How would an employer base converting a 1099 Commission-Only earner to a W2 Salary without risking loss?

Question

I want to pay only commissions based on performance, but many applicants ask about a base salary, and I don't want to risk losing money if they don't make at least what I'm paying them.

Is there any value for an employer in converting a 1099 contractor -who only makes commissions, but consistently above a certain amount, to a salaried W2 employee?

If so, what are reasonable guidelines to base that salary on?

Let's say I have someone consistently earning $100,000/yr. What could be a fair and viable base salary to pay them?

I imagine if, after putting them on salary, they stop performing as well, and didn't make more than I paid them, it would be sensible and legal to fire them if they don't make at least $X* above that salary, yes?

• What should a sales rep earn above their base salary to justify retaining them?

Answer 1

Some sales people thrive in the commission based compensation plan, others want a non-commission compensation plan. Of course it depends on how they react to the relativity of their actual performance, and how the company will react to a performance below expectations.

How successful you are in this transition depends on what risk you are willing to take, and what risk they are willing to take. Over the next few years that number that initially attracted the current sales people to stay could be proven to be bad for your exact situation. Or bad for them.

Is there any value for an employer in converting a 1099 contractor -who only makes commissions, but consistently above a certain amount, to a salaried W2 employee?

The employer will know how much it will cost for these sales people. What they still won't know is how much income will be coming into the business. They are now paid based on how many hours they work. The employee will now determine if the level of effort matches the compensation, and how hard they will try to make that last sale of the day or the month.

Note: a commission based compensation plan can be handled by 1099 or by W-2 based on the nature of the job. If you are dictating the time and place of their work schedule then they are W-2.

Answer 2

In order to make a profit, you need to be making significantly more than you are paying any one person. Take a good hard look at your business model.

Most business models start with reserving 20% for profit and taxes. There can be 5-15% administration, overhead, etc. If you are building or buying product, you need 30-40% for that. That leave 25% for sales and marketing. Your model might be different, and you might spend more for sales if your organization is only a sales organization.

In other words, a good salesperson will generate 5x their compensation in sales. A great salesperson will generate 10-30x their compensation.

You need to look at your sales cycle. If a sale generally takes 30 days, then you can put people on a monthly sales quota. If a sale takes 6 months, then the quota time needs to be longer.

If a salesperson is on salary and not making their quota, fire them.