For the past decade, nationally syndicated talk-show host and best-selling author Dave Ramsey has helped hundreds of thousands of Americans get out of debt and start living with financial freedom. His genuineness and financial insight have made him something of a national phenomenon. Each week, in this space, he will answer questions from readers about personal finance.
Compensating sales representatives
We are starting a company and I have a question about compensating my sales people. In order to attract the best quality of sales people, and of course I would like to grow the business, what type of plan do you think is best? Is a full commission model better or would a base salary with a commission bonus structure work?
I have a bunch of folks here at my company who do sales and marketing for me. What I do, depending on what it is they are selling and what the lead-time is on it, I put them on a “Survival For All” plan. For instance, they will get a base salary around $25,000 or so. They have enough each month to eat and to get by, but then they have to sell a couple of thousand per month in commissions before they get more than that. That part is called a draw.
In my case, it is a non-refundable draw because I don’t borrow money and I also don’t loan money. It’s non-refundable meaning that if they crash and burn and after 90 days, they haven’t made a dime, then I eat that amount. That makes me hire more carefully to make sure I get quality folks working for me. The draw will eventually be irrelevant because they should be able to make that amount every month, no problem.
Then it turns into a straight commission situation. This works wonderfully as a motivator to your employees. They have to leave the cave, kill something and drag it home, so to speak.
This is my favorite way to pay employees, believe me. I would put the receptionist on straight commission if I could figure out a way to make that work.
You have to know that I come from a background where both of my parents were in the real estate business, so I know nothing but straight commission. I had a salary job once for about three weeks and couldn’t take it. I have to be able to set my own limit to how much I can make.
In your new business you may have to deal with someone who would panic in a straight commission setting, and that may affect his or her performance. Some people can’t perform unless they are relaxed, so the base plus commission structure may give them a bit of security.
So there are a few options, you just have to pick the one that you are most comfortable with, and that creates an atmosphere in the workplace where your people can excel.
Emergency fund or pay off debt?
I have a question about your “baby steps” and how they apply to my situation. I was wondering if I should save up three to six months’ expenses, which is baby step #3 before I pay off my debt with the debt snowball, which is baby step #2.
I am self-employed and work on a contract basis. My current contract will be up in the middle of October, and at that time I will find another contract to replace what I have now. I tend to lean more toward the conservative side, so I want to make sure I have money saved for when the work ends in October. Should I save up my emergency fund now?
In a sense, you are going to be laid off in October, so it would be wise to be prepared for that in advance. Just making the minimum payments on your debt for now and saving up three to six months’ expenses would be one way to plan for that event.
However, the day you get your next contract, I want you to take that emergency fund back down to $1000. You will have gotten your stability back at that point. The good thing is that you have a month and a half or so to be looking for a job. That is a luxury that not many people can afford when they get laid off.
As soon as you have the new contract locked down, bring the emergency fund down and go into attack mode on the debt snowball. I mean every extra dime you can find needs to go to paying off the debt. When you have paid the smallest one, put all of that money toward the second one, and so on. Sell some things if you have to, but get out from under the debt as soon as you can, and don’t ever borrow again.
Think of how quickly you could save three to six months expenses if you had no debts at all. Better yet, think how you could change your family tree if you had no debts to pay and could save like crazy. You can make it happen.
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