Hiring for Sales on 100% Commission? Make sure it fits your model and market

Recently I have noticed startups in our area maturing to a level where they are ready to reach out to the market. Several have asked me about hiring their first sales person, and because they are startups and money is usually tight, they hope to pursue a 100% commission model. This means they want to pay the salesperson when they get revenue from a closed deal. There are several reasons why this approach might not lead to the best results.

Product Fit

With the right big ticket item and a seasoned Account Executive, 100% commission can be an attractive value proposition for both of you. However, this works better for companies who are mature in their market approach, and they have support structures in place to augment the efforts of their representatives. This model was very popular in legacy enterprise systems where a deal meant a big upfront check.  With the advent of SaaS, more and more, that means a monthly check which changes the payout structure.  While that can mean a nice residual for the sales rep, it makes the “big payout” a lot less common. the buyer education cycle might take a little longer, drawing out the early sales cycles, and two, is an Account Executive model what you need.  If you have a lower ticket, higher transaction solution, inside sales might be the way to go. Which brings us to point number 2.

Inside vs. Outside

It might not be necessary to start out with a large team of account executives. An inside team paired with a closer (whether that’s the CEO right now, or outside rep familiar with your industry) can be highly effective at breaking a new market and preparing you to scale. But neither one should be solely on 100% commission. Point number 3 is the kicker here.

Labor Laws

In most states, every employee is entitled to at least a daily minimum wage. Commission by itself does not qualify, unless the rep makes enough to cover minimum wage in every pay period. A draw against commission may be set up, which is essentially a loan to the employee. However, in most circumstances if the individual leaves with a draw outstanding on the books, the company can only recover what was paid out over minimum wage. If your sales cycle is 90 days, six months, or even longer, that leaves a large timeframe to cover.

Competition

Right now, market conditions favor the Candidate, not the Company. The year 2007 is far behind us. Currently, there are over 100 opening for Inside Sales Reps being advertised in the San Diego Metro region. San Diego is not even considered to be a hotbed for Inside Sales, so other regions may have even more of a manpower issue. Research presented last year at an AA-ISP webinar (I am Chapter President for AA-ISP in San Diego, this year’s Chapter of the Year) showed turnover rates at over 20% annualized for Inside Sales positions. Only 13% of companies surveyed were able to train their reps to be effective in less than four months, so if a company’s performance matches those numbers it is likely perpetually training new reps and losing the reps it trained. Bottom line, every company is competing with dozens of other companies for a limited pool of candidates. A 100% commission job may not be the most attractive offer a Candidate sees.

Reputation

If you bring reps on board without intending to pay them a living wage and offer them little training, little support and no benefits, what sort of message are you sending them every day. Is this who you want to have making that all-important first impression on your future clients?

So, what is the right model for a startup hiring their first inside sales team?

As a recent AA-ISP San Diego Chapter meeting, panelists shared a range from 60/40 to 90/10 base to variable split is as typical for inside sales. Tricia Bertuzzi surveyed US companies and found an average base/variable split of 64%/36%, published in her  The Sales Development Playbook. Reducing the pressure for high volume, encourages a rep to do the research necessary to make a higher quality call. It also depends on what they are doing, whether it’s just setting an introductory meeting (higher base) or qualifying opportunities (higher variable).  Bottom line, think about all of these factors when setting up your first commission structure since this is what motivates your reps, and in turn, that’s what fuels your business success.