About to hire a salesman...could use some advice.

[Kentuckydiesel]

We are a family owned/operated manufacturing company with a few different product lines. Unfortunately, when the economy tanked, business slowed quite a bit, and all of the sales staff either quit or were let go, leaving one person running the company and handling sales. I came back to the company a few years ago because I wanted to turn things around. I finally have everything shaped up on the production end, so now it's time to hire a dedicated salesman to build our dealer network back up to proper levels.

As I'm sure most of you know, hiring a *quality* salesman can be a daunting task. A salesman, by nature, should be able to sell themselves. Unfortunately, that's the only thing that many of them are willing to sell. Luckily, one of my most trusted friends (for nearly 20 years now) has been talking about wanting to work for our company for quite a while, and he finally came to me a couple months ago, saying he was ready to make the move.

Before you scold me for hiring a friend, let me tell you, this guy will be a great asset. He can sell anything, but does so with honesty and integrity rather than just blowing smoke up peoples orifices...and everyone he meets trusts him right off the bat. Beyond that, he understands we aren't running much profit at the moment, so in order to be part of building the company, he has offered to take a fairly large cut in pay just to be able to get in on the "ground floor".


We have a fairly high overhead, so we need to do about $850,000 in sales to break even (which we are currently doing). After we cover overhead, we average about 45% profit on our sales.

Looking back over the best of the last 15 years, when we had two salespeople, they were able to sell up to about $1,500,000 each (adjusted for inflation) per year. On the lesser years, they were able to sell about $750,000 each.


As a company, we haven't paid commission to sales people since the 1970's, but that has to change. There has to be something driving a person to sell.

I'm trying to come up with some idea about what sort of salary/commission rates I need to start with. Should that change as he gains more experience? (such as reducing salary, increasing commission). He is telling me he needs to pull in about 700/week before taxes, in order to make ends meet. This is a sizable pay cut from his current job, but there is an expectation that he will make more once business picks up. What about travel, food, and vehicle expenses? Commission from one order vs repeat orders?

Any advise would be appreciated.

Thanks,
Phillip

 

[dstryr]

I pay my guy about 700 a week (after taxes) base and then 5% on his account. If he is going on a long trip I'll kick him some gas money. I've had him working for us for about 6 months now. Before this we've never had a salesmen hunting us down work.

 

[Kentuckydiesel]

I pay my guy about 700 a week (after taxes) base and then 5% on his account. If he is going on a long trip I'll kick him some gas money. I've had him working for us for about 6 months now. Before this we've never had a salesmen hunting us down work.

If you don't mind my asking, what kind of sales expectations does that come with? I see percentages thrown around quite a bit, but it seems they would be very different between high dollar vs low dollar products.

Thanks,
Phillip

 

[behindpropellers]

I pay my guy about 700 a week (after taxes) base and then 5% on his account. If he is going on a long trip I'll kick him some gas money. I've had him working for us for about 6 months now. Before this we've never had a salesmen hunting us down work.

Do you raise your price 5% on what work he brings in?

 

[sealark37]

Since he is your friend, ask him what kind of salary/commission structure he sees as desirable. If he says he needs 700 a week, start off at 800 a week. You need to pay all of his travel and sales expenses. You should provide a vehicle or a liberal mileage allowance. His commission should be a percentage of all sales in his territory, including present accounts. I know, you built those accounts, but he should be developing them. You should come to a clear understanding (written) of what will happen when his sales grow to the point that you need another salesman to cover present accounts and growth accounts. There is a need for some system of feed-back from him to you concerning his daily activities and methods. He will need a contact in your plant that can quickly answer his questions and be available to talk to his customers about their concerns on a real time basis. This person may be the next salesman you put in the field. Don't get greedy. It is to your advantage for him to get wealthy selling your product, as long as you offer an equitable commission structure. He needs feed-back from you on how much of your money he needs to spend on entertaining customers and "buying" their business. Only you know. He should have some idea of your idea of sales routines and techniques, even if he has a firm grasp of what works. Two last things: A good salesman does not always make a good sales manager, and, oh yes, Don't get greedy. Regards, Clark

 

[Ries]

Some time ago, when I was doing a different product line, I had an outside sales rep, I paid him 10% of his sales, but no salary.
I think 5% of sales, with a base salary, sounds pretty fair.

And, no, you dont raise your prices, you eat that amount as a cost of doing business...

 

[aspp]

One place I worked at used a variable profit share for the salesmen. Top salesman got the biggest share, low man got almost nothing. It was also used for the mechanics based off rework numbers. We loved it, half the salesman did too. The other half were lead weights and needed to move on anyway.
Not sure that any of this is helpful, just what I have seen in the past.

 

[dstryr]

Do you raise your price 5% on what work he brings in?

Like mentioned above...parts cost what they cost. You just have to be more diligent about taking on the work you are profitable at. I hardly take on any simple 2.5 axis work anymore. Doesn't work for my business model.

 

[Gary E]

We are a family owned/operated manufacturing company with a few different product lines. Unfortunately, when the economy tanked, business slowed quite a bit, and all of the sales staff either quit or were let go, leaving one person running the company and handling sales. I came back to the company a few years ago because I wanted to turn things around. I finally have everything shaped up on the production end, so now it's time to hire a dedicated salesman to build our dealer network back up to proper levels.

Sounds to me as you are hiring a SALES MANAGER... no? or is he both a manager and a salesmam ?? how would that work??

 

[Mcgyver]

Do you raise your price 5% on what work he brings in?

if you could raise your prices 5% just like that......you should have already done so

 

[Mcgyver]

Sounds to me as you are hiring a SALES MANAGER... no? or is he both a manager and a salesmam ?? how would that work??

agreed. building and managing a channel is a very different job than a salesman. Some skills will overlap, but you need more of a commercial guy to build a distribution/dealer channel

 

[gbent]

The owner at a previous job belonged to MANA, a professional organization of sales agents. He met and hired some good salesmen through that organization.

If you give him a set territory, he gets the all the existing accounts in the territory, but it could be at a low commission rate. You can bring the commission rate up as the years go by, or full commission only on sales over existing levels. Salary levels can be guaranteed for an initial period to give him time to build up his contacts with reduced commission levels, or commission is paid only on sales above a threshold. That threshold declines over time as they are transitioned to full commission.

You have got to dig deep with your friend to find out why he is willing to take a big cut in pay to come work for you. Something just doesn't smell right. You have got to find out his expectations, and then you have to either make sure you can meet them, or you have to change his expectations. If they are unmet, the deal between the two of you will come apart. Even if you don't know his expectations.

 

[awake]

I'm not sure of the math, but I'm thinking that 700/week clear means at least 1000/week before taxes. If he is used to having insurance and retirement taken out pre-tax, maybe more? Again, not sure of the actual figures, but the point is, be sure you are talking about the same thing when you talk about $X per week.

 

[awake]

No, I just looked back at the original post and realized I missed the words "before taxes." Disregard that part. Still want to be sure there are no hidden expectations about benefits.

 

[Kentuckydiesel]

Sounds to me as you are hiring a SALES MANAGER... no? or is he both a manager and a salesmam ?? how would that work??

The people he will be selling to are independent businesses who essentially resell and install our products, so in my mind, he's a salesman rather than a sales manager.


He and I discussed each of our expectations at great length yesterday. There's definitely no confusion as to what each of us is looking to get from the other. After nearly 20 years of friendship, we can be brutally honest with each other. I just want to make sure I'm treating him fairly and I set up a system that not only works for this first guy, but will work well for each additional hire.

Regarding existing accounts, I was wondering how most people work that. Just to throw out some numbers...if a salesman makes 3% on a new customer's first order, 5% on repeat orders...what does he get for existing customers? If we already have $1,000,000/year coming in, does he automatically get commission on that, or is dropping in on existing customers just part of the job, and covered by the base salary? If we hire three salesmen, are they all getting paid commission on existing business?

Also, let's say a salesman brings in enough new customers to equal an additional $1,500,000 and he gets 5%, now he's pulling in $75,000/year on top of a $35,000+/year base salary. He decides he's comfortable pulling in $110,000/year and he doesn't try to get any additional customers. Does he default to inside sales and managing the customers he brought in? Do we taper off the commissions over a time period to keep him selling (at the cost of customer service)? Do we give him goals he must meet and potentially fire a guy who, in a way, is still making us money even though he has hit a plateau? BTW, I'm not trying to come off as a greedy a-hole, just trying to cover all the bases and get everything laid out.

Basically, this guy is going to be outside sales, finding new customers. Once the new customer is ready to order, they will call us here at the office and go over the details. Each order usually requires a fair bit of time in sending CAD drawings and quotes to the customers before we get approval. Things that can't easily be done on the road.

Now that I mention it...since we have to have inside sales people to handle the customers that an outside sales guy sends in, how are commissions and such usually distributed among outside and inside sales people? (Inside people have traditionally been straight salary here)


Thanks,
Phillip

 

[sealark37]

Inside sales compensation works very well with a salary, and a small percentage over-ride. The tendency is for new accounts sold by the salesman to slowly be seen as "house accounts". It is an old, old story where a lazy salesman is fired or has his territory/commission reduced, only to take his customers with him to a competitor. The old employer is scandalized by this disloyalty, failing to see their actions as foolish. If a salesman is worth his salt, he is driven to increase his sales/income in any way he can. If he feels that his employer is treating him fairly, and communicating their thoughts to him regularly, he will be extremely loyal. If he senses that moves are afoot "in the office" to reduce his share of the pie, he will be seeking a way out. Regards, Clark

 

[Kentuckydiesel]

Inside sales compensation works very well with a salary, and a small percentage over-ride. The tendency is for new accounts sold by the salesman to slowly be seen as "house accounts". It is an old, old story where a lazy salesman is fired or has his territory/commission reduced, only to take his customers with him to a competitor. The old employer is scandalized by this disloyalty, failing to see their actions as foolish. If a salesman is worth his salt, he is driven to increase his sales/income in any way he can. If he feels that his employer is treating him fairly, and communicating their thoughts to him regularly, he will be extremely loyal. If he senses that moves are afoot "in the office" to reduce his share of the pie, he will be seeking a way out. Regards, Clark

These are very good points.

Thanks,
Phillip

 

[Mcgyver]

Regarding existing accounts, I was wondering how most people work that. Just to throw out some numbers...if a salesman makes 3% on a new customer's first order, 5% on repeat orders...what does he get for existing customers? If we already have $1,000,000/year coming in, does he automatically get commission on that, or is dropping in on existing customers just part of the job, and covered by the base salary? If we hire three salesmen, are they all getting paid commission on existing business?

Also, let's say a salesman brings in enough new customers to equal an additional $1,500,000 and he gets 5%, now he's pulling in $75,000/year on top of a $35,000+/year base salary. He decides he's comfortable pulling in $110,000/year and he doesn't try to get any additional customers. Does he default to inside sales and managing the customers he brought in? Do we taper off the commissions over a time period to keep him selling (at the cost of customer service)? Do we give him goals he must meet and potentially fire a guy who, in a way, is still making us money even though he has hit a plateau? BTW, I'm not trying to come off as a greedy a-hole, just trying to cover all the bases and get everything laid out.

the age old questions of sales compensation. imo most management comes down to you get what you measure and reward. We're always trying to reward to get the results we want but so many things are in conflict whatever we do, unintended consequences bite us in the ass. There is no silver bullet. just keep framing in the context of the results you get will be based on what you reward. Personally I dislike bases, but the 100% commission guys are out making $1MM year selling big stuff.....so you will have to pay a base. I also don't want existing customers ignored, and I don't want a focus on revenue rather than profit - big margin small sale is better than huge low margin sale sort thing. i 'm thinking a model where the base is a % of house accounts.....let it slip and the base goes down. Commission is a bigger percentage but on gross profit for orders in the first year ...thereafter becomes a house account. a millions ways to do it

I do think though that you completely off on the job description. Its your business, but what you described the job as is half channel manager, half sales manager. He's got to support, train, motivate, manage, service, set up programs and initiatives, etc with your sales channel. imo you need a salesy commercial guy more than a salesman.

if a salesman makes 3% on a new customer's first order, 5% on repeat orders...what does he get for existing customers?

No! (imo) new orders are a lot harder to get.....this formula rewards sitting back and visting with existing customers - a comfort zone. It'd reward new business more.

 

[motohorseman]

If he is as good as you seem to feel he is, pay him what you feel he is going to be worth, it's an investment.

$45-60K plus bonus should not be out of line IMO (low in many parts of the country), and pay mileage or lease him a car and pay the costs, it's a business expenses.

Also, pay some meals and entertainment, provide a company cell phone and maybe a mobile computer (laptop, tablet, etc).

You want him to succeed, give him the tools.

Bonus, once a set number is hit.

Example, you're at 45% GP$

His salary, $5K per month -

Consider 22.5% of the 45% as a "commissionable" amount - He would need to generate about $50,000.00 in sales to break even on him at that rate - or about 10% in sales

You could keep it simple by paying 10% on the sales over the base of $50K per month

If $60,000.00 is sold, $10,000.00 is the sale over the base and his bonus would be $1000.000

He takes home $6000.00 and you can calculate your earnings - And as his sales increase, him income increases, and everyone profits.

Strongly suggest that you have him sign a non-compete agreement

 

[gvidas]

re: long term incentives, if your goal is specifically bringing in a bunch of new accounts, KISS:

- Pay a base salary of $800/wk or whatever

- Pay commission on all purchases made by a new account in the first six months.

- After you've had the account for 6 months, smoothly transition the account to an inside sales rep, who continue to work for salary.

- Pay commission on singular "growth" sales to existing accounts (this should be really, really clearly written out, or maybe even ditched entirely: something like a growth sale is a 20%+ increase over a normal order, or a new order from an old customer, that can be directly traced to a specific sales rep.)

Run some numbers with what you expect from him, what you want from him, and the minimum you would accept from him, and see how this or any other formula plays out.

With the 6 month sunset provision, the percentage could be nudged up depending on how repeat customers work for you (if they're more likely to be slow-and-steady customers, where 6 months of commission isn't that much of a carrot, maybe the rate should be more like 10-20%.)

(n.b. I have never hired a sales rep, nor worked in sales, but this just seems to solve some of the problems raised.)