As a startup advisor and marketing consultant, I’ve often been asked if I am willing to work on commission, or to be paid based on the performance of my work.

Most of us in sales and marketing have worked with significant “at risk” compensation -- be it performance bonuses or commission -- and pride or confidence in our ability to deliver typically prevents us from saying no to the request outright.

But I have found that commission-only or heavy “at risk” compensation often does not work well in early-stage startups.

I appreciate the question from startup founders. They are supposed to be aggressive, scrappy operators of their businesses. Often marketing / sales is a new area that they are not experienced in, and even if a consultant comes recommended, they don’t know for sure how the effort will work out for their business.

But commission-only structures in early stage startups are likely to be either unfair to the sales or marketing hire, or detrimental to the startup that is hiring them. The likelihood of getting it “just right” is very low.

How could trying to reduce risk by paying heavily or 100% on commission can actually create more risk for your company?

1) No Established Processes. The biggest issue with startups exploring marketing / sales efforts is that they don’t have established processes for these efforts. So part of the job is going to be experimenting and seeing what works. Obviously an experienced consultant should have a pretty good idea of what has worked for other companies and where to start, but every product and customer base is a bit different. And a lot of the effort is going to go into developing materials and learning from customer interactions.
Just like the business overall, you want the sales person to have the freedom to experiment and “fail fast” if an approach doesn’t work. Being paid on performance doesn’t incent people to experiment, nor does it encourage them to spend time developing materials and processes that may be necessary for longer-term success, but don’t produce results immediately.

On the flip side, if I have an established business like a gym that has been in business 5+ years, paying sales representatives on commission-only may be completely reasonable. Presumably I have a training program, brochures and web content already prepared, and a pretty exact idea of what types of pitches get people to sign up and how to handle common objections. And if tens or hundreds of sales people have worked for the business over the years, I also have a good baseline to evaluate new sales people’s performance against.

2) Little Historical Data. Another significant problem is a lack of historical sales data. Most startups have information on their early users, but extrapolating this out to sales or marketing targets is difficult to do accurately. And if most of your customers have come from your friends in the industry, your incubator classmates, or a TechCrunch article about your beta launch, it will really be hard to accurately forecast sales. When developing a commission plan, you want as much historical data as possible so your forecast sales targets are as realistic as possible -- otherwise the commission will be too hard or too easy to achieve, and the person will be underpaid or overpaid relative to the impact of their work.

3) Harder to Learn. One critical goal for sales and marketing in early stage startups is learning from your customers -- what they want in the product, what they are willing to pay, and more. When people are being paid primarily or only on commission, they only want to focus on activities that generate commission (obviously). So it is harder to change course or experiment with different pitches or types of activities other than what “is working.” But there may be other efforts that would “work” better if you only had a chance to try them, and there may be changes in the product needed to find the right fit.

Good sales and marketing folks are no different than engineers -- the talented, experienced ones are always in demand, especially here in Silicon Valley. So by offering only commission, you may be self-selecting for less qualified candidates who need the job. You may get lucky, but you may end up thinking your sales efforts were a failure, when you really just attracted the wrong person. And early on, hiring the wrong person or getting bad data about a critical future area of your business (sales and marketing) could make a big impact.

For more on learning about your startup through sales, see Steve Blank’s post about making sure you hire a “VP Customer Development” instead of a “VP Sales.”