ALP 29: Paying commissions to agency employees for new business

Most agencies want their employees to get involved in developing new business, but how do you properly reward them when they do?

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Most agencies want their employees to get involved in developing new business, but how do you properly reward them when they do? That’s the subject that Chip and Gini explore in this week’s episode.

Gini says the key is that “you certainly want to incentivize people and incentivize them at a level that they want to participate in business development and can participate in business development, but also not eat into your profitability.”

Whatever plan you come up with, Chip advises, “you have to have a policy in writing on something like this. Anytime you have a commission scheme involving employees, put it in writing, so that there’s no misunderstanding.”

Chip also says that agency owners need to remember that “whatever you’re incentivizing is what you will tend to get, and so if you are incentivizing revenue, people will do whatever they can to acquire that revenue, regardless of how profitable it is.”

Gini underscored that “this is another situation where it depends, and it depends on who’s on your team and what they’re motivated by.”

In the end, the best principle may be to keep it simple because “you don’t want it to be so complex that nobody understands it,” explains Chip.

Transcript

CHIP:
Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin

GINI:
and I’m Gini Dietrich.

CHIP:
And today we’re going to be paying a commission, not to you or me, Gini, not to the listeners, we’ve already established that I – that you’re cheap? – But but instead commissions for employees or others who are bringing in business for agencies, that is the topic of today’s show.

GINI:
Love his topic, and it’s I think it’s an important one, because you certainly want to incentivize people and incentivize them at a level that they want to participate in business development and can participate in business development, but also not eat into your profitability.

CHIP:
Exactly. If you end up with a commission plan that that makes you lose money, that’s probably not a good model for the long term. Not going to lead to a lot of success. But this is this is clearly a topic that resonates with agency owners, because you had thrown it out recently in the Spin Sucks community Slack channel. There we go. See if I can say that correctly.

Yeah, for some reason, my my brain froze on it. But yes, it’s the Slack community for Spin Sucks. And it’s a great place. And so you threw it out there and said, you know, how are people handling it. And I got to say, we got a very strong response on this one.

GINI:
Say that five times fast.

We did. And I think there was some pretty good consensus too, it seems to be 10% seems to be the number. But it was interesting to see how it was broken down. So some people said 10% of the first year’s revenue for the client. Some people said, 10% of the first year’s income for the client. Somebody said at my old shop, the referral fee was 10% of the first month’s retainer after the client was in good standing for 90 days. And then someone else said, we pay 10% of the gross for the life of the contract, which – but it’s across the board it was 10%. So you know, it varied – the how it fit in varied, but across the board, it was 10%.

CHIP:
So people, people like the concept of tithing, it’s just what are you tithing?

GINI:
Right.

CHIP:
And the what you’re what you’re taking that 10% from, I think, is important. And obviously, an agency may choose to do something other than 10, you could do 8 or 12, there’s frankly, no magic, you know, to any particular number, it’s figuring out how it works within your overall pricing and cost structure so that you’re still profitable, and that you’re also generating enough of an incentive for your team or your subcontractors, whomever you’re, you’re offering this referral reward to, to be incentivized to do it. But I think the you know, let’s, let’s take a look at the different models of what you’re taking a percentage of, because I think there are pros and cons to each. So, you know, if we think about it, in terms of gross revenue, you that’s obviously the biggest possible number that you can work off of, particularly if you’re like the the one agency owner who said that they do that for the life of the client. So, and I think he, he cited in particular an example of a client that he’s had for five years. And so someone’s been making, you know, like, $12,000 a year in passive income just off of that one client, which Yeah, which obviously, is a good deal. And honestly, that’s, that’s similar to a model that I used in the early days of CustomScoop to incentivize people to come in. And I think it was 10 years later, we were still paying some of these folks 10% of the revenue. And so I mean, it, it cuts both ways. Because over time, you sort of sit there and say, Well, geez, it’s great that I have this revenue, but is it still worth paying it to that person, they may not even still be in touch with whoever is at that client? You know, so they’re not necessarily helping to retain the revenue anymore? Or do you just say, hey, look, cool. They helped me get this originally. And, you know, we’ll just we’ll keep paying it and feel good about it?

GINI:
Yeah, I think there’s some, some karma in there as well. I mean, bada boom, you know, do do you want to continue doing that? Because if if you do, I think there’s some good karma that you put out there that people want to continue to refer business to. There’s also I think this kind of walks a little bit of the gray line of ethics, because it could get to the point where people are referring business to their network only, only to get the, the referral fee. And so there’s some of that too where are they the right fit? Are they the should you be referring it, you know, so I think you have to walk that fine line as well. But I’ve always for us, if it comes, if the referral comes from outside the agency, I’ve always just sent a really nice gift, you know, something that they wouldn’t necessarily buy for themselves. If they’re a champagne drinker, it’s a, you know, $500 bottle of champagne, if they like wine, you know, whatever happens to be. And that, you know, tends to make people feel very much appreciated, but not necessarily keeping us on the hook for paying them. Because we don’t know, we don’t know what that client is going to turn into. We don’t know if that clients going to not pay their bills, like, there’s a lot we don’t know, going into it. So I think you also have to kind of weigh that into it as well. And you don’t want to lose money on it either.

CHIP:
Absolutely. And I think in an earlier show, we talked in general about some of the external resources you can use for sales. And and this was one of those topics. And it is that, you know, certainly when you’re talking about people outside of your agency, you do have to be much more concerned with the ethical constraints of any of these referral fees. Because, you know, is this person referring business that perhaps they have some direct influence over as opposed to simply recommending it, you always want to be careful that you’re not, you’re not crossing the line there. But But if you’re thinking about people who are, you know, either in house employees or today, some so many agencies are using freelancers who do a lot of work with the business, you know, those are folks where, you know, perhaps the ethical concerns aren’t as great. And instead, it comes down to, you know, how are you properly incentivizing them? How are you making it mesh with your profitability, but at the same time, you also need to be thinking about if you’re, if you’re going to leave it open ended with employees in particular, are you creating an incentive for them never to leave, because typically, you would stop paying them after they’re no longer an employee. So you’ve now created an incentive, potentially, where they have less incentive to leave, because they’ve got a nice base of money coming into them, regardless of how productive they are as an employee. At the same time, it almost puts a perverse incentive on you, as the agency owner to move them along at some point. Because you sit there and see how much they’re they’re collecting without, you know, being directly tied to their their then current work. So you want to be careful, think about those things. Anytime you make any kind of a referral or commission scheme open ended, there are those unintended consequences that you may not think about the early days.

GINI:
And I think on the flip side of that, as well is if you have to let them go for cause. And then, you know, how do you how do you handle that? So is it written into the contract that it immediately ends if they leave, whether it’s cause or on their own? You know, I mean, I think there’s a lot of that kind of stuff. That’s why I really like the – My favorite comments of all this was, at the old shop, we would do a referral fee was 10% of the first month retainer after the client was in good standing for 90 days, because then it’s clean, it’s easy, you’re not getting a paycheck, or a bonus every month, even if you’re not doing your job. If you leave for cause or you leave on your own. There’s none of that there’s you don’t have to deal with all those legalities. So of all the comments I think we got of all the comments we got, I think that one’s my favorite.

CHIP:
Yeah, and I think you touched on a really, really important point here. And, you know, I know, I tend to be sort of the the bureaucratic type. And so I harp on these things a lot. But you have to have a policy and writing on something like this. Anytime you have a commission scheme involving employees, put it in writing, so that there’s no misunderstandings, you don’t have someone say, Well, wait a minute, you know, so and so got this, and I got that. Or when I’m leaving, you know, now you got to pay me a lump sum or whatever it is, make sure that you’re being very clear. And you’re thinking through those different scenarios, you know, what if this client, you know, if you’re going to do something other than just that one time payment? What if they stop paying at some point, you know, when does it terminate? You know, do or do you get to wait to make the payment until you actually collect the cash? You know, so timing matters? How often are you paying it out? Are you paying it out monthly? or quarterly? Or annually? There’s a lot of different ways to do this. And you just want to make sure you’re, you’re being very clear with everybody so that they know what the correct expectations are.

GINI:
Yeah. And it may evolve. I mean, like a lot of things we talk about here, you may start out with one thing and discover that that’s not the right way or it doesn’t work for you, you know, there are a couple of people that commented on this thread that said, Yeah, like, the like 10% of the gross for the life of it creates the opportunity to turn employees into new business machines. Okay, great. So but yeah, you definitely have to think all of those things through and be flexible and willing to adapt as well.

CHIP:
And you want to see how it works in your own organization, your own agency, because, you know, no two agencies are going to be exactly the same in this regard. And, you know, if you’re, if you’re working for an agency that has average retainers of 30, 40, $50,000 a month, the percentage that you may pay out, you may want to look at differently than an agency that you know, is their bread and butter is 3 or $5,000, retainers, you know, or if you’re doing purely project based work, let’s say you’re, you know, a web design firm or something like that, there’s all sorts of different permutations in there that you need to be thinking about, and make sure that you’ve, you’ve come up with a scheme that, that gives people that desire to become the sales engine, that that one of the agency owners talked about, but also, you know, fits within your overall structure and reflects the values and needs of your particular business.

GINI:
You know, I, this reminds me, I have a really good friend who works for a major consumer packaged goods company, and their commission structure is so complicated, that it has all sorts of formulas and drop downs and everything in the spreadsheet to kind of figure out, Okay, if I do this, then I get that, and I, I feel like that’s just too complicated. Like, let’s just make it as easy as we can make it as easy as for everybody to understand, create a really level playing field, and then make it as easy for you as the agency owner to hold up your end of the bargain by paying it out.

CHIP:
And I have built a ton of different sales commission plans over the years, both in the agency environment as well as when I was selling software, and so that, you know, there’s a, there’s is a tendency to almost overthink things, and try to come up with these complex formulas and accelerators, and hey, you know, if I do this or that, and, and, you know, let me pay differently if they pay in, you know, for a retainer, or if it’s a project, you know, you know, you don’t want to be so complex that, that nobody understands it. And you also, as I think I’ve said, previously, when talking about any kind of a bonus scheme, or that sort of thing, whatever you’re incentivizing is what you will tend to get, and so you know, if you are incentivizing revenue, people will do whatever they can to acquire that revenue, regardless of how profitable it is it but the same time, you know, the answer isn’t well, you know, do 10% on profitability or something like that, because then there will be a tendency, particularly if they’re a manager and have any degree of control over it to perhaps be penny wise pound foolish. So, so think, you know, remember that whatever you are paying on is likely to be the kind of behavior that they’re going to skew towards

GINI:
Whooo. So I think what we’re saying is, there’s no easy answer, and it depends.

CHIP:
It depends – is it turns out that’s a favorite thing, yeah, yeah, it does. And, and so that’s, that’s why you need to think them through, you know, when you do put it to writing, make sure that you note in there that this is the plan as of whatever date it is, but you know, it’s subject to change. So that, you know, people are not able to argue, well, this is this is in perpetuity, you know, you want to make sure that you are giving yourself the flexibility to make those adaptations. So when you see the unintended consequence pop up, you can make that change. But, you know, stepping back from some of the, you know, we’ve been really into the nitty gritty here, but, you know, overall, you know, what are your thoughts on providing commissions to employees? Right, so we, you know, we’ve sort of assumed that they are a good thing. But let’s, you know, I think it’s worth, you know, talking for a minute about whether or not you should actually have a formulaic commission type structure for staff, or if, you know, just as you said, you do with with external folks, you know, should it be more of a, either a gift or a subjective bonus or something like that, you know, what are your, what are your thoughts on that?

GINI:
Yeah, you know, I think this is another situation where it depends, and it depends on who’s on your team and what they’re motivated by, because what we have found is that, and we’ve done some of this work with clients do, we have found that generally, people aren’t super motivated or incentivized by money, as long as they’re making a good wage, and you know, they’re not living paycheck to paycheck and all those kind of, like, basic needs are taken care of, they’re generally not incentivized by are motivated by money. And so we do some really deep work to figure out what does motivate each individual. And typically, we incentivize based on that versus money. And for some people, it is money, and that’s fine. And if that’s the case, you know, especially for our our sales team, if that’s the case, then yeah, we have incentives and all that kind of stuff from a monetary fiduciary standpoint. But when you’re talking about an account team, and their job, they’re really incentivized or motivated, motivated by doing really good work, having clients say that they’re doing really good work. And, you know, maybe splurging on something that they wouldn’t necessarily get themselves, then that’s, that’s what we tend to do. Just because that that’s what that’s more appreciated, because I think, as you all know, once you get a bonus, it’s spent and it’s gone. And, and people are like, Okay, well, what have you done for me now? what’s what’s next? And that doesn’t tend to be as lucrative for the agency or the teammate.

CHIP:
And I think that the other thing to think about is, you know, as an agency, you need to look at at how you’re generating new business, and how does this fit with your general approach. And so in particular, what I’m thinking about is I’ve been in businesses, including agencies in the past, where multiple people are involved with bringing in a client, and so then, then you have to figure out, okay, who is entitled to this, this commission or this formulaic bonus, and you know, if it’s going to be split, how is it split? And so you need to think about is, is the way that your agency works, where it’s, you know, people are generally going out and eating what they kill? Or is it really a team based approach? So, you know, bringing it in is really more just making the initial referral and saying, Hey, we should, you know, let me make this introduction, but then it’s a whole team effort to win it, you need to think about what the actual process is, because the more involved that individual is in securing the business, the more the more it makes sense to commission or otherwise, bonus it. Whereas if it’s, if it’s more of an introduction, you know, that may be something that’s, that’s more suited towards, you know, one off bonuses or gifts or those kinds of things. So, so consider that particularly because, you know, you don’t want to end up in a situation where your your commission or bonus scheme is actually causing problems. So you don’t want a situation where you’ve got two employees fighting over the commission, right. And I have seen that I, you know, and you also sometimes will end up in a – and this is more true, I think, in traditional sales organizations really haven’t seen it much on the agency front. But you will see sales reps unwilling to help each other at times, if they are being commissioned individually. Because well if I’m spending time helping you close your deal, then that’s not helping me now, that’s a very short sighted way to look at it. And as a manager, you need to address that. But nevertheless, it it creates that tension at times. So think about that, when you’re putting together the plan and deciding whether it’s even the right thing for your business.

GINI:
Yeah, I mean, I mentioned this before we started recording, but when I worked for the big agency, I had a contact, a friend, who was running an organization, and I was at dinner with him. And I was – and he said, You know, we’re looking for a PR firm, and I’m all of like, 25 or 26 years old. And I said, Well, I mean, I work at the best global agency in the world, you should come talk to us. And he did. And, and through that whole process, I was sort of his hand holder, even though I was super young, they you know, because it was my friend, it was my relationship, I was his hand holder through the whole thing. But there was a team of people. I mean, there, I think there were 10 of us that worked on on the new business pitch, the travel the dog and pony show, presenting to the board, all of that kind of stuff. But it would have been nice at 25 or 26, to be told, you know, here’s a couple thousand dollar bonus for bringing that in, and then have the rest of the team incentivized as well.

CHIP:
Mmhmm. Absolutely. And, you know, and that’s something to think about too, you can create structures where it’s different for, you know, a junior employee who, you know, might, you know, take that percentage and feel much happier about it. Whereas, you know, a more senior manager, you might just consider it part of their overall bonus assessment each year, right? So there’s, you know, you don’t necessarily have to have one size fits all, I would argue not to make it overly complex and have everybody on their own scheme, you know, that, that that creates tension, as well as confusion. But, but, you know, there could certainly be bands. So, you know, if you’re, if you’re an account executive, maybe it’s one thing if you’re a VP, maybe it’s another thing and if you’re C level, well forget about it, that’s part of your whole job anyway.

Yeah, I mean, I think it’s, it’s part of your job, but probably past like managing supervisor at the VP level, it’s your It is part of your job to do business development. And because of that, you are incentivized with your bonus each each year when you hit certain goals. So I would say I would argue, in an agency world, anything that’s below VP should be incentivized because it’s not part of their job. And then VP and above, it’s part of their job. So that’s part of their bonus pool.

Although, of course, it you know, these days with, with title inflation, particularly at smaller firms, you have to be careful about doing it purely based on title because I’ve met some awfully young VPs lately.

GINI:
Well I was a VP at 27, but they also told me, you know, 30% of my job was to bring in new business, so and I had, I had a bonus pool that I was part of.

CHIP:
Right. And and that’s and that’s something that philosophically every agency needs to figure out, you know, a lot of agencies love to say, everybody’s job is new business, which is sort of true, but the reality is, it’s not, I mean, you don’t expect everybody typically in your agency to be out hunting for new business, you know, they may have to play a role in different things, but But think about how new business fits into each person within your group. Because that also will help you figure out what the right structure is, what the correct amounts are. And, ultimately, if you if you come up with something that makes the team feel like they’re winning together, but they’re also personally benefiting from it, that’s where you’ll end up with the best, the best recipe for success. But, you know, like any good recipe, it’s going to need tweaking for the individual palette.

GINI:
Yep, totally agree.

CHIP:
You know, I’m not sure that I have anything else to add on commissions, Gini. I think we may. We may have covered this one.

GINI:
It’s a complicated one. But, whooo.

CHIP:
Yeah, I’d say, you know, just I think we just, maybe just every podcast we have we’ll just wrap up with or not wrap up with, we’ll just start with “it depends” and just end the podcast right there. “Gini, do you want a commission? It depends. Okay, move on. Okay. Excellent.” No, but I but I think this is this is an important topic for folks to be thinking about, you need to understand how to properly incentivize your team and, and it you know, like everything else, that it should be an intentional decision and not just, you know, because you heard someone else did it or you just decided not to do it, because it’s too much effort. Give it some thought, come up with the right mix, and it will help you succeed.

GINI:
Yes, indeed,

CHIP:
Just as the Agency Leadership Podcast helps agency owners all across the world succeed. And if you like what you’re hearing here, make sure you leave us a nice positive review somewhere whether that’s Stitch or iTunes, how was that for a little sales pitch there at the end? Did you like that?

GINI:
That was amazing. That was pretty good. actually.

CHIP:
There we go. But but in fairness, we do and we do enjoy those reviews, we enjoy the feedback. If you have questions that you’d like us to explore here, feel free to shoot them in our direction because we’re always looking for new topic ideas and ways to help solve the real world problems that our listeners have. So with that, I’m Chip Griffin

GINI:
and I’m Gini Dietrich

CHIP:
And it depends.

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