Here at Sales Cookie, we help winning organizations automate their sales incentive program. Are you considering hiring independent reps and wondering how to compensate them? If so, this post is for you!
When Independent Reps Make Sense
Independent sales reps, also known as commission-only reps, are independent contractors who are paid sales commissions to sell yours products (or services) and represent your company.
Keep in mind that commission-only reps are independent business owners. Therefore, choosing to work with your organization is as much a business decision for them as it is for you.
Here are some situations where hiring commission-only reps make sense:
- You want to more aggressively pay for true sales performance – without impacting the more gentle compensation model used by your mainline reps.
- You want to extend your reach to areas where you do not have a physical presence, or where hiring full time employees could be costly or risky.
- You want to limit your overall employee salary mass, reduce liability associated with full time employees, or simply augment your sales force.
- You sell specialized goods (ex: medical devices), and so require sales employees with some unique domain knowledge.
- You simply want to experiment and compare the effectiveness of full time vs. commission-only reps.
Recommended Sales Commission Structure
The best way to create a meaningful incentive program for commission-only reps is to put yourself in their feet. Here are the main characteristics of a well-designed commission structure for independent sales reps:
- Independence – commission-only reps look for environments which offer minimal interference from you. If they were not independent-minded, they would not be commission-only reps.
- Unlimited – the best independent reps work for themselves because they believe they can deliver exceptional results which will exceed salary-based compensation models. For this reason, it doesn’t make sense to cap commissions.
- Fair – products which require heavy customer education, are harder to sell, or require more involvement (ex: travel) should result in higher commissions. The same applies if the sales cycle is longer, or sales are one-time only.
- Competitive – your independent reps aren’t necessarily loyal to your company – they are looking for the best commission package available anywhere. You’re not spending anything on their base salary, so be generous with their commissions!
- Flexible – initially, your sales commission package might look attractive. However, once your independent reps realize that your products are hard to sell, they may leave. Be ready to make adjustments.
- Manageable – often, independent reps receive different commission rates based on the product or service sold. You need to be clear about payout schedules, and properly notify your commission-only reps when incentives change.
Independent Sales Representative Commission Structures
With salaried reps, you have the flexibility of choosing a base vs. variable pay mix. As a result, a large variety of incentives is available to you. For example, salary-based bonuses, team sales contests, or non-cash rewards are all viable options. With independent reps however, you have one less degree of freedom (no salary), so your choices are more limited.
This table shows typical commission structures for independent reps:
|Commission Type||Revenue-Based||Profit-Based||Accelerators||Per-Product Payout|
|Total Gross Revenue||X|
|Total Gross Profit||X||X|
|Revenue w/ Accelerators||X||X|
|Gross Profit w/ Accelerators||X||X||X|
- Any time you use profit to calculate commissions, you need a product or service catalog (with base costs) to calculate margins.
- If the revenue from some products is considered more valuable than that of other products, consider using a score-based approach.
- Accelerators mean that you pay different rates for different levels of attainment. Attainment payouts can be cumulative, or non-cumulative.
Commission rates for independent reps vary from 5% to 40%. In practice, most independent reps receive either ~25-35% of profit, or ~10–17% of revenue. However, many organizations with revenue-based commission plans also use scoring to handle the fact that some products may be easier to sell than others. For example, you could treat revenue from product A as worth 0.8x revenue, but revenue from product B as worth 1.2x revenue.
Independent Sales Representative Commission Issues
Here are some things to watch out for when hiring independent reps and setting up an incentive program.
- Discounting policy – because independent reps aren’t employees, your level of supervision is limited, making a clear discounting policy important. Also, consider using profit-based commissions to protect yourself from excessive discounts.
- Several masters – your independent rep could be also working for other entities. You may be competing with other companies for a slice of their time. If your own sales commissions prove disappointing, they could leave or de-prioritize you.
- Cheap, initially – your commission-only reps may be cheap – until they start closing serious deals! Commissions may at times look excessive. Refrain from capping commissions, but plan for unexpected wins (ex: using profit-based commissions).
- Misc. activities – your independent reps don’t want to spend time on normal sales activities such as sales meetings, sales training, etc. Unlike your full time reps, they don’t earn anything while attending a training session!
- Legal agreement – obviously you need a robust legal agreement. Consider using an automated commission management solution with e-signatures and user formal enrollment. You also need to deliver advance notice when changing incentives.
- Clear role – you will need to clearly document their rules of engagement. Do independent reps need to support existing customers? Is travel required? How much of it will be reimbursed? What about their cell phone bills?
- Repeat business – how do you want to handle repeat business? Should independent reps receive credit for upgrades, renewals, or add-on purchases? Should you only take into account one-time purchases?
Ultimately, your independent sales commission program must provide a win-win balance, which can be quite hard. With full time sales employees, a bad quarter typically isn’t enough for them to leave. They still have earned a base salary. And you can easily make some adjustments (ex: grant bonuses). However, with commission-only reps, you can’t afford to make any mistake with your incentive program’s design – they will be gone if you do.
Should Independent Sales Reps Have Quotas?
It depends on how you what you mean by “quota”, and how you use them. Some organizations pay zero (or highly reduced) commissions when under quota. Some organizations also use quotas to define accelerators or tiers such as:
- Under 100% of quota, 2% commission
- Between 100% and 120% of quota, 7% commission
- Between 120% and 140% of quota, 10% commission
Your independent reps don’t have a base salary to fall back on. However, it doesn’t mean they shouldn’t have sales objective. And, perhaps, you would like every member of the sales force to have a quota – this makes sense!
It’s perfectly OK to use quotas for independent sales reps to set goals. However, they should receive more reasonable commissions when under quota. It’s simple – if they fail to deliver, either they will quit (they need to earn a living, after all), or you will let them go (they are only contractors). Keep in mind that any commissions you would have paid them under quota would probably be lower than any salary you would have paid a full time rep.
Converting a Regular Incentive Program To Commission-Only Reps
Let’s say you’ve designed a well-working, battle-proven incentive program for your full time reps. Now, you want to convert it into an equivalent one for your commission-only reps. Converting your commission plans is actually not too difficult. All you need to do is define a hidden “virtual salary” for each independent rep. Next, adjust your commission payouts to make up for their zero base salary.
For example, let’s say you have this:
- Joe is a full time rep
- Joe has a 72K / year salary, so he gets 6K / month
- If Joe reaches 80% of quota, Joe will get an extra 6K in commissions (12K total)
- If Joe reaches 100% of quota, Joe will get an extra 10K in commissions (16K total)
Sarah is an independent rep with an equivalent level of experience (i.e. you would offer her a ~72K salary to join full time).
What do you need to deliver the same thing terms of sales commissions for your independent rep?
- Sarah is a commission-only rep
- Sarah has a 0K yearly salary, so 0K / month
- If Sarah reaches 80% of quota, Sarah should also get 12K in compensation
- If Joe reaches 100% of quota, Sarah should also get 16K in compensation
From this, you can see that Sarah’s commission rate should be:
- (12K – 6K) / 6K = +100% compared to normal when at 80% of quota
- (16K – 10K) / 10K = +60% compared to normal when at 100% of quota
So here you have it – a way to convert your existing incentive plans for independent reps. Of course, feel free to adjust rates to further motivate your independent reps vs. providing a “safety net” which makes up for having no base salary.
In this post, we described situations where hiring independent reps makes sense. We also explained how to design a working sales commission structure. Equipped with a well-designed incentive program, you could build an army of hungry independent sales reps in different territories without increasing your salary mass. Visit us online to discover ways to automate your incentive program and always pay your reps the right amount – on time!