The Salesman's Cut

      gets paid for the sale? Business owners debate the ethics of a tricky sales situation. November 10, 2006

What is the obligation between a cabinet shop and an independent salesman who receives commission? On a residential job, I pay a 10% commission, which covers the cost of the sale, design drawings, site measure, and client handholding through the process. This is a fair relationship... I would imagine he makes about $100 an hour typically with this arrangement.

What about the ancillary work that is generated as a result of this salesman? Let's suppose he got us a job, and another subcontractor on that job asked us to quote a project for them. I would not have met this subcontractor if my salesman had not put me on this job, but he did not solicit this work. Furthermore, he will have no involvement in this project. What is my obligation, if any, to the salesman? He is a valuable asset to this company, but business is business. 10% of the project generated indirectly would be about $200,000. Seems a bit excessive.

Forum Responses
(Business and Management Forum)
From contributor W:
That's a good question. Does he expect a commission of some kind from this? If he does, and you don't pay him something, what's to keep him from the next time a sub wants a job done, not passing it on to you, but maybe somebody else? If he's valuable to your company for sales, then it would be good on your part to appreciate that in some fashion. After all, he works on commission.

From contributor H:
And what now? If you meet another contractor via the last one, do you owe him commission too? No! Your obligation to your salesman ends at the first sale. Was he present when this other contractor met you? Did he set up the meeting? Any extra work that develops out of the initial job for the initial client you should pay the salesman for, but keep him earning it by having him iron out the details. But if you go to the job and meet Joe Blow and get another job, then you don't owe your salesman for that job. 10% of a 2m job, he gets 200k, and he wasn't even there? Come on!

From contributor P:
Wow. 10% sounds like a pretty nice commission. Especially nice on a $2M job. In a past life (computer services), my company had a fairly elaborate commission scheme. First, I recall commissions were graduated. For example, 10% on jobs up to $200k, 8% for jobs from $201K-$500K, etc. There were also adjustments to the commission depending on the salesperson's involvement (referrals, extension of existing work, etc.) It was always in writing, and it was a tough balance between fairness and keeping the salespeople motivated. There were always situations that weren't covered in the plan, and we would attempt to negotiate them in good faith. Incidentally, the difficulty in landing a sale was not a factor. When a big sale falls out of the sky, it's called a "bluebird." Doesn't sound like that's your case. More like a referral. Maybe you should set up a separate fee structure for referrals.

From contributor T:
If I were the boss, I would turn this referral over to my salesman. After all, selling is what you hired him to do, so why go over his head? Let him do his job and if he is that valuable to the company, then you will both benefit from this turn of good fortune. Let's face it, the contractor approached you to also cut out the salesman, hoping for a better price. Don't kid yourself. You might want to take this opportunity to work out the ground rules for when this happens again. You might even establish some ethics.

From contributor J:
Why not just reduce the commission, as you are removed farther from the initial contact? I.e. 10% for the contact he initiated, and pay him 5% for that sub that approached you directly, etc. That seems fair to me.

From contributor S:
If you buy a new car, the salesman makes his commission. If your friend likes your car and goes in and buys one, your salesman doesn't get a commission unless he was directly involved in the sale. Suppose the next door neighbor likes the residential job you did, and 3 months down the road calls you and asks for a quote. You quote the job and get the work without the salesman being involved... do you send him a check, too?

Your salesman doesn't even know about this job unless you tell him, so obviously he wasn't involved. You did a good job on the first project, that's why the sub was interested in your company, not because of anything the salesman did. Your salesman will want a commission if he finds out about it (he'll refer to it as "found" money). In my opinion, this is a "house" account and you don't owe any commission.

By the way, a $200K commission for this is way too high. That equals $100 an hour for a year's work, 40 hours a week. I doubt either of you have that much time in it for the sale. If a job like this goes sour and you lose money (by non payment), does the salesman share in the loss, or still get full commission?

You mention "independent" salesperson. I assume that means he is strictly commission, and a non employee. Really a broker of sorts. In that case, he may refer work to other shops also without your knowing. In that case, you definitely owe him nothing, in my opinion.

From contributor G:
I don't think he is making $100 per hour on what you are paying him now. I sold, measured, designed, drafted and collected the money for a shop at 15% and felt it was fair, but I wasn't getting rich. I wasn't making more than $30 gross as a subcontractor per hour by the time I was done.

From contributor O:
Sales is a tricky business. Everyone needs a salesman until they are busy, then they get the shaft. Perhaps a sliding percentage on referrals. Even Jimmy Hendricks still gets royalties and he's not even alive.

From contributor P:
Jimmy Hendricks is still alive. He lives around the corner. Jimi Hendrix, however, is dead. (Or is he? He could've faked it to further his career.)

From the original questioner:
Perhaps this has more to do with the difference in the type of work we've generated lately. Residential work takes a lot of time. Time to cultivate sales leads, time to design the projects, time to run down samples, time to manage client's apprehensions, etc. 10% is justified.

Commercial work appears to be different. We haven't traditionally done much commercial work, but high rise condos are becoming popular and could become a big part of our business. I would be interested in the pay structure that other companies use when dealing with large scale contracts, on jobs that require little or no involvement from the salesman after the introductions are made. In other words, there's no design, no client hand holding, no further management of any kind. What is fair compensation in this situation?

From contributor R:
Contributor T is on the right track. Call him independent if you like, but your salesman is your company representative whether you pay him salary or commissions. All your customers need to know to deal with him unless he messes up or demonstrates his dishonesty (in which case you fire him). He's investing his time and efforts and you want both to be to your benefit. So make all those sales opportunities to his benefit, too, regardless of how the sale comes in.

Allow me to illustrate: As a manufacturer's rep, I deal with end-users all the time, and they always try to buy directly from the factory. Everyone has a reason for it (often the hope of a better deal), and manufacturers are tempted to make the deal, especially if they get to pocket more profit. But it's bad business.

We have worked hard to build a base of vendors who stock and sell our manufacturers' products to their own customers. They could sell anybody's stuff, but they push ours and give excellent service on it because we support their businesses and don't betray them. So when a "bluebird" contacts one of the factories about a multi-million dollar sale, he's given a list of our vendors he can buy through. We don't play favorites and we may never know how the customer truly came to find out about our products. We don't care. We keep the roles straight. The vendor does the work and gets the sale, the factory keeps producing and we get our commission on the total volume of sales we support.

In this case, your business is the factory, you are the repping firm, and your salesforce (of one) is your vendor. What you pay him should compensate him for the work he will normally be doing. Let the company's "bluebirds" fall into his lap when they do, but also make him do the grunt jobs where he's losing money. It's a complete package. If he's at all smart, he'll see he comes out ahead and knows you won't stiff him on jobs that are cake. And the end-user is more likely to get consistently high quality service from your salesman regardless of the size of the job or whether the salesman can smell something big in the works.

From contributor V:
Since he is not doing anything on this project, he would not have earned any percentage. However, there is an alternative and that is what many call a "bird dog" fee. That is a lump sum fee for a referral that brings business. Just as a question - what if the salesman spent time cultivating a contact who ultimately contacted the company direct? He gets what for his time and effort?

From contributor K:
The only reason to have an independent rep is to find customers that wouldn't come to you anyway. In this case, you have a territory management problem because two salesmen (you and the other guy) are fighting over a prospective customer. Usually commissions go to the salesman who does the work in bringing the deal to completion. If that's you, you get the commission. I would avoid paying finder's fee on this one because it was the "good will" of your company that brought you the lead, not the salesman. You have lots of ways of paying back the salesman for the good work he is doing. One simple way is to give him some prospective customers to pursue... ones that you would normally pursue, turn over to him. This will get him a lot of commissions and free up your time to pursue the million dollar deals.

From contributor E:
"Commercial work appears to be different. We haven't traditionally done much commercial work - I would be interested in the pay structure that other companies use when dealing with large scale contracts, on jobs that require little or no involvement from the salesman after the introductions are made. In other words, there's no design, no client hand holding, no further management of any kind. What is fair compensation in this situation?"

In my world, every unit is different. Even if it's a building of 1000 identical condos, every one of them will have quirks and weirdness that someone has to account for. Also, it seems to be standard practice that if a buyer comes in before their unit is complete, they have the option to make changes or upgrades. This can be paperwork quicksand. Everyone wants to know what it would cost to do it in cherry.

While it is true that much of the management and design/engineering can be duplicated, the sales and management roles continue throughout the project. "On a residential job, I pay a 10% commission, which covers the cost of the sale, design drawings, site measure, and client handholding through the process."

This job description sounds like as much project manager as sales. If you don't have another P.M. to hand the job off to, then you will need this salesperson all the way through the job.

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