Commission or Compensation for a Regional Outside Salesman for a Product-Based Business?


1

My Company & Personal Background

I have never hired/managed a sales person, but I would like to hire my first. From when I founded the company 3 years ago up until now, I've only received sales via SEM/SEO/WOM.

We manufacture and sell firearms related products.

For our products, the Bureau of Labor Statistics shows salaries for Sales Representatives, Wholesale and Manufacturing, Except Technical and Scientific Products (NAICS SOC: 41-4012) to be from 55k to 62k annually.

My company and I are located in Arizona.

Solicitation

I was recently solicited with a proposal by a customer from South Carolina, who is currently a salesman and has been his entire life. He would like to act as a sales rep for my company and represent the "South East Region" of the US, which encompasses 9 states. He plans to physically travel around selling to individuals, resellers and distributors.

His Proposal

For all sales that I generate through personal contact a 25% commission on the gross profit will be earned and 10% on all orders shipped into my region regardless of how they were attained, by Internet, phone, etc..., to include repeat sales.

My Questions

  1. Are his rates reasonable for a traveling salesman? If not, what would be a reasonable starting point?
  2. Is it reasonable for him to receive compensation on sales in his "region" that are generated from SEO/SEM/WOM without his efforts?
  3. Is this just a management nightmare that I should avoid?
  4. Are there benefits to starting with an inside sales person first?
  5. What are the foreseeable problems that I may encounter (i.e. financial, logistics, legal, etc.)? How can I protect my company?

Sales Salary Compensation Commission

asked Feb 13 '12 at 08:09
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Clint
695 points
Top digital marketing agency for SEO, content marketing, and PR: Demand Roll
  • The 10% on all orders shipped into the region has me a little worried. What if you get another sales person in the same area? Does his region get split, or is he going to be claiming a percent on what other salespeople in that area do too? – rbwhitaker 8 years ago
  • @rbwhitaker - Me too. That is one of the reasons why I fear this could turn into a management nightmare. Perhaps a better solution may be [no geographic restrictions](http://answers.onstartups.com/a/32261/1100) and use fixed pricing or limits? – Clint 8 years ago

1 Answer


1

It depends on your market, sales cycle times, volume and value per sale etc. Basically there is no one size fits all answer here but from what you have said:

First up

  • I would put in some performance metrics that can be reviewed monthly / quarterly.
  • Don't give an open ended cheque book which ties up an entire market indefinately.
  • Define what you both mean by "gross profit" because with the cost of sale, production, fullfilment etc need to be taken into consideration. If you miss this then the sales person may be taking all of your real (net) profit.
  • If the sales person is doing a lot of general advertising then maybe the 10% is sort of justified ... if not then its a hard call.
Potential conditions/qualifications I would make :

Sales Region

  • I would limit the areas to start with and allow them to grow their region over time by proving themselves.
  • If your acheiveing between $x and $y per quarter, per region in sales then you get to keep your area, otherwise we reserve the right to give parts of it to others.
  • Above $a you get to expand your reach but you must maintain sales from your existing regions as above.

What about ongoing relationships?

If this salesperson is motivated by the sale only then your customer service and followup is likely to suffer, if he wants an ongoing 10% then he has to give evidence of followup and resales to existing customers (use something like salesforce for them to report into).

Managing the incidental sales:

  • Maybe give a % per sale or per sale item (wholesale and retail prices) his commission is the difference between the two and you work your costs out on the wholesale price. This is typically far safer long term plan for both of you.
  • For the 10% I would consider providing a unique sales number/email address/contact point any requests going through this point would get the 10% because they are his, general direct doesn't qualify because its not through their effort that you got the sale.
answered Feb 13 '12 at 12:01
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Robin Vessey
8,394 points
  • +1 on the % per sale or an amount between the resale/wholesale prices. We have quick access and accurate access to our gross margins/profit, but I probably wouldn't want that to leak via a sales person. My original thinking was that the sales person would make/lose profit proportionally with the company, but now I see how it is flawed in many ways. – Clint 8 years ago
  • You mention limiting sales areas initially. Contrarily, what if we had no geographic restrictions? What are the benefits and disadvantages? This could potentially create competition among the sales people and we could set fixed pricing to keep them from undercutting each other. Any thoughts? – Clint 8 years ago
  • You want to look at the law of I intended consequences, freakonomics radio. It would be good if you keep their goals inline with yours but if you get it wrong it can cause a lot of heart ache. – Robin Vessey 8 years ago
  • That's said fixed pricing, if you build in discounts for volume and repeat sales then you have a level playing field and setup the incentives along the lines I assume you want, higher volume sales long term. – Robin Vessey 8 years ago
  • I care only about increased net profit. Higher sales volume does not necessarily indicate that. – Clint 8 years ago
  • Well I think you need to create a few models in excel to see what the options will mean – Robin Vessey 8 years ago

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