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.
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 :-)