In the previous issue, we discussed the job responsibilities of a design sales rep and the importance of establishing realistic new business development goals for the firm. Now we’re ready to look at compensation options, including some variations in commission structures. We’ll also discuss the challenges of finding candidates who are a good match for your firm, and guiding a new sales rep through a successful orientation period.

DECIDE ON A SALES COMPENSATION STRUCTURE
Your new business development person should be considered a senior team member right from the start, and the overall compensation that you offer should reflect that status. As an initial reference, look at design compensation surveys such as the one published each year by the AIGA. When determining compensation levels in your firm, keep in mind that income for marketing and sales positions tends to be higher in large firms, in companies that have national client accounts, and in advertising agencies. Sales compensation might take several different forms: base salary only (prorated if the position is less than full time), commission only (usually referred to as straight commission), or some combination of the two.

Some firms select a straight commission structure in order to reduce initial costs when a new business development position is created. However, it can lead to problems because it tends to encourage sales reps to go for quantity over quality. The easiest accounts to land might not be the ones you want. To preserve the go/no-go decision-making authority of the founders or principals of the firm, the employment agreement for your sales rep should state that the determination of whether or not to accept assignments from a new client account will be made by the company at its sole discretion. (More about employment agreements later.)

Employees on straight commission often negotiate to receive a draw, which is a set amount of money paid to the rep on a regular basis, regardless of how much commission is actually earned during that period. Reconciliations and adjustments are made at set intervals, such as every three months. Because a draw tends to function as an advance against commissions that have not been earned yet, it’s not unusual for a dispute to arise over charge-backs if a rep happens to be overdrawn at the time of termination.

Other design firms avoid such problems by providing a salary only. This approach gives the firm complete freedom to pick and choose from the various opportunities identified by the rep, with no disputes over what is pitched and what is accepted because no sales commissions are being affected.

Lastly, there are firms that combine the two: a base salary to provide the rep with some stability, and a commission to serve as a performance incentive. When the mix includes a high base salary, the commission percentage will be low (perhaps in the range of 2 to 8 percent). Conversely, a low base salary is usually paired with a higher commission percentage (perhaps from 8 to 15 percent). Just stating a percentage is not enough, however. You must be much more specific about how the system will work.

What is the commission based on?
• Marketing and sales executives line up new projects and get signatures on proposals that, of course, have healthy anticipated margins built into them. However, it’s the responsibility of the creative team to successfully complete each project on budget and deliver the expected margin. For this reason, marketing and salespeople receive commissions based on the total professional fees generated on a project, whereas members of the creative team tend to be rewarded with discretionary bonuses only if a completed project actually produced a good margin. (In most instances, the success of a project can be attributed to factors that were within the control of the team. The gross margin that comes from each project is then used by the firm to cover other expenses, so discretionary bonuses for creative team members are not tied to net profits for the entire company. The company’s bottom line is affected by many factors outside of the team’s control.)

• In most firms, the commission calculation is based on professional fees only. Project income related to materials, outside services, and reimbursable costs is excluded.

Is there more than one rate?
• The commission structure that you develop might have several different layers or categories. However, the overall structure must still be easy to understand—don’t make it any more complicated than it needs to be.

• An external sales representative whose primary task is to initiate new relationships may be offered a much higher commission on companies or project categories that have been specifically targeted by the principals of the firm. The target list must be updated according to an agreed-upon schedule.

• A smaller commission might be paid on projects outside of the desired companies, industries, or categories, or on the reactivation of past accounts that have been dormant.

• Usually, no commissions are paid on client accounts that are active at the time of hire. These are considered to be “house accounts.” A list of them should be provided to the rep on the first day of work.

• New, commission-only reps sometimes bring pre-existing client relationships with them. When this happens, you must check to make sure that there are no conflicts of interest with any previous agencies. The rep may ask for 20 to 25 percent of the fee income from the first project on each of those accounts. You’ll have to decide whether or not you feel comfortable with such an arrangement. The second project, however, should drop down to whatever standard rate has been agreed upon.

• In general, design firms discourage sales reps from hanging onto new accounts and gradually morphing into project managers. This is done by gradually reducing the commission paid on each new account until, at the end of the second or third year, it becomes a house account. (For example, your firm might offer something like a 7½-percent commission on the first project with a new client, a 5-percent commission on subsequent projects during the first two years of the relationship, and no commission on the account thereafter.)

When is it earned?
• The word “earned” carries special significance here. You must identify the moment in time when a rep becomes entitled to a commission. That moment should not be when the proposal is signed. It should not be when a purchase order is received and it should not be when services are billed. A commission should only be earned when payment for services rendered is received from the client.

• On a large project, you don’t need to wait until the entire project is complete. A commission can be calculated as each progress payment arrives from the client.

• However, you should not generate commissions when advance deposits or retainers are received from clients. This is because no services have been performed yet. You might have to return the deposit or retainer to the client if the project is cancelled. Wait until services have actually been performed, then generate an internal invoice to cover the work, and pay that invoice by applying funds from the deposit or retainer. That internal payment will trigger the commission calculation.

When is it paid?
• It’s important to establish a regular schedule for summarizing commission activity and reporting it to the rep. Most firms do this monthly, after the in-house financial statements have been finalized. Be clear about where the numbers come from. You need to maintain an audit trail from cash receipts data to identification of activity by sales rep, and through the commission calculation itself.

• When you’ve prepared the monthly commission report, you might then write a manual check to attach to it. However, it’s more common to produce a commission check as part of the next regular payroll. That way, it can be printed by your payroll service. Sales commissions are taxable personal income, so all standard taxes and withholding amounts apply.

• Whenever a sales rep resigns or is discharged, you need to prepare a final payment for all wages due at the time of termination, including salary, accrued vacation pay, and earned commissions. In most states, final payment must be made within three days.

• Once a commission has been earned, it cannot legally be forfeited.

• Also, your company cannot reduce the amount of any final payment by making deductions for projects that were not pro. table, or attempting to recoup other business expenses such as lost or damaged laptops or mobile phones.

It will take you a while to develop the commission system that makes the most sense for your firm. Each time that you adjust the variables described above, measure the potential impact by running some sample calculations. Start with a “best case” scenario that reflects a series of positive assumptions about new business volume. Then, calculate a “worst case” scenario based on negative assumptions about activity, perhaps even including a client who fails to pay. Scenario planning will help you to understand the range of financial results that could be produced by the new system. You’ll quickly see that, if goals are high and the new business development person hits them, she could become the highest-paid individual in the company. This is not an unusual situation, and the founders or principals of the firm must be comfortable with the idea.

When planning your overall annual budget for new business development, remember that, in addition to employee compensation, benefits, and taxes, the firm must also pay for marketing materials, business cards, association memberships, business travel, customer entertainment, a laptop computer, a mobile phone, and the like. These additional business expenses are often equivalent to one-third of annual compensation or more.