What is a fare sales commission?

How is a commission based sales contract structured if (as a startup) you hire a sales guy on commission and the duration of his contract is shorter than the duration of the contract with the customer he brought in?

• Lets say I'm paying 10% commission to a sales guy on a client he customer he brings in for a 2 year contract. Now I want to go for a 6 month or 1 year contract with the sales guy (I'm guessing this is pretty standard) and lets say we make variable monthly revenue from the client he signed up. So we pay out 10% of what we make to our sales guy every month. Now is he right to push back on a 6 month or 12 month contract and demand a 24 month payout (same as duration of customer contract term)

• Answer:

  There are a number of ways to handle that but the most obvious one is to pay him some percentage of future contract value right up front. I realize this is harder for a cash business and there's always a small chance of you not getting paid by the client, but the math behind those things is typically very favorable and shouldn't be a major factor. As a salesperson and as a company, you don't want to get in a situation where the sales rep is due more commission over the length of contracts than he's worth to the company for bringing in new business. That's not good for you or him. In telecommunications or web hosting or other subscription businesses, its been customary to pay the sales person a significant percentage of first year value, eliminating the need to pay them for any future revenue or upsell on that account. This makes the salesperson happy because they get more money right away (and we are coin-operated after all) and the company happy because: Typically the first contract with a customer will be the smallest one. All future revenue should be higher due to upsells and contract extensions, etc. You are now free to collect all of that money without paying any commission on it. You want your salesperson being comped on net new immediately, and then forgetting about it so he can focus on closing the next one. You don't want him looking forward to monthly checks. In your current model he can build up enough of an account base to start thinking about taking days off at the beach, etc. That's not best for your or him. On a two year contract, instead of paying him 10% per month, agree to pay 10% of half of the first year contract value up front (if you're small, you can pay him after cash, not on bookings). For  you, this looks tougher up front but gets much better within a few months and then really good in quarters 3-8 of the first contract with the customer. For the rep, this looks a choice that's not really a choice: You can get 10% of $10k per month (or $1k per month) for as long as the customer remains a customer and keeps paying us, etc, or; You can get $6k right away. Think about the cost of cash, etc. The rep should have no problem with this. Any contractor knows that nothing is guaranteed and cash is king. You can mitigate the risk of cancellation and non-payment by building in a standard clause saying you can recoup commission from non-paying customers from future pay, etc. This is very standard. The basic economics behind this are simple: the cost of cash for you as a business should be far lower than they are for your beleaguered contract sales rep with no job security and no base salary. You can profit off the arbitrage opportunity and make him happy all in one shot.