This is a slight departure from what I normally write since it is focused on business. If you’re looking for non-business material, check out the rest of my writing here.
Since I get asked about commission-only (also known as performance-only) sales quite a bit in my professional life, I decided to put this guide together to explain how and when it makes sense.
This is all written from the perspective of someone who has been in sales for a long time and is a distillation of what I’ve learned working in a variety of sales pipelines.
When It Makes Sense
Generally speaking, commission-only sales is best suited for companies that have enough paying customers to prove product-market fit, but don’t want to hire an internal sales force.
The path most successful companies take towards a full-blown sales department follows a trajectory that looks like this:
- Founders sell and close initial customers to generate seed revenue.
- Commission-only salespeople are brought in to further refine and scale the sales process.
- Once the sales process has been vetted thoroughly, managers are hired and salaried salespeople are brought on board (or the commission-only salespeople are converted to salary).
You’ll find this pattern in every high-quality, sales-driven business. Founders first, then commission-only, then a salaried salesforce.
It’s important to note as well that the compensation structure goes through a sort of narrowing.
The founders get the largest financial benefits since they’re equity holders, commission-only salespeople get above-average commissions to compensate for their lack of salary, and salaried employees get the smallest benefits from new sales since they are salaried employees.
When It Doesn’t Makes Sense
The big mistake a lot of founders make is skipping step 1, and jumping straight to hiring commission-only salespeople when they don’t have any revenue or a proven offer.
They think their process will unfold like this:
- Come up with an idea for a business and make no effort to validate it.
- Post a job somewhere for commission-only salespeople.
- Make tons of money without risking anything.
This is a surefire way to fail. Yet I get requests like this more often than I care to think about.
To be clear: only an incompetent salesperson would ever accept a commission-only role when there isn’t any proof their time in the trenches will be rewarded with commissions.
Sales is hard, sometimes grueling, work that involves dealing with harsh realities and rejection on a daily basis. For most salespeople, the big reason sales is worth tolerating is because it pays well (and the fact that winning a big deal is an incredible feeling).
Any quality salesperson worth their salt will be qualifying you right out of the gate to make sure you aren’t going to be someone who will put them through the pain of a sales process without proper compensation.
Revenue vs Profit Compensation
How the commissions are structured is important to cover as well.
Good businesses set their products and services up so that there is enough margin to pay a salesperson.
Bad businesses don’t, and they try to pass that lack of skill/judgement on to their salesforce in the form of commissions based on profit margin.
Think of it this way: from the salesperson’s perspective, there’s no way to influence the profit margin. In most cases, margins aren’t visible to them and aren’t under their control.
A company could hypothetically say that every sale their commission-only salesforce closed wasn’t profitable, and therefore save themselves the expense of paying them for their work.
This is an unreasonable and unethical way to do business. You need to make sure your margins support hiring salespeople beforehand. If they don’t, then you have a much larger, non-sales-related problem.
Take care of this before you hire someone to sell for you. Your poor unit economics are not the salesperson’s fault, so don’t act like it is.
When to Pay
Business owners try to demand profit-based compensation since it’s riskless for them, and many companies try to pay only when they get paid.
This makes sense if the salesperson has full visibility of the revenue coming in from their work (such as a Stripe dashboard), and a high degree of control during the closing stages of a sale.
It doesn’t make sense without those conditions. If the salesperson can’t know when the money lands in the corporate bank account, then they can’t figure out when to expect their commission to come through.
Likewise, it doesn’t make sense when the final stage(s) of the sale are controlled by a founder, the firm’s counsel, and so on.
To avoid all of that, the best way to handle timing for commissions is to set a schedule that assumes these out-of-their-hands factors will be taken care of.
Think of “paid in 14 days from signed contract” instead of “paid when the client pays.” At that point, it’s up to the business employing the salespeople to make sure the deal is done and paid for within that timeframe.
Do you have any leads to pass along to the salesperson? If so, that’s the absolute ideal situation — it’s a sign that you’re willing to invest in the success of your business and it gives the salesperson an idea of what your ideal prospects look like.
If you don’t, then be ready for a rough ride when it comes to hiring a salesperson. You’re asking salespeople to figure out what your ideal customers look like, and that’s something most quality salespeople won’t bother with.
They want validation that you’re running a quality business, and not having leads is a red flag from that perspective.
At least have some examples of successfully-closed sales, customer profiles, etc. if you don’t have leads to pass along, and be willing to pay a larger commission to compensate for the extra work they’ll have to do.
In my experience, existing rolodexes are some of the most overrated “assets” in the sales world. I can’t tell you how many times I’ve watched a salesperson weasel their way into a contract or a job because of their “rolodex.” These people, almost without exception, deliver far below expectations.
The reason is simple: just because a salesperson could sell one product line to a customer, it doesn’t mean that group of prospects will magically buy whatever new product this salesperson is pushing.
Even products that are very similar to what was being sold before aren’t guaranteed to be of interest (either at a business or political level) to those prospects. This is true for high-ticket sales in particular, as there’s almost always a long, political process for approving the purchase of a new product or service.
It’s even worse when the salesperson says things like “I’m friends with everybody at (company).” Friendships and business relationships are different animals — friendships are much easier to generate than sales.
I would even argue that someone who prefers to make friends with prospects is a weak salesperson, as much of sales revolves around hard conversations that can often turn people off (“Are you going to buy or not?”).
It’s my personal opinion that quality salespeople don’t need to know anybody in an industry to win. Having some social proof in the form of a brand that is recognizable or past successes that can be referenced is a big deal, but that’s not the same thing.
A good salesperson, armed with the knowledge of why people are buying a given product or service, should be able to do well with a list of strangers. Not being able to handle that means there’s either a serious problem with the product, or the salesperson isn’t as good as they say they are.
Hiring a commission-only salesperson means you’re forfeiting the explicit employee-employer relationship. That in turn means you’re forfeiting the right to put onerous demands on their time.
They are intrinsically motivated to put hours in since they only get paid for closing sales. But they’re the ones taking all the risk. You don’t have to pay them unless they perform, you can’t demand that they sell at specific hours, show up at an office, etc.
If you’re looking for that kind of relationship, then you’ll need to pay a salary. Until then, you’ll need to “let go” a little bit and let the hunters hunt.
With all that being said, I personally have certain conditions that must be agreed upon before I’ll start a commission-only contract.
Any business I’m engaging with:
- Must have paying customers.
- Must be willing to pay a commission that compensates me for the risk I’m taking.
- Must pay based on revenue, not profit.
- Must not attempt to lock down all of my time.
- Must be willing to pay based on when my work is done, not when the business is paid.
If all of those conditions can be met, then we can talk. You should expect any commission-only salesperson to lay down similar terms.