What's a typical sales commission for professional services?
What's a typical sales commission for professional services?
I ask because I am thinking of going into business with some friends (professional services and product company). We agree on how to split up the equity, but the business development expert (who also would be the CEO) is saying that there should be a 10% gross margin bonus for sales, while the rest (after cash reserves) gets divided by equity.
Does 10% seem high? Does this arrangement seem fair?
In truth he is very good at business dev, and he knows a bunch of people. But on the other hand, if we are going in as friends, shouldn't we just divide the profits (after cash reserves)? Plus, the way I look at it, I can't do my job (development/management) without his sales, but he can't do his job without the reputation that comes from the quality work of those I will manage.
1 Answer
Wait... the sales guy would be CEO? And he also wants a commission?
That's not how it works, no.
Commissions are usually paid to the mercenary sales people at the bottom of the sales organization... people who really only care about their next sale, assuming that's how you want it.
As you move up the org chart you want people who care about the overall success of the company, not just the next sale, so you give people equity instead. They will get rich if the company becomes more valuable.
As far as how MUCH to pay in commission... there is no "typical." You have to have a sales manager who is constantly and perpetually tweaking the formula. Commissions are sort of like little pieces of carrots in a rat's maze. You have to keep moving them around all the time to keep the rat running. If you want the rat to do what's right for the business automatically, you give them equity (ownership) or some kind of profit sharing, not commissions on individual sales. There are too many ways commission plans can go wrong if you don't tweak them constantly. If this sounds like too much of a pain for a small startup, you're right: it is. Don't use commissions, share the equity.
In terms of compensation in a professional services firm, you should read Managing the Professional Services Firm before you take another step. There are many ways to get it wrong and only one way to get it right :-)
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@joel, thanks this is exactly the sort of advice i want – Hvgotcodes 14 years ago
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@joel, I dont want to minimize the level of his contribution -- hes not just the 'sales guy'. he has a bunch of leads, and is good at closing deals, and is well connection. would those considerations change anything? – Hvgotcodes 14 years ago
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@Joel, thanks for the book recommendation. @hvgotcodes, you can read the synopsis here http://grahamwilson.org/maister.pdf. In my organization, we're equal partners, and there is no commission if you make a sale (and we're all responsible for sales). – Sean 14 years ago
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@sean thank you -- did you see my comment about the CEOs role and experiecne? I mispoke when I said 'sales guy'. He is a buzdev pro. – Hvgotcodes 14 years ago
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That's fine; I'm sure he will be a wonderful addition to the team. He still shouldn't get a commission. – Joel Spolsky 14 years ago
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@joel, yeah. Hey I just realized that you are the joelonsoftware. respect... – Hvgotcodes 14 years ago
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@hvgotcodes I did and I agree with Joel. No sense in him getting two pieces of pie when ya'll get one. – Sean 14 years ago
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@sean -- yeah, it's definitely unfortunate when business dealingS get in the way of friendship. I dont know how to proceed -- he is bringing a lot to the table; his dealings/networks are going to allow us to get this thing bootstrapped. On the other hand, its a bit vain to assume that any one part of this thing is all that is needed for success...I might just bow out and wish everyone luck – Hvgotcodes 14 years ago
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IMHO the only way to resolve the inevitable conflicts between founders is to set it up with absolute equality. If you have 4 founders and every one gets the same salary and 25% of the founders' equity, it feels fair and you never have conflicts. The minute you start tweaking that formula around the edges you create infinite opportunity for arguments and fights and unhappiness. – Joel Spolsky 14 years ago
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@joel -- yes, my thoughts exactly. which is why in my question i expressed the notion that if we are all friends, the s*** should all be equal. the actual bootstrapping concerns are transient and have nothing to do with what is going on in X amount of time. *sigh* i wish everyone viewed this gorp the same way.... – Hvgotcodes 14 years ago
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@hvgotcodes if you're friends you're going to likely not be friends at the end of the journey (whether you start it or not honestly). The only people harder to work with are family. My last business (SaaS) has pretty much failed and I lost $xxk (of real money and untold $$ in hours, lost productivity at the day job and pain to my family) and a friend of almost 20 years out of it -- that company was setup inequitably because he believed that sales >> software (I was doing it to help him out so I didn't force the issue). – Sean 14 years ago
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@sean, that's disconcerting.... – Hvgotcodes 14 years ago
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@hvgotcodes Stress and money tends to bring out the worst in people. Trust issues develop, resentment, etc. If things are inequitable at the start, as Joel said, it's a recipe for disaster. In my current endeavor (3 fndrs), I'm finding out that the stuff that didn't bother me when we were coworkers and friends, really frustrates me when I'm relying on someone to do something. I'm sure that some of my personality defects are rubbing my partners the wrong way too. Communication and trust are key and hard to do/gain honestly (esp. in your case where you know that he values himself more than you). – Sean 14 years ago
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@sean i understand completely. This is exactly what I am learning. I don't value him less; I value of us equally. – Hvgotcodes 14 years ago
