ASA Central Network

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  • 1.  Administrative Percentage

    Posted 01-19-2021 10:03
    Hi everyone!  We pay commission based off gross margin dollars.  When I initially set this up, I used an arbitrary number for the administrative cost to run the business and only took into account the factoring cost percentage and added a couple of percentage points to that to deduct from the gross margin dollars.  I know now that the percentage that I chose doesn't come close to reflecting the cost of running the business--advertising, credentialing, and the cost of salary of the person who does payroll,  credentialing etc.  Can anyone chare with me how they arrive at the administrative cost percentage that they deduct from gross margin dollars before paying out commission?

    Thanks for your help!

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    Jennifer Conrad
    President
    Birch Agency
    Trussville AL
    (727) 781-7812
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  • 2.  RE: Administrative Percentage

    Posted 01-20-2021 12:11
    Great question, I look forward to following this one for additional replies - I think about this regularly!

    To come up with a reliable figure for that would require assuming a static production level. I don't know the volumes of your business, but let's say if you do $150,000 in production any given month, your business loses money. If you do $350,000 you make money. It'd be difficult to have one percentage for all companywide production levels - and to truly factor in costs, your salespeople should end up with a bill, not a paycheck, on the former number. 

    One way to recoup costs on early dollars is to tier your commissions. The margins we use are simply gross billing less burden (for EE, it's pay rate X 1.1 to account for tax). I'm sure a much smaller percentage of that is paid out than we would if we added something to reflect admin costs. Using a simple margin like that, we can put commission burden into it ($ X 1.1) and start looking at what percentage on what volume covers the salary of the producer plus company expenses. Once we've broke even, we can pay a higher percentage of the gross margin.

    Another thing you can look at is paying a smaller commission for your 'house leads', in terms of where you mention advertising. The quicker you can recoup advertising costs, the more your company can make sense of ramping up that investment, the more leads you have for your team. 

    Just my thoughts.

    Chris Franks
    CEO 
    Complete Mobile Dentistry
    Chris@completemobiledentistry.com

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    Chris Franks
    CEO
    Complete Mobile Dentistry
    Windsor WI
    (608) 492-5733
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  • 3.  RE: Administrative Percentage

    Posted 01-20-2021 13:02
    Hi Jennifer. If you are paying a commission based on gross profit, I'm not sure how costs from SG&A impact that as it relates to the commission? I guess you can certainly deduct certain operating expenses, but it seems to me that what you're really incentivizing, then, is bottom line profitability. Should your commission plan be based on that?

    Also, by including costs into the calculation, you are adding things that in some cases are not directly controllable by the staff. Those then can become a disincentive and actually be counter-productive to what you are trying to accomplish with the commission. Maybe what you should consider is a commission that pays out at 100% for a certain GP number that you determine. Then, if the deal comes in less than that, you have a scale that reduces the commission accordingly, and the same for deals that exceed your GP benchmark.

    Best of luck!

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    Jay Mattern
    CEO
    TerraFirma Marketing
    South Bend IN
    (574) 213-3855
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  • 4.  RE: Administrative Percentage

    Posted 01-21-2021 11:19
    Hi Jennifer - Jay has some great points. Let your production staff worry about making good deals for you (at whatever GP% threshold you have set for them). It's up to ownership/leadership to worry about controlling OpEx. Production staff should not be placed in the same position as ownership - it's not fair for them as they don't have control over the business' fixed costs.

    Commission structure should just be a variable cost that slides with GP. It might be classed as OpEx but it is variable based on actual production. If you have a GP% target each month, you should know what to expect from a GP$ standpoint. This simplifies everything - then driving sales is the only thing that matters, because you have firm GP margin requirements for every dollar in sales, and know what your monthly OpEx will be.

    Since OpEx is largely fixed, you should know what GP threshold your business is required to hit to satisfy OpEx and arrive at whatever profitability % you are targeting.


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    Sean Barber
    CEO
    Pluto Healthcare Staffing
    Columbus OH
    (513) 600-7331
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  • 5.  RE: Administrative Percentage

    Posted 01-21-2021 11:26

    Thanks Sean and Jay.  I am primarily worried about the first sales person that I hired.  She was hired in at a 50% commission rate off Gross Margin.  I am hiring in new sales people at a salary plus commission structure, and I am not as concerned about an administrative cost sharing role with them as I am the person who is on a straight commission structure.  Although, the company that I used to work at did have an administrative amount that came out of our gross margin prior to paying commission.  So, I assumed that this was common practice.

     

    1.4257011397@web370104.mail.gq1.yahooJennifer Conrad | Director of Educational Resources

    Birch Agency

    Nationwide Special Education Staffing Services

    P: 727-781-7812

    FAX: 727-674-0704

    jconrad@birchagency.com

    www.birchagency.com

     

    Connect with me:    

     

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  • 6.  RE: Administrative Percentage

    Posted 01-21-2021 14:50
    Hi Jennifer - that makes sense. I am not familiar with that type of structure based on my experience in our industry. I think it is tough to justify - it puts production staff in a very challenging position as Jay commented earlier. It also sounds like a tremendous logistical burden on you to calculate this "cost" each time commission is paid.

    Do you think you'd be able to restructure things with that one sales person? It sounds like it's a poison pill structure - someone keeping 50% of GP would make them more profitable than ownership at a lot of agencies. If your GP% is 30%, they are getting paid 15% of Revenue. That's just not sustainable.

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    Sean Barber
    CEO
    Pluto Healthcare Staffing
    Columbus OH
    (513) 600-7331
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  • 7.  RE: Administrative Percentage

    Posted 01-21-2021 16:00
    Wow! 50%! I agree with Sean. You can't maintain that level of commission. My former staffing firm had a commission based on 2% of gross profit.You may have to step your current sales person out of that over a period of time and you'll probably have to offset some of it on the salary side (assuming they are someone you want to retain).

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    Jay Mattern
    CEO
    TerraFirma Marketing
    South Bend IN
    (574) 213-3855
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  • 8.  RE: Administrative Percentage

    Posted 01-21-2021 17:05
    I have always used a simple rule of thumb when reviewing  a commission plan with our clients, and we call it the rule of 1/3rd.  Until such time that a person has covered 3x's their regular salary no commission would be paid. While ​this may appear to be too much, if the base salary is 50,000 no commission would be paid till Gross Margin is 150,000.   This provides you with 1/3 to cover the salary, 1/3 to cover all overhead, payroll taxes, workers comp, ATS costs, margin costs, etc. and 1/3 for profit to the owner.  In this case that means 50,000 should be going to the owner at which time you would be sharing the profits of the entity with them.  Too many times when we drive into the numbers we find out that the commission plan took no account of owners profit they are expecting before they pay the employee, nor all the overhead, and remember overhead is not always a fixed set number either.  So while a very antiqued method, it appears to normally do the job of making sure that a base gross margin is hit first and thus anything above that you have already covered your overhead plus a profit amount for the entity.

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    Jerry Grady
    Partner
    UHY LLP
    Ann Arbor MI
    (734) 213-1040
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  • 9.  RE: Administrative Percentage

    Posted 01-22-2021 09:01
    Hi Jennifer - at my last gig, we instituted a fixed 3.3% workers comp/healthcare cost into the COGS.  While it was by no means exact, it did decrease the commissionable gross profit amount to our recruiters and sales managers, which indirectly helped offset the actual workers comp and healthcare charge.  This 3.3% did not hit the P&L.


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    Chris Pang
    Financial Planning and Analytics Manager
    The CSI Companies
    Jacksonville FL
    (904) 338-9785
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  • 10.  RE: Administrative Percentage

    Posted 01-22-2021 09:26
    Great point, Chris! We had a pre-set accrual rate for W/C as well. It was essentially an averaged % (plus a little extra) that we plugged into COGS so that our teams had a single cost basis and could accurately calculate bill rates. We then "picked up" the difference between the accrual and the actual cost. Profit centers did not share in the pickup, however.

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    Jay Mattern
    CEO
    TerraFirma Marketing
    South Bend IN
    (574) 213-3855
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