Con­grat­u­la­tions, you have done it!!! Your busi­ness is tak­ing off, and the demands on your time have tak­en you to the point where you no longer have the capac­i­ty to man­age all aspects of your busi­ness, specif­i­cal­ly adding top line rev­enue growth at a mean­ing­ful rate. To take your orga­ni­za­tion to the next lev­el, you know it is time to bring in addi­tion­al resources to focus on grow­ing your rev­enue and ulti­mate­ly your bot­tom line. This is a great prob­lem to have, but for many small busi­ness own­ers a very scary prob­lem, as you have no idea where to start or how to com­pen­sate these indi­vid­u­als or if it is even the right time for this hire. If you find your­self in a sim­i­lar sit­u­a­tion, here are some fac­tors to con­sid­er when hir­ing for a sales role.

Before decid­ing to bring on addi­tion­al resources to focus on sales you, as the small busi­ness own­er, need to under­stand the finan­cial impact this hire will have on your net income. Here are some ques­tions to think through as you deter­mine what the finan­cial impact will be:

  • What is a rea­son­able tar­get in addi­tion­al sales you can expect from this indi­vid­ual? As an own­er and expert in your busi­ness and your indus­try, you know what the sup­ply is, and you know your cus­tomer base, and you know what cus­tomers have yet to be reached. How much of this can your addi­tion­al resource tap into and grow your top line rev­enue?
  • What are your cur­rent gross mar­gins? This is impor­tant to deter­mine of this addi­tion­al rev­enue, how much in addi­tion­al gross prof­it will I gen­er­ate? This will help you decide if you can afford to make this hire.
  • Will my gross mar­gin be impact­ed by this addi­tion­al rev­enue growth? Will mar­gins improve as a result of the growth or will it have a neg­a­tive impact on my over­all gross mar­gins? Will I need to con­sid­er addi­tion­al resources in oth­er areas of the busi­ness to sup­port this rev­enue growth?

Once you have answered these ques­tions and ana­lyzed what impact this addi­tion­al hire will have on your gross prof­it, you should be able to deter­mine if it makes finan­cial sense to bring on this addi­tion­al resource. The goal at the end of the day is not to grow top line rev­enue but increase your bot­tom line and equi­ty. For exam­ple, if you deter­mine one addi­tion­al sales­per­son in your orga­ni­za­tion can gen­er­ate $75,000 of addi­tion­al gross prof­it on a year­ly basis, if the cost of that hire does not exceed $75,000 then you will be increas­ing your bot­tom line and equi­ty, if not you should con­sid­er if it even makes sense to make this hire.

Now once you have deter­mined it makes sense to hire on a sales­per­son in your orga­ni­za­tion, the next ques­tion to answer is how I am going to com­pen­sate them? This isn’t an easy answer and there is no one solu­tion for every busi­ness. You first should think through how much you are will­ing to com­pen­sate this indi­vid­ual in total. The answer to this ques­tion should large­ly be dri­ven by your first analy­sis where you deter­mined the impact to gross mar­gin this hire will have. Remem­ber, you don’t want to com­pen­sate this hire above what their gross mar­gin expec­ta­tion is. After fig­ur­ing this out, you next need to deter­mine what com­pen­sa­tion struc­ture should you imple­ment. This answer is large­ly depen­dent on your risk tol­er­ance, but here are three com­mon struc­tures that a busi­ness can use when com­pen­sat­ing their sale roles.

  • Fixed Salary with Vari­able Com­mis­sion – this is prob­a­bly the most com­mon struc­ture we see with our clients and is good for own­ers with a medi­um risk tol­er­ance. You just need to deter­mine what per­cent­age should be fixed and what per­cent­age is vari­able. You then will need to fig­ure out should you use a flat com­mis­sion per­cent­age for all sales (i.e. 10% of all sales) or does it make more sense to use a slid­ing scale per­cent­age (i.e. $0-$20,000 is 5%, $21,000 to $40,000 is 8%, etc.). Some busi­ness­es will even set a floor where no com­mis­sion is paid until a cer­tain tar­get is met. For exam­ple, until you reach $40,000 in sales, no com­mis­sion is paid, but after that either a flat per­cent­age is uti­lized, or a slid­ing scale is used. Again, these deci­sions will ulti­mate­ly be dri­ven by your risk tol­er­ance and what you think will be moti­vat­ing to your sales team to max­i­mize your net income.
  • All Vari­ance Com­pen­sa­tion – while not as com­mon today, there are still orga­ni­za­tions that imple­ment this strat­e­gy and is geared to own­ers who have a very low risk tol­er­ance. This struc­ture takes all the risk off the table as you will nev­er be in a posi­tion to com­pen­sate an employ­ee who hasn’t pro­duced any rev­enue for the orga­ni­za­tion. While in the­o­ry this sounds great, this prac­tice can lead indi­vid­u­als to mak­ing any sale they can find, many of which can ulti­mate­ly be neg­a­tive for the orga­ni­za­tion.
  • All Fixed Com­pen­sa­tion – again, not a com­mon prac­tice, but cer­tain man­age­ment the­o­ries talk about tak­ing out the com­pe­ti­tion with­in the orga­ni­za­tion and one way to do that is to elim­i­nate all com­mis­sions. This is espe­cial­ly true of orga­ni­za­tions with mul­ti­ple sales roles as in many instances due to com­pe­ti­tion, com­mis­sions can have a neg­a­tive impact on the busi­ness for a vari­ety of rea­sons. With his approach your total com­pen­sa­tion would be paid as a salary.

Tak­ing your orga­ni­za­tion to the next lev­el, can be a very excit­ing time, but one that comes with many chal­leng­ing and crit­i­cal deci­sions. Deter­min­ing if bring­ing on addi­tion­al sales resources and the com­pen­sa­tion plan for that role can be one of those chal­lenges. If you find your­self in this sit­u­a­tion, don’t wor­ry, this is a com­mon ques­tion we help many of our clients with and would be hap­py to work through the analy­sis with you.

As always, if you have any ques­tions or would like to learn more, feel free to reach out to any of us at Mack­ey Advi­sors (859) 331‑7755.