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What's a typical sales commission for professional services?

I ask because I am thinking of going into business with some friends (professional services and product company). We agree on how to split up the equity, but the business development expert (who also would be the CEO) is saying that there should be a 10% gross margin bonus for sales, while the rest (after cash reserves) gets divided by equity.

Does 10% seem high? Does this arrangement seem fair?

In truth he is very good at business dev, and he knows a bunch of people. But on the other hand, if we are going in as friends, shouldn't we just divide the profits (after cash reserves)? Plus, the way I look at it, I can't do my job (development/management) without his sales, but he can't do his job without the reputation that comes from the quality work of those I will manage.

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3 Answers

up vote 7 down vote

Wait... the sales guy would be CEO? And he also wants a commission?

That's not how it works, no.

Commissions are usually paid to the mercenary sales people at the bottom of the sales organization... people who really only care about their next sale, assuming that's how you want it.

As you move up the org chart you want people who care about the overall success of the company, not just the next sale, so you give people equity instead. They will get rich if the company becomes more valuable.

As far as how MUCH to pay in commission... there is no "typical." You have to have a sales manager who is constantly and perpetually tweaking the formula. Commissions are sort of like little pieces of carrots in a rat's maze. You have to keep moving them around all the time to keep the rat running. If you want the rat to do what's right for the business automatically, you give them equity (ownership) or some kind of profit sharing, not commissions on individual sales. There are too many ways commission plans can go wrong if you don't tweak them constantly. If this sounds like too much of a pain for a small startup, you're right: it is. Don't use commissions, share the equity.

In terms of compensation in a professional services firm, you should read Managing the Professional Services Firm before you take another step. There are many ways to get it wrong and only one way to get it right :-)

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@joel, thanks this is exactly the sort of advice i want – hvgotcodes Feb 6 '11 at 1:21
@joel, I dont want to minimize the level of his contribution -- hes not just the 'sales guy'. he has a bunch of leads, and is good at closing deals, and is well connection. would those considerations change anything? – hvgotcodes Feb 6 '11 at 1:34
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IMHO the only way to resolve the inevitable conflicts between founders is to set it up with absolute equality. If you have 4 founders and every one gets the same salary and 25% of the founders' equity, it feels fair and you never have conflicts. The minute you start tweaking that formula around the edges you create infinite opportunity for arguments and fights and unhappiness. – Joel Spolsky♦ Feb 6 '11 at 5:26
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@hvgotcodes if you're friends you're going to likely not be friends at the end of the journey (whether you start it or not honestly). The only people harder to work with are family. My last business (SaaS) has pretty much failed and I lost $xxk (of real money and untold $$ in hours, lost productivity at the day job and pain to my family) and a friend of almost 20 years out of it -- that company was setup inequitably because he believed that sales >> software (I was doing it to help him out so I didn't force the issue). – Sean Feb 6 '11 at 15:35
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@hvgotcodes Stress and money tends to bring out the worst in people. Trust issues develop, resentment, etc. If things are inequitable at the start, as Joel said, it's a recipe for disaster. In my current endeavor (3 fndrs), I'm finding out that the stuff that didn't bother me when we were coworkers and friends, really frustrates me when I'm relying on someone to do something. I'm sure that some of my personality defects are rubbing my partners the wrong way too. Communication and trust are key and hard to do/gain honestly (esp. in your case where you know that he values himself more than you). – Sean Feb 6 '11 at 16:33
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up vote 0 down vote

If the sales guy is CEO, he should be getting commission no matter how small the company is.He is getting equity in the co and thats how it works for co-founders. He should be paying commissions to next level sales people he hires.

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up vote 0 down vote

In my previous experience, the equity distribution is as follows: Co founders=5 to 15% CEO=3 to 5% (if not a cofounder) managers=1 to 3% staff=less than 1%

Now, the distribution could vary based on the compensation each one gets. I've never seen the CEO getting commission even though he is in sales.

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