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van
07-09-2010, 11:08 AM
hello. i'm new here. i decided to join as i saw the other threads as being very helpful-- and i was hoping you guys can help with my question.

i was wondering if anyone's familiar with industrial partners? i'm not that familiar with the terms and conditions of having this type of partner, but from how i understand it, starting a business, this partner does not put in any financial capital. his share is from his skill/service input into the business. my question is, does an industrial partner get a monthly salary like the other partners who handle operation and marketing but have financial share/investment in the company?

thanks!

Spider
07-09-2010, 05:16 PM
You can set it up however you all agree. To my mind, the financial input and the physical work input are separate things, to be considered separately - Partner A might put money in and do no work, Partner B may work but have no financial stake, and Partner C might have a financial interest and work in the business. You could set it up as a partnership - with all the ramifications of a partnership - or simply incorporate and hire for a salary those who will work and sell shares to those who will invest financial value.

van
07-09-2010, 10:44 PM
Hi, spider! thanks for the reply. I just find it a bit tricky. We are 3 in the business (hehe, it's just a modest one, nothing spectacular). Partner A and B both shoulder the financial investment and have 40% share each in the company. In terms of work, A will handle operations, B will handle marketing.

Partner C has no financial input but is given a 20% share for his equivalent skill input. Logically, A and B, on top of being company owners, are technically employees for the role they play and are given salaries.

I am thinking Partner C (IT skill) shouldn't have a salary as his work is the investment he's putting in in lieu of money that awards him 20% share. I think I'm looking at it correctly but it feels quite weird to make him work 9-5 (like Partner A and B's sked) without pay though... but his work is his investment...right?

i was thinking that he be given an allowance? But to be fair, whatever amount this allowance is should also be additionally given to A and B as well, right? but this is too much of a financial drain for a starting business, so I guess this wouldn't work now....

sequoiapayroll
07-09-2010, 11:48 PM
Knowing what type of business this is would really help...

As mentioned, you can set this up however you want. Partner "C" is being paid for the skill he brings to the table. You can get different opinions on this all day long, but if you want my .02, It seems fair to pay him 20%. He may not be putting money into the business, but IT knowledge is very valuable, especially if you plan on having any type of business presence on the web. It is also valuable if you plan on expanding your business in any way. Think about it, if you want to set up a phone system for an office, he can do that. If you need to network computers, or create internal e-mail, he can do that as well.

I do have a question, If partners A&B are given 80% collectively and partner C gets 20%, where will the "salaries" come from?

My opinion: Get an LLC partnership, Invest your money, set everyone up with a small salary. I would pay "C" according to the work he is doing. If the other two partners are doing more work, pay them more. At the end of the year (or quarterly, or whatever) do a profit share option to divvy out the remaining funds as desired.

van
07-10-2010, 01:56 AM
hi, sequioa! thanks for your thoughts. re salaries: it'll be scheduled eventually when sales are satisfactory and can sustain such. it won't be in the immediate 6 mos or maybe year after the business begins, but if things are already profitable, we are considering retroactive partial compensation and/or commencement of regular salary... and yup the 40-40-20 is just a guide how to disburse allotted x profit.

the set up we're looking at is forming a corporation. Though it is net based, the IT is quite simple and we can actually commission someone to make and maintain it. We have 4 on file actually should we got that way. On the scale of tasks, the most burdensome would be marketing.

re giving the industrial partner a salary, the thing that "bothers" me is that, how's this arrangement more advantageous than just hiring him as an employee then? the reason why we (partners A and B) considered giving him a share is for him to be personally invested in the creation and improvement of IT side and, more importantly, to minimize/zero the IT expenses of this start up. He doesn't want to put in cash -- what will deserve him his 20% share? If he gets a salary, we're virtually paying him to be a partner?... There's no offering on his part. Maybe limited time without salary compared to Partners A&B?

what do you think? sorry, i'm not that familiar with this business practice and am still researching it. my own business is sole prop so this is the first time to explore this kind of partnership. please feel free to share anything you'd like.

Spider
07-10-2010, 10:17 AM
I'm glad you have decided to incorporate. That means you will not actually be partners, although you may refer to yourselves as such.

I see it like this.

Mr.A. buys shares to whatever amount and that is his share in the business. (40%)
Mr.B. buys shares to whatever amount and that is his share in the business. (40%)
Mr.C. does not buy any shares but has shares allocated to him for his expertise. (20%)

Or, Mr.B. could be given shares over time to reward his continued involvement (eg. 10 shares for every month of employment up to a maximum of 20% of the total shareholding.)

Whatever you all agree regarding the shares, that has nothing to do with salary. A salary and working hours, etc. should be agreed and paid for all parties. If one of them is not going to work, he doesn't get a salary. Those that work get a salary.

Distribution of profits is made $X-amount per share paid to each of the shareholders.

If you think of the shareholders as separate from the employees, you will find it easier to figure out.

van
07-10-2010, 12:24 PM
hi, spider. i understand what you're saying but why do i still have this gnawing feeling about that arrangement? Sorry, i really don't mean to be difficult, i just need to convince myself that this is fair to be able to proceed with a clear head. please bear with me.

I do recognize that being a shareholder and employee are two different things. I find it a bit off though for C to be given a 20% share as reward(!) for just being involved. Just like C, A and B are involved and assigned Marketing and Operations respectively because it's their expertise, but they put in financially to earn their 40%... you get where I'm coming from?

Does this sound fair? Let's say 40%= $40,000, which means 20% = $20,000. He needs to put in 20k. When salaries do begin, partial deductions will be applied to his salary until the total deductions amounts to 20k, afterwhich he gets full salary.... does that make sense?

sequoiapayroll
07-10-2010, 01:27 PM
re giving the industrial partner a salary, the thing that "bothers" me is that, how's this arrangement more advantageous than just hiring him as an employee then? the reason why we (partners A and B) considered giving him a share is for him to be personally invested in the creation and improvement of IT side and, more importantly, to minimize/zero the IT expenses of this start up. He doesn't want to put in cash -- what will deserve him his 20% share? If he gets a salary, we're virtually paying him to be a partner?... There's no offering on his part. Maybe limited time without salary compared to Partners A&B?

what do you think? sorry, i'm not that familiar with this business practice and am still researching it. my own business is sole prop so this is the first time to explore this kind of partnership. please feel free to share anything you'd like.


Based on this, it sounds to me that you would rather pay him as an investor instead of an actual member of the corporation. And you can do that, if you want. If he were an investor, he would be investing time and "know-how" into the company, without a pay check. He would receive a portion of the net profit at the end of the year/quarter/whatever. He would not have any "ownership" in the company, however you would be tied to him financially for a set pre-determined period of time in a contract. If you would like to talk this through with someone, give me a call at 479-409-8284, my name is Josh. I am not trying to vie for your business, but we do handle incorporations for new businesses on a somewhat regular basis. No obligation, just a phone call. And maybe we can help shed some light on what would be the best move for this start up.

Spider
07-10-2010, 05:26 PM
hi, spider. i understand what you're saying but why do i still have this gnawing feeling about that arrangement? Sorry, i really don't mean to be difficult, i just need to convince myself that this is fair to be able to proceed with a clear head. please bear with me.
.. I do recognize that being a shareholder and employee are two different things. I find it a bit off though for C to be given a 20% share as reward(!) for just being involved. Just like C, A and B are involved and assigned Marketing and Operations respectively because it's their expertise, but they put in financially to earn their 40%... you get where I'm coming from?
.. Does this sound fair? Let's say 40%= $40,000, which means 20% = $20,000. He needs to put in 20k. When salaries do begin, partial deductions will be applied to his salary until the total deductions amounts to 20k, afterwhich he gets full salary.... does that make sense?Let's suppose you are starting a business in sports apparel, and Michael Jordan said he would like to be involved but didn't want to invest any money. Just having Michael Jordan part of the company would be enormously beneficial to you, and paying him 20% of the profits just to be able to use his name would be worth it, eh?

Now, Is your man a "Michael Jordan" of the IT industry? If not, is there some value in having him part of the company? If not, why do you want to give him 20% ownership?

Perhaps Mr.A. has the concept for the business and you need Mr.C, to make it happen. Is his expertise worth 20% ownership? If yes, you pay him whatever percentage ownership to bring him on board and tie him to the corporation, then pay him a salary to do the work he will have to do.

Perhaps, Mr.C. is the concept person. Perhaps Mr.C. is Steve Jobs. Would you give Steve Jobs 20% of your company just to have him involved and come to a board meeting once a month? Would you also pay him a salary, too, so that he spends part of every day with you?

If Mr.C. is just a nice guy with IT capability, couldn't you hire him - or any other IT person - without giving him a piece of the business? I would want Mr.C. to bring something for that 20%. That "something" could simply be continuity. If any IT person could do the job but changing IT person mid-stream would cause problems, delays, whatever, then giving him a percentage of the company does give him an incentive to stay and see the project through.

I hope these thoughts help you get your mind at ease.

van
07-11-2010, 11:28 AM
spider, i guess that's what it is. He is no Michael Jordan. He is competent and all that, but there is no premium about him per se that will advance the project exponentially. Applicant D, E and F can do what he's to do. In a nutshell, the #1 reason for this whole arrangement is to get a trade of some sort-- his 20% in exchange for the financial equivalent of his service/skill. That way, we can save on cash out for IT requirements. It seemed logical and fair in my head, but just got muddled when I put myself in his shoes and worried about day to day expenses if I didn't have a salary (although if things go right, a continuous hefty end of the year profit share).

But if what you're saying is we have to pay him a salary on top of the 20% profit share, maybe this is a wrong arrangement to consider.

That said, I'm considering sequoia's suggestion more... I may have been using the wrong words, but it sounds close to what we're thinking of... I see, it is not as a "partner", but the term is "investor" instead (or maybe special contractual supplier?) Hmmm....

Spider
07-11-2010, 02:20 PM
How would your business run if you hired Mr.C. and after a few months he quit and you took on Mr.D., then he found a better job so you turned to Mr.E, then to Mr.F. Would this change of personell affect the growth of the the company. If not, perhaps there is no need to offer him free shares. If the constant change of IT person would destroy what you are trying to do, then offering him x shares every 6 months would hold him for the longevity you need.

Actually, I am a great believer in profit-sharing, but that can be done without giving up ownership of the business by way of shareholdings. Here's something I have done in the past very successfully. Every employee was given profit-sharing on the basis that $1 earned in salary or wage was equal to $1 invested in purchasing shares. At the end of the year, the profit distribution was done like this --

1. Add up the total wages and salaries;
2. Add the total wages/salaries to the total amount invested in the company at the beginning.
3. Divide the total from #2 into the profit to be distributed.

Eg. Total wages and salaries paid for the year - $200,000
Total profit to be distributed $20,000
Distribution = 10 cents on the $

Thus, if a person earned $30,000, they received a profit distribution of $3,000
If an investor invested $10,000, they received a profit distribution of $1,000.
If a person invested $5,000 at the beginning, and earned a salary of $35,000, making a total of $40,000, they received a profit distribution of $4,000

-- $1 earned = $1 invested, except the $1 earned had to be earned every year and the #1 invested was a one-time investment.

That worked extremely well for me and helped me take my small business from nothing to multi-million dollar status inside five years.

sequoiapayroll
07-11-2010, 03:34 PM
I think that from what we have discussed, it sounds like partner is the wrong word. Based on everything I've heard, it seems logical to use him as an investor. If you hire him as contractual labor, he will probably want some type of compensation early on, which will be counterproductive to keeping your IT costs low/nil. If it were me, I would set up a contract with him as a short term investor (three to five years, possibly). Terms could be negotiated between all parties until an agreement is made. I would suggest a % of net profit, maybe bi-yearly or even yearly, to give you time to gain profit...

van
07-12-2010, 10:33 PM
sequioa, yes, when we briefly discussed it, he seemed open to the idea of a % in profits. We didn't discuss salaries yet, that's why i wanted to clear in my head first exactly what salary arrangement there would be before we cover that. 3 years sounds perfect, but maybe include a 1 year performance evaluation clause-- it would be frustrating if we find out in the course of the year that he's difficult to work with. If he's great, maybe schedule an increase his %. If this is the arrangement then, do i assume we can't ask for a regular office presence? not necessarily 9-5 everyday... maybe 2x a week? Would that be too demanding?

re profits, i've still to research further about this in this kind of setting (inc.) and would eventually get an accountant for this, but from what i've gathered, you don't disburse the entire profit but just a % of profit as dividend. Say profit is 100,000-- for Investor C, should we give the entire 20k in full, or can we still practice partial profit release (but the balance is still credited to him, of course)? I'm thinking the former sounds fair, the latter more logical business practice and the norm. Lol, intricacies of sole prop is much easier.

spider, yes, i think i should read up more on this. i always equated shareholder = ownership = %profit = fixed. I am very very open to good incentives for performing employees. Hehe, that's the reason why i couldn't work for anyone, I didn't like the idea of working my butt off for fixed pay while the owner reaps much more from my work ;D I was planning team/individual performance bonuses, but what you mentioned is very interesting. I like sharing a sense of ownership with the team. I mentioned above that i've to read more on this, but just a quickie, since you mentioned it in your reward system - how do you compute how much of the profit will be disbursed? Is there a ratio guide for this? Say Profit is 100k, I know you don't pay out the whole amount-- is there a standard how much of that will be disbursed (esp in your reward system, the amount to be distributed is a basis of of how much they'll get.

It sounds really great (your system), but i'm not sure we can do both -- yours and the performance bonuses we were planning for a starting operation... I like yours because the amount's more flexible, i like ours because it'll be employee specific (meaning slackers get no reward)... so we'll have to choose one... but yours seems better... thanks for the suggestion.

Spider
07-13-2010, 12:02 AM
...I like sharing a sense of ownership with the team. I mentioned above that i've to read more on this, but just a quickie, since you mentioned it in your reward system - how do you compute how much of the profit will be disbursed? Is there a ratio guide for this? Say Profit is 100k, I know you don't pay out the whole amount-- is there a standard how much of that will be disbursed (esp in your reward system, the amount to be distributed is a basis of of how much they'll get...In our case, we paid out most, probably 90% - 95%, of net profit. We were a service business and had little need for substantial reserves.



...It sounds really great (your system), but i'm not sure we can do both -- yours and the performance bonuses we were planning for a starting operation...My system was a performance bonus. If the people perform, we make a good profit and everyone gets a better pay-out. If they don't perform, the profit is less and the pay-out is less. It is a true performance bonus, based directly on performance. Not a subjective system where some people (at the top) arbitrarily decide who performed and who didn't.



... I like yours because the amount's more flexible, i like ours because it'll be employee specific (meaning slackers get no reward)... so we'll have to choose one... but yours seems better... thanks for the suggestion.My system was not flexible. It was based on a fixed relationship between labor and capital - $1 earned equalled $1 invested. And the profit was also fixed - the total profit paid out at the end of each year (less a bit to stay in the black.)

The problem your employee-specific system has (and which mine purposely eliminated) is the arbitrary nature of employee-specific pay-outs. Giving different people different bonuses is guaranteed to cause dissatisfaction. We paid our better people a higher wage than we paid our not-so-good people. At the end of the year, the not-so-good people hadn't earned as much as the better people, and that worked out higher payments for the better people and less for the not-so-good people.

In fact, I sold this system well to our employees. They certainly knew that the more money we made as a company, the more money they would make. On one occasion, the local union wanted to meet with me. I met them in our office, with our empoyees. I told our employees that I would love to pay them more but we still had to be competitive, we still had to be the lowest bidder. If I double their salary, we would get no work and they would get double of nothing in wages. In any case, all the profit we made was paid out at the end of each year so they get it anyway. They - our workmen - sent the union officials packing.

As for slackers, the employees will take care of that. On another occasion, three of our men (3 of a 4-man crew), came to me and asked me to fire the other man because he wasn't working well. This man was the brother of one of the three. We had hired him because he was the brother and now this brother was asking for him to be fired. Why? Because he wasn't working well, was holding them back and that would reduce the company profit and therefore reduce their bonuses.

Our employees were ordinary construction industry tradesmen. They were smart enough to realize that doing good work was profitable - and they worked their butts off! And we all made some really good money.

sequoiapayroll
07-13-2010, 11:25 PM
sequioa, yes, when we briefly discussed it, he seemed open to the idea of a % in profits. We didn't discuss salaries yet, that's why i wanted to clear in my head first exactly what salary arrangement there would be before we cover that. 3 years sounds perfect, but maybe include a 1 year performance evaluation clause-- it would be frustrating if we find out in the course of the year that he's difficult to work with. If he's great, maybe schedule an increase his %. If this is the arrangement then, do i assume we can't ask for a regular office presence? not necessarily 9-5 everyday... maybe 2x a week? Would that be too demanding?

re profits, i've still to research further about this in this kind of setting (inc.) and would eventually get an accountant for this, but from what i've gathered, you don't disburse the entire profit but just a % of profit as dividend. Say profit is 100,000-- for Investor C, should we give the entire 20k in full, or can we still practice partial profit release (but the balance is still credited to him, of course)? I'm thinking the former sounds fair, the latter more logical business practice and the norm. Lol, intricacies of sole prop is much easier.


Everything that you mentioned here sounds good, and all of it is up to your preference, as long as the other member(s) of the LLC agree. You could do a full payout of 20%, or a dividend, whatever you agree to. You could also build a contract as to evaluations of performance, however, I would suggest an attorney to draft a contract for this due to the fact of potential of major legal issues if someone waivers on their end of the deal. The only hang up I can see is asking him to spend time at the office. If you regulate days at the office, he has to be classified as an employee and you will have to pay him at least minimum wage, payroll tax, workers comp, etc.
The potential downside to an investor of this sort is the risk that he is lazy. Especially if business is slow. If he knows things are slow, he could reason that 20% of nothing is nothing, and he could lose motivation.

van
07-15-2010, 10:15 AM
altho this is out of the initial topic concern, hope it's ok to discuss it here.

spider, i meant yours is more flexible amount-wise. What we were considering was a target based performance bonus our business being sales driven: certain achieved quotas = corresponding bonus amount for the team and/or individual. Flexible in the sense that the amount they would get a performance bonus progressively proportionate to their performance (ergo, pay). The system we initially thought of won't be subjective as you mentioned as it won't be based on a boss's evaluation, it will be based on sales numbers.

If you've time to spare, could you give your opinion on this:

What I like about our system vs what you're suggesting:
1. Bonus benefits the individual directly vs bonus equalized among same pay employees: say 10k is to be disbursed, 2 out of 10 employees of equal pay are the better performers by a significant margin-- as the distribution is based on pay, the bonus of the 2 will be equitable, not equal

2. reward is immediate (i.e. monthly, bi monthly) as opposed to year-end
i was thinking this might boost their performance for the succeeding month getting the benefits faster?

What i do like about your system is that it fosters team spirit vs competitive environment (then again, is competitive really that bad?) I'm impressed with the brother story you mentioned. I've never directly managed this many people who need to be motivated to be mini-entrepreneurs themselves-- in my own business, i have 5 that are more for operation support than to expand my business. Any tips would be greatly welcome:)

btw, definitely, we can't release 95% of profits. we've so many bases to cover, especially in the start up phase to maybe up to the 2nd yea, wrt projected operations sustainability and upgrade... I was thinking 50-60%. With that in mind, won't the employees feel "cheated" if profit release isn't based on 100%?



If you regulate days at the office, he has to be classified as an employee and you will have to pay him at least minimum wage, payroll tax, workers comp, etc.

sequoia, got it. we'll negotiate this one then, to the minimum as much as possible... or agree on an output schedule should he not want to have regular work time.



The potential downside to an investor of this sort is the risk that he is lazy. Especially if business is slow. If he knows things are slow, he could reason that 20% of nothing is nothing, and he could lose motivation.
If he really has this attitude, won't this arrangement be better to handle this risk as compared to making him a partner/part-owner and then we'd have a harder time replacing him? Am i looking at this correctly?

thanks so much guys!

sequoiapayroll
07-15-2010, 02:54 PM
If he really has this attitude, won't this arrangement be better to handle this risk as compared to making him a partner/part-owner and then we'd have a harder time replacing him? Am i looking at this correctly?

thanks so much guys!

Absolutely. At this point, I would not use this IT guy as a partner in the corp. He either needs to be a "blind" investor(not really knowing the profit numbers), or he needs to be contract labor, and be completely separate from the business. The benefit to investor over contract labor is no upfront cost. You could address work performance in your contract, and cut him loose if he isn't holding up to his end of the bargain.

Spider
07-15-2010, 05:25 PM
Van, it seems to me you are talking about a sales commission, are you? If yours is a sales company and everything revolves around sales, then certainly sales is the performance measure. Mine was a service business, so that profit accrued by working efficiently.

Even when workmen are on the same payscale, they never get paid the same in total because of overtime hours, days off, vacation time worked, etc.

The problem with basing performance bonus on sales is that not everyone in the company will be totally and directly involved with sales - office support staff, the product development people, and so on. No matter what you do with a sales-based performance measure, some people will score no direct sales success but will have been instrumental in the success of the sales people. And they need to be compensated, too.

If you pay your people fairly, and in relation to their value to the company, any distribution of profit on the basis of what they earned must also be fair.

I'm thinking you might have a sales commission to reward and motivate sales (which could be monthly), and end-of-the-year profit-sharing, which rewards and motivates general good work.

Perhaps you could establish a sales performace bonus of 5% of sales volume, say. Announce that 75% of the total sales bonus will be paid to sales reps proportional to their sales figures, and 25% would be divided evenly amongst all non-sales staff for the help and support their work gave to the sales people. Or something along those lines.

A 50 - 60% of profit distribution will be quite acceptable if properly explained. Even less, if adequatley explained. People are not stupid to business needs. You can explain that 50% of profit will be retained for future business expansion, and 50% paid out as end-of-year disbursement to all staff based on....whatever you decide.... Especially of you can be somewhat specific about the future expansions planned and hoped for, and how they will benefit the employees in the long term.

I hope this helps.

van
07-15-2010, 09:09 PM
sequoia, thanks:D

spider, no, it's bonus on top of the commission--- um, is that too much? Oh, maybe we can combine both systems, that way even the non-sales people can be included as well. Very nice thought, I didn't consider them, thanks. The monthly bonuses we're considering are quite significant amounts, you're right, maybe we could either scale that down a bit to be able to accommodate the year-end profit sharing or explain that a % of it will go to the non-sales.

Last question though, I assume it's safe by the fact that you're recommending this type of reward system, but isn't there a danger revealing the exact numbers of the company's books to each and every employee? And by the summary of disbursement they'll receive to explain their share, how much their fellow employees take home amount would be? Yes, I can be over-paranoid...

Spider
07-15-2010, 09:37 PM
What is the point of a monthly bonus on top of a monthly commission? Aren't they really the same? They would be the same if the method of calculating them is the same - a percentage of sales. Why not just have a larger commission?

Here's a thought - although it takes a little more work for you to administer, but not much once it is established. Give your salespeople their commission based on sales. Then have a sales bonus for non-sales staff, being a stated percentage of total sales for the month. The salespeople would vote the percentage of the bonus to go to each non-sales staff member. The votes would be merged to come up with the percentage of the bonus to be awarded to whom. This way those non-sales staff members that are most helpful towards the sales people gaining sales would be rewarded appropriately.

Whatever you do on this, I still believe an end-of-year profit-sharing is important to keep everyone pointed in the same direction and keeping their eyes on the prize - the bottom line.

I see no danger in revealing details from the company's books. 1) Most people won't be interested. 2) When you have grown into a public company, you will have to share your accounting details with the entire world! Get used to it now! As for revealing everyone's pay to everyone else, I never found that necessary - all you need to say is "The 50% of profit was divided into the total wage and salary cost and that gave everyone a share of 10 cents for every dollar earned - if you earned $20,000 last year, your share of the profit was $2,000., if you earned $40,000 your share is $4,000, and so on." I never had anyone ask for a more detailed breakdown.

van
07-16-2010, 02:51 AM
spider, I didn't really see the commission as a bonus, but more of a performance based partial salary; the other portion would be the regular minimum- above minimum wage. So the more they close, the more commission + regular basic pay, the bigger their take home pay. The alternative would be higher basic pay, but much smaller or no commission. If they close x contracts, then they get a performance bonus.

The monthly/quarterly performance bonus may or may not be implemented and the amounts "regulated" (based on sales trend); unlike the commission where the employee is entitled to it not as a a bonus but as a form of pay so regardless of th company's sales performance, it will be given. Sorry if I'm not using the right terms, but in the one and only company I worked at briefly decades ago, that's how they did it and I don't remember any complaints... Is this system weird?

Spider
07-16-2010, 09:17 AM
You lost me a bit here, Van. Maybe that was because I wasn't clear. If payment is going to be calculated as a percentage of sales, then I would call that commission. But if a bonus is going to be calculated in the same way - as a percentage of sales - what's the difference? Seems you have some other rule in there to make a bonus different from a commission - what is that rule?

Now I see that the bonus may or may not be implemented. Does that mean this is an arbitrary payment - and you'll pay it sometimes and not others, when you feel like it, perhaps? Does the amounts being "regulated" mean that there will be no basis for calculatimg the bonus and that the amount of the bonus will be arbitrarily decided?

When you say that employees will be entitled to the commission "not as a bonus," are you saying they will not be entitled to the bonus and that it will be arbitrarily given?

van
07-16-2010, 11:50 AM
We're on the same page-- i think I'm the confusing one. Sorry.

Hypothetical: Minimum wage $1,000 a month
Employee A basic salary: $1,200 (just a little above minimum)

Method 1:
For every sale that's worth $300 each, he gets 10% commission= $30@.
If he sells 10 units = commission is $300
Take home pay that month: 1200 + 300 = $1,500

If the $600 performance bonus is implemented that month, meaning if he is able to sell quota of 20 units, his take home pay will be: 1,200 + 600 = 1,800
plus the bonus of $600, total would be = $2,400

If on the second month he sells the same, but the bonus is bigger $1000, then he'll be getting 1,800 plus 1,000 bonus, total would be = $2,800

Method 2:
I guess we can do what you're saying to make it less complicated... on the second month example= 1,200 + 600 (10% of the 20 units) , total would be = $1,800

The advantage i see in method 1 is that it's specific target driven, the objective is clearer. They don't only have to perform well, there's a specific number they need to be able to hit to get the bonus.

Second advantage is that we can adjust the bonus amount accordingly depending on sales trend of the entire team. Increase, maybe increase further, or decrease. As much as possible, we'll aim for a bonus every month. Increase in the bonus performance amount will reward the employee higher, than if we just base it on a fixed commission % as in 2nd month comparison between methods 1&2 above.

what do you think?

Spider
07-16-2010, 09:14 PM
When trying to assess anything like this, I try to put myself on the receiving end - How would I react if I was offered this as an employee?

Method 1 — I would know what my salary is. I would know what the commission rate is. I would know how many I sell so I could easily calculate what I will earn in commission. What I don't know and have no way of calculating is the bonus. What I cannot ascertain cannot motivate me. You say, "If... a performance bonus is implemented that month." That means to me that it may not be implemented. You say, in the second month, the bonus may be bigger. That says to me it may be smaller. Or non-existent! I would react by saying to myself, I may or may not get a bonus, it may or may not be worth working hard for. Forget it! If I get something, Great! If not, well, I won't bank on it - I'll focus on the commission and anything I get over that will just be gravy. IOW, the performance bonus will not be an incentive.

Method 2 is just straight pay – salary plus commission. No incentive.

Have you dropped the profit-sharing idea?

Marco Santori
07-19-2010, 07:35 PM
Van, I'm new on this board as well, and your discussion pulled me in. I have to echo Sequoia's comments here, in that you're contemplating a fairly sophisticated agreement between you and your industrial partner (or whatever we end up calling him). This is likely not a job for legalzoom or some other online incorporator. They have their uses, but for the business association you'd likely end up forming, you're going to need to consult an attorney to draft a quick agreement for you.

I've worked with people who have successfully accomplished this in the past. It's likely no more than a few hundred bucks. Don't let them fool you - it can be done cost-efficiently. PM me if you have questions about the legal issues (there are several that pop into my head just from reading this).

I will also add that the beauty of the LLC form is its flexibility: you can give your industrial partner an ownership stake in the corporation so that he has some skin in the game, but still tailor it to allow him just as much freedom and demand just as many obligations as you like. Further, you can set forth the way you'd like him to be paid with great specificity. Practically speaking, this is an inconvenient process if you try to use the traditional corporate form. I could go on about how to use an LLC to accomplish this. Shoot me an email if you have specific questions. I'm happy to help.

From what I've read so far, making him a member with carefully tailored limitations on his management role is the way to go.

van
07-19-2010, 09:15 PM
spider, no, we're still incorporating the end of the year scheme, will calculate the best % for all when the real figures for base pay are established... I was just explaining how the original plan we had would've worked :) we would like any scheme to be as motivating as possible-- in your evaluation of method1-- shouldn't the basis for pay calculation for any potential employee be just the basic pay and the commission? the bonus after all is that, a bonus? meaning regardless how it is calculated (either by the varying monthly bonus or by year-end employee profit%) no figure is definite and it may range from small to significant, depending on a lot of factors which aren't all in his control? (sales climate, unseen company expenses, , etc) meaning even if we do the employee profit%, he should primarily be satisfied with his fixed pay to accept the job because the bonuses may or may not meet his expectations come end of the year. That said, your recommendation for the end of the year % has an undeniable psychological value so we're definitely incorporating it.

hi, marco! thanks for the offer! we're still going for the inc. route, whether the IT guy is on-board as a partner or not. thanks for the offer for legal insight, will take you up on that when the need arises.

Spider
07-19-2010, 10:55 PM
Okay. From what I understand you to be saying, all employees will get a salary and all will be involved in the profit-sharing, and the sales people will get commision, too. So, what is a bonus expected to do? If I don't know what the bonus is going to be, it won't motivate me to work harder.

You could make a game of it. Devise a bonus scheme that is clear and determined but different from month to month---

Month 1. $250 bonus for each sales rep who increases their month's personal sales volume 10 percent over previous month.
Month 2. $500 bonus for winning 5 new clients.
Month 3. $300 bonus for 7 sales to previous buyers.
Month 4. $100 bonus for every order in excess of $3,000
Month 5. $1,000 bonus for the highest volume. $200 for the runner-up.

You can change the bonus frequently, but it must be declared at the beginning of each month so that employees know exactly what they are working towards.

You cannot hit a target you cannot see.

van
07-23-2010, 12:04 AM
Yes, quota and corresponding bonus will definitely be announced a week prior to concerned month. :) and yup, maybe smaller but regularly scheduled bonuses would be better than big amount but intermittent...

thanks A LOT for the help, guys!

Spider
07-23-2010, 09:19 AM
BTW - Don't forget the incentive value of non-financial "bonuses" too. Not everyone is driven by money. Prestige and perks are better motivators for some people -

-- Special "Salesman-of-the-month" parking
-- Desk-top Trophies
-- Executive privileges
-- Theater or stadium tickets
-- Round of golf at topnotch country club.


I enjoyed this conversation - I hope it was helpful. But we did drift away from your original question. How did you settle what to do for the 20 percent non-contributing "partner?"

van
07-28-2010, 11:19 PM
Helpful, indeed! Thanks for the additional incentive tips, spider!:) The 20% partner will be treated as an investor, which excludes him from ownership. So it'll be like, instead of investing financially, it is in kind over the year, at the end of which he gets 20% of the profit. He won't be required to come in on a schedule, just output progress. Forgot to ask-- we were thinking that we'll be releasing to him 20% of the total profit (not just 20% of the profit marked to be released that year), that's would be fair and correct, right?

But, to keep you guys posted on Person C-- well, well.... glad to find out as early as now that we won't be working with him. After 3 months of good communication, last month we had major ethics problems with him. It's a major step back, but at least we found out before this got underway. So we're now about to talk to Person D and E. I don' get some people. They complain that they need additional income, complain about money, etc etc, but when opportunities present themselves, they f it up. Oh well....

Spider
07-29-2010, 10:54 AM
Helpful, indeed! Thanks for the additional incentive tips, spider!:) The 20% partner will be treated as an investor, which excludes him from ownership. So it'll be like, instead of investing financially, it is in kind over the year, at the end of which he gets 20% of the profit. He won't be required to come in on a schedule, just output progress. Forgot to ask-- we were thinking that we'll be releasing to him 20% of the total profit (not just 20% of the profit marked to be released that year), that's would be fair and correct, right? ....I'm confused. You say you will treat your 20% partner like an investor and then go on to describe treating him not like an investor. An Investor of cash would get proportional ownership, wouldn't he? And the Investor of cash would get his relative proportion of distributed profit, right? So, your 20% partner is being paid quite differently from the other investors, it seems. It's not for me to say whether this is fair - if you all agree that is what you want to do, then that makes it fair. Just make sure it is clearly stated and that everyone understands and agrees to the terms.



...But, to keep you guys posted on Person C-- well, well.... glad to find out as early as now that we won't be working with him. After 3 months of good communication, last month we had major ethics problems with him. It's a major step back, but at least we found out before this got underway. So we're now about to talk to Person D and E. I don' get some people. They complain that they need additional income, complain about money, etc etc, but when opportunities present themselves, they f it up. Oh well....It's called Self-sabotage. If we do not feel, deep in our subconscious, that we are worthy of something, we will be inclined to make sure it doesn't happen, no matter how beneficial it may be. It's a strange phenomenon but really quite common.

van
07-30-2010, 10:35 AM
Woops, correct... I'm getting terms mixed up. Not investor, contracted labor rather, with "investor" incentives. Or maybe we can call him a short term investor, it has a better feel :) ... No ownership (but the term may be extended indefinitely) but computation of incentive is straight up a % of profits, and thanks again for making it clearer in my head, 20% of full profit, not distributed profit as real investors will be paid -- meaning his share will be technically an expense of the company (right? because paperwork wise, there's no way to explain his % if he's not a shareholder).

Spider
07-30-2010, 10:50 AM
Yes, that's how I see it, too.

Good job!