To $20k yeilds 10% Commission

From $20k To $30k yeilds 9% Commission

From $30k To $40k yeilds 8% Commission

From $40k To $50k yeilds 7% Commission

From $50k To $60k yeilds 6% Commission

From $60k To $70k yeilds 5% Commission

From $70k To $80k yeilds 4% Commission

From $80k To $90k yeilds 3% Commission

From $90k To $100k yeilds 2% Commission

From $100k Plus yeilds 1% Commission

 

So a $12k project would pay $1,200

A $37k project would pay $3,460 ($2k for the 1st $20k, $900 for $20k-$30k, $560 for the remaining $700)

And a $130k project would pay $6,700 ($2k for the 1st $20k, $900 for $20k-$30k, $800 for $30k-$40k, $700 for $40k-$50k, $600 for $50k-$60k, $500 for $60k-$70k, $400 for $70k-$80k, $300 for $80k-$90k, $200 for $90k-$100k, and $300 for the remaining $30k)

After writing that, I have to wonder if going to 1% is too low. Maybe I should stop at 4% or 5%.

I've bounced this idea off one person (not a sales person) who wasn't crazy about the idea.

What do you think?

How much is a fair amount to pay?

2 more things:

• I want to be fair.
• I do cap the time period to 1 year.

Am I missing something? You would pay $2,000 for a $20,000 deal and only $1,000 for a $100,000 deal? Good luck getting any salesperson to do that. Salespeople are simple creatures, they are coin operated and they can do math. Creating compensation plans is simple: pay more for more desirable behavior.

Our team pays 10% on the total value of the contract or 20% on the value-added margin. It is simple and clean.

Every attempt that we have made to create tiers has created confusion, complexity and resulted in either an alienation of an existing sales professional and no traction ever kicking in on a new one.

I think that tiered compensation works far better in an employment situation where there is a base being paid. I would advise against it in a referral network. If you feel it is necessary I would "compromise" at a two tiered system in the same model that you have which up to X at Y% and over that at Z%

To make yourself feel better remember that you are not paying for work. We all know that that work for a $2,000 contract is often just as much and often more than the work for a $20,000 contract. You are paying for a connection -- for access. The value of a connection to someone who is the decision maker for $200,000 is much more valuable to you than the connection to someone who is a decision-maker for $2,000.

At a flat 10% the payout on a $200,000 contract is $20,000. In your tiered model the payout on $200,000 is $7,400 (is that right -- I got lost trying to do the math) I would not feel good as a sales person earning $7,400 on a $200,000 consulting referral. If it meant that I didn't make the referral -- was paying an additional $13,600 worth securing $180,000 of new revenue?

You want to encourage big projects? Give big payouts. It's that simple.

I'd rather have 90% of $100k than 100% of $0.

I personally think a business arrangement is "fair" when the terms are clear, all the parties are competent adults entering into it voluntarily, and everybody continues to do what they agreed to do.

In that light, any commission structure can be fair. Instead, I'd suggest you figure out what kinds of projects you prefer, and how much money you'd like to make, and use a very simple commission structure that maximizes the incentive for those. If you achieve that, be happy, and don't worry about whether other people are "making too much money" from what you do.

For instance, I'm a software development consultant. Since I can't bill anybody for time spent on sales, I'd be happy to pay somebody extra commission for referring good long-term clients. Also, I like to avoid really small clients because they're more likely to be unprofessional and hard to work with.

So if I were setting up a commission structure for my consulting practice, I'd maximize the incentives for long-term, steady clients. I wouldn't have a time cap, and I'd want to reward bringing me larger clients by having the effective rate to go up.

One way to do that might be like this:

• If you refer a client to me, you'll get a 5% commission on payments received from that client.
• I'll send you commission checks quarterly, but not until aggregate payments from that client reach $20,000.
• Every time aggregate payments from that client pass a multiple of $50,000, I will add a $1,000 bonus.

Added 22 April 2011:

The OP mentioned "sales guy" in a comment, and my original answer overlooked the possibility of using professionals.

In business-to-business sales, there are three kinds of people who can refer you business:

1. Professional salespeople on your payroll, whether commissioned or not.
2. Independent professional sales reps or rep organizations, who typically represent multiple clients and work on commission.
3. Friends, family members, professional colleagues, etc. who don't do sales for a living.

I've had some experience with the first two in several industries. Within a given industry, for each of those two types, there's a standard commission structure including rates and durations, as well as other norms. Those ways of doing business have typically been hammered out as workable over many years, so when you're first working with salespeople in a given industry, it's best to adopt the standard approach; anything else will mark you as an amateur and you won't attract top-notch representation.

The OP also asked

would you want to be paying for that introduction if you have the client for 20 years?

For professionals, I'd do whatever my rep agreement said. But part of the job of a professional sales rep is to "service" an account: drop by in person to visit the client, take them to lunch, make sure they're happy and help fix things if they're not, solicit new business for you, and generally help you manage and improve your relationship with the client. So you're not just paying for an introduction, and if a rep serviced an account for me for twenty years, I'd be quite happy to pay their commission.

As for referrals from friends etc... As a software development consultant, I typically make a lot of money from any given client for anywhere from a few months to a couple of years. Then something happens (e.g. the project terminates, they reorg or get bought or change technologies, they bring development in-house) and that's the end of the relationship.

Over the last twenty years, the longest continuous client relationships I've had have been five and seven years. And there have been some periods where I've had no work at all for months at a stretch, and that completely sucks.

So if a friend brought me a client, and I was continuing to make money from that client twenty years later, I'd consider myself incredibly lucky! At the twenty year point, I'd be grinning as I wrote their commission check, and thinking, "What other nice thing can I do for this wonderful person who did me such a big favor?"