Want to Work on Commission? Make Sure You Have a Nest Egg

by | March 10, 2009

The possibility of an uncapped paycheck can entice people to commission-based jobs. Although the prospect of earning big money in one "good" month can be tempting, there are risks involved in making the switch, especially for folks accustomed to a steady paycheck.

Mike Little, a 45-year-old sales representative at a packaging label company in Fort Worth, Texas, has seen his life savings depleted four or five times in his 23 years in sales. "Your rewards can be huge but the risks can be just as big," he says.

The inconsistent nature of working on commission doesn't suit everyone. Here are some tips for those considering the switch:

1. Evaluate Your Personality

Working on commission requires establishing relationships, massaging deals and building trust with clients. In order to be successful, it helps to be a "people person."

"Introverts will not succeed on commission," says Rick Gold, vice president of Strategic Workforce Solutions Inc., a full-service search firm in New York. "Clients don't necessarily do business with me because I'm the best recruiter ever, it's because I build relationships and trust," he says.

Work ethic, self-motivation and a thick skin are major requirements to succeed on commission.

"If you're not disciplined, commissions could be a disaster for you," says Mike Humphrey, 55 years old, vice president of Bailey Insurance and Financial Services in Waco, Texas.

John Vosilla, a real-estate agent for Our Island Real Estate in Staten Island, N.Y, agrees. Mr. Vosilla, 49, says a regimented schedule is fundamental to working on commission even though a supervisor isn't enforcing it. He works five to six days a week from 10 a.m. to 8 p.m. and says he is reluctant to vacation until he builds a network of referrals.

Debby Stone, founder of InterVision Group, LLC, a leadership and career coaching and consulting firm in Alpharetta, Ga. says she evaluates how goal-oriented and resilient clients considering commission-based jobs are. She says that candidates must be self-motivated and able to bounce back after hearing "no."

2. Manage Expectations.

Although an optimistic attitude is important, your expectations when first starting out should be sensible.

"It could take six months before you close your first deal," says Mr. Gold. He suggests saving up a nest egg of at least six months of salary before making the move to support yourself while you build a network of clients.

Mr. Vosilla didn't receive his first check for seven months and says it is important to consider the lag time of sales. In real estate, it could take 45-90 days for a closing.

If you are unable to save, another option is to try to work for a company that offers a draw, where the firm fronts money for you to live on which is then repaid once you start closing deals.

Mr. Little set up a "guarantee" with his new company. While he gets established and brings over former clients, they reimburse him with checks that would equal a $55,000 salary. Once he brings in his own deals and is able to make at least $55,000 in commission, the checks will stop.

3. Create a Budget.

Setting a budget can ease your transition to fluctuating paychecks. "There are some months where I'm living like a king and other months that I'm just getting by," says Mr. Gold, who tries to put at least half of every commission check into an investment account.

In order to survive on commission, you have to be wise with the big checks and make the small checks stretch. Mr. Humphrey and his wife created a budget early in his career. He says it can be tempting to splurge when a "monster check" comes in, but he says he puts the smallest, conservative amount in his checking account and saves the rest.

"I've had a couple of months with negative commission statements where I actually owed the company money," says Mr. Humphrey, who relied on his savings to get through the tough times. He also avoided long-term financial obligations such as mortgages and car payments by renting.

4. Get family onboard.

Your new working situation will likely affect your family, so it is important for them to know some of the challenges of working on commission.

If a spouse has a salaried position with benefits that cover you, your transition may be easier, says Mr. Little. If a spouse also works on commission or you are the sole provider, you should evaluate whether working on commission is feasible for your family.

Mr. Humphrey admits it was initially hard to get his wife to accept the idea of an inconsistent paycheck.

The change may cause stress on the relationship, Mr. Little says he thinks the "up and down nature of the business" contributed to his divorce.

"Anyone who plays an important role in your life needs to understand it may have a financial and emotional impact," says Ms. Stone.

5. Know the rules.

As with any job change, it is wise to research companies you are considering working for. Ms. Stone suggests speaking with current and former employees to gauge whether the company treats salespeople fairly. "Ask questions that may be uncomfortable to ask of the interviewer such as how much they earn and what to expect about sales territory," says Ms. Stone. She suggests asking a question such as, "Would you recommend the company to a friend?" and evaluating the response.

It is also important to fully understand the terms of your arrangement. Review a copy of the commission plan before you accept any offers, and during the interview process, ask if the commission plan changes over the course of the year, says Mr. Humphrey.

Understanding your sales territory and researching the market can give you a realistic perspective of your earning potential. Ms. Stone says to research how many prospective companies are in your market, how many have been contacted by predecessors and how many have relationships with competitors.

Filed Under: Job Search


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