Rewarding Employees for Job Leads
When an employee brings in a job lead, what's a reasonable finder's fee? March 14, 2005
Question
I'm a small custom shop, currently with three employees. My number 1 guy is an exceedingly talented young fella - hardworking, honest, with a love for the craft deep in his soul. We are currently bidding on a very cool job in a historic part of town for some folks with whom he is acquainted – we (as in The Company) will probably sell the job, but he is definitely the contact. Wouldn’t even be bidding if it weren’t for him. A few days ago, he said that he’d be willing to split it with me 50/50. Gotta admire his chutzpah. He took my explanation of how I view the business in stride. Like I said, he’s a keeper. I don’t look forward to the day he decides to strike out on his own.
The thing is, I sincerely do want to do something for him. I pay him at or above the high end of the scale for this part of the country, and look forward to raising his pay (as well as the other guys) as the business expands. But I believe that some kind of bonus or finder’s fee is in order. Curious about how others out there handle such things, and also what kind of scale you might use (percent of the net, etc.) to calculate it.
Forum Responses
(Business Forum)
From contributor I:
I'd say give him a piece of the profit, for a couple of reasons. It becomes a win/win situation, it gives him a game to play, and if it works out, it might be a situation you want on a more permanent basis, i.e. a way to retain a high quality person who might allow you to shed some hats.
I have let a few of these guys get away over the years and somewhat regret it. One has his own shop now with average sales of around 2 mil, and another works in the industry as a salesman with average sales of 3 mil. In hindsight, if I had given them a game to play, it may have been to my advantage.
From contributor F:
We pay all employees who bring us a job a finder's fee. It varies, but is in the 3-5% range, depending on type of work and how much they sell the work. It is in the handbook with all the other rules and regulations. You could always pay more if you can add it on to the price.
From contributor B:
Tying a finder's fee to profit is kind of nebulous. I agree with the 3% to 5%. A 50/50 split would not be in order. After all, it is your shop and he is the employee. A lot of employees don't realize that they have work because you sold the job. Doesn't matter who told you about the job - if you don't sell it, then they don't have a job. I tried this sort of thing once. He would bring me a name and expect me to design, price and sell, then give a finder's fee. For that I can drive down the street and list all the construction projects… If you sell any, then send me my cut. From your comments, I think something is in order. Encourage him to find other jobs outside of your normal paths. How would this fee effect your other two employees?
From contributor G:
The company I work for usually gives around 10%, from what I've been told by the ones who seem to refer the most jobs.
From contributor W:
5% is a respectable finders fee for the referral, not 50%. Don't tie the fee to the profit, either. Give him 5% of the sales price. This will motivate him to bring in more business and 5% should not kill you. Don't pay the fee until the job is complete and paid for. It's worked for me in the past and my guys like it. Whenever they bug me for a raise, I tell them to go sell a job. You would be surprised how much my business picks up around the holidays.
From contributor T:
Wow! I'm going to pay a salesman ten percent to go drum up work, quote it and bring it home and five percent to an employee for bringing me a prospect? That seems way out of whack to me. I pay more like two percent of gross sale.
But I pay my guys production bonuses and they go like hell and clamor for more work, and most of 'em would bring me leads for no other reason than that they care about the company and see that it's in their own best interests to do so.
From contributor J:
Around here, salesmen get around 7-12% of the sale. If you give him 50% (that's way too much) he will always want this and you will probably be hurting in the long run, since other employees will also want this. 3-5% just for finding a job, I think, is a good deal. 50%? Before you know it, he'll want to be an equal partner.
From contributor L:
From my experience, a salesman would balk at a fee of only 5%. I agree that 50% is outrageous unless you are looking for a partner, but it is very easy to take the job to another shop that would gladly give 10% and maybe more. So you are in kind of a bad spot.
The part that bothers me is the employee's request for 50% split. I get the impression that there could be more to it than is being told. If I was in your position, I would hold off and wait for the other shoe to hit the floor before I would make any commitments. There could be serious consequences down the road if you make a mistake now.
From contributor E:
My thought is there isn't another shoe to drop. This guy is just an employee and he doesn't have a clue what's involved. Just the fact that he said 50% shows this.
When I sat down with my employees last year and shared some of our expenses with them, like our gas bill at $2500/mo, electric $3200/mo, the 100% health insurance I pay for them ($120 to $695/month), they couldn't believe it. The only thing they have to compare with is their personal expenses at home - $90 gas bill and $50 electric bill.
We pay our salesman 3 1/2% of the gross sale. He gets paid when we get paid. He hasn't put his nuts on the line to pay the mortgage, create jobs, buy equipment, etc.
From contributor A:
5% for a reference, huh?! Sounds like easy money. I would quantify how much time he spent introducing you to the prospect (his role in the project), and juxtapose that number to a 5% fee, and see if he acts a little embarrassed.
50% sounds like an education is in order. Walk to the white-board, list all your expenses before the actual project costs (rent, gas, vehicles, insurance, taxes, electric, phones, use of machinery, etc.) and then explain to him that when he is able to bankroll his share of these expenses, you can talk about splitting the job 50/50.
I would then explain to him what experienced salespeople do to earn their 10% (prospect, sit the sale, follow up, make the sale, process the sale, etc.), and then ask him if he still thinks that 50% is a reasonable number, since all he did (I assume) is introduce the prospect to you. If he hasn't put two and two together yet, I agree - there may be more to this than you think.
From contributor P:
You say you want to keep him? Then pay him. Whatever it is, 3, 5, 10, or 50%, just make sure he understands your expenses and why he is getting what he is getting. A disgruntled employee will only leave that much faster and be your competition. I just went down that road. Keep him happy if he is good.
From contributor G:
This guy asking for 50% has to be talking net profit. What does he think you make from a job? What is your net profit? 10% - 12%? Split that with him. But he needs to know the difference between net profit and gross profit. I guess you need to decide how much of a business education you want to give him and how dangerous you want to make him. If he is thinking 50% of the sale, you have a lot of educating to do.
From the original questioner:
Many thanks for your input. 30 years ago, the Air Force afforded me 3 years under a Meister in a shop in Germany. Long story. Anyway, I had a military career to attend to, so I had to use the lessons from “Kurt the Red Devil” (anyone from Ramstein out there?) on the side, until I retired a couple of years ago. So, having returned to my first vocational love at 45, I find myself an able practitioner of the craft, a well-trained leader of men - and a virgin business owner. Geez, there is a ton to learn in that department. I am grateful for a place to bring my questions.
Like I said, this young man is a keeper. No shoes to drop. He's just got stars in his eyes, is all, and who could blame him? Like I said, we’re a small shop, and growing. His moxie is part of his value to our future, and I want to make sure I keep him motivated. Sure, he’ll start his own shop in time, but I’d like to delay that as long as possible – at least until he can train a couple of guys under him to take his place. But I know this – he’s gone in a minute if I don’t treat him right. My issue as the owner is figuring out what “right” is within the context of wise stewardship of the business.
By the way, we got the job, and I’m going to give x% of the gross, smaller maybe than some suggested, but with room to grow. I’m going to make that part of company policy, for everyone in the shop. I like the idea of tying some things to production, too, but that's a hurdle for another day.
Attached is a pic (bad pic, doesn't do justice) of what this troop is capable of. Thanks again, all. This has been most helpful.
From contributor Y:
x% from gross is a big mistake. Better would be x% from profit.
From contributor R:
In the States,10% gross is common. Did this guy bring in the gross job or just the doors? I can't count the number of times I have given a 10% finders fee, sometimes even to a competitor that kicks a job my way when they are booked up. 10% off the top says "thanks a lot" and is widely accepted as the standard. I have learned that I have to share the prosperity, and it just keeps rolling in.
From contributor T:
There's a lot of difference between a salesman getting 10% to find, bid and sell a job and an employee bringing you the name of somebody you can bid to and who is probably taking other bids as well. By this logic, you should pay 10% to your last customer when one of their neighbors calls you for a job.
From contributor R:
Customers that send a job are a completely different story. They are helping out their neighbor by giving the name of a professional that did a great job for them. But when a construction professional sends something my way, I send a little green their way. They could give that customer 10 other cabinet shops.
Let's say I know two carpet men. One says "Thanks for the Jackson lady" when I see him at Wal-Mart. The other pulls two one hundred dollars bills from his wallet and says "I've been saving this for you." If someone put me on a hot lead, and I know that without a doubt I would not be doing this job without the referral, I add some in on the bid, then actually take some out of my pocket. It's like tithing at church. It's easy on a 300 dollar week, but a lot harder on a $5000.00 week.. Now why is that?
From contributor K:
We usually give 10% to people who work for/with us, friend and family. It makes people feel appreciated and encourages them to send more work your way. Think of it this way... without that referral you wouldn't have had any of that profit.
From contributor A:
If you are working on a 20% net profit margin (substitute your actual net profit margin) and assuming you achieve that margin and none of it is eaten up with ancillary expenses, you are forfeiting 50% of your net profit margin by giving 10% of the gross... That's really gross, if you ask me. All for just giving a lead?
Again, seasoned salespeople are usually compensated that amount and they actually work for it. Such a figure is high, in my opinion, and when you juxtapose the amount of work that goes into what you produce vs. simply providing a lead, do you really feel anyone simply providing a lead, no additional work involved, should receive 50% of your net profits? Sounds awfully lopsided...
From contributor K:
Wow… you are only netting 20%? Maybe it's because we are talking about custom furniture, but no one I have come across in this end of the field has such a small profit margin. And that's with people telling us that our markup is lower than most.
The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).Comment from contributor S:
If this guy is a keeper, you need to keep him. But you cannot afford to start a precedent that you can't live with on future deals. Set this guy down with your accountant. Give him a little bit of a business education. He needs to understand the value of your risk, for starters. He needs to learn what sales commissions are in other business, such as real estate and auto. If he is a good, smart guy, he will understand. When you arrive at a percentage, you might want to cast that in stone for the future, as soon as you find out if you can really live with it. If this is a unique project, you might consider a cash bump for the uniqueness, as that will get you advertising that most other projects will not.
