CEO's Notebook

CEOs discuss the pros and cons of independent sales reps; when regulations kick in for your business; company relocation on a budget; and KSOPs, the next killer benefit. Plus: "My Biggest Mistake," by HR Block cofounder Henry Bloch.

Hands On

Selling Alone

She fired her sales reps and has no regrets

By Ilan Mochari

Five years ago, when Michelle Lubow wanted to grow Design One, a promotional-merchandise seller in Seattle, into a powerhouse, she brought on five independent sales reps (ISRs). They worked as contractors and were paid strictly on 50% commission. The company quickly doubled its sales, reaching $3 million annually at one point.

But two years later, the reps were selling too many small, low-margin orders, which allowed them to make nice commissions but were lousy for Lubow's bottom line. They were also leaning too hard on her for support on big sales.

So Lubow sacked all five of them last October. She's glad she did, even though she lost five accounts and saw sales drop to $2 million -- and she isn't gaining new customers as rapidly as before. The accounts that stayed with her have grown in size, however, and all the new sales are large, high-margin orders. More important for Lubow, running the business all by herself has been much more delightful. She has more time for being creative and building customer relationships -- something she missed during Design One's early days. "I was spending all day helping the sales staff, and I was no longer enjoying running the business," she says.

Lubow would rather do her own selling than manage a sales force. But for CEOs whose bottom line is revenue growth, ISRs are the way to go. Michael Reagan, who owns a $1.4-million FastSigns franchise shop in Phoenix, uses ISRs even though he's been burned more than once. "Sometimes they act like loose cannons, cutting deals with customers that we can't realistically fulfill," he says. "But if you learn to screen them, they can be great."

Reagan, who serves as head of the nonprofit industry group National Association of Sales Professionals, says that the decision about using ISRs hinges on a company's goals. "The rub is, after you've got a certain market penetration, you say to yourself, 'It would be cheaper to have it all myself, instead of losing 20% to 50% of each sale to commission," he says.

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What to look for in hiring ISRs

As head of the National Association of Sales Professionals, a nonprofit industry group, Michael Reagan knows the pros and cons of employing independent sales reps (ISRs). Here's his list of questions to consider before hiring them:

How will they represent you? "Sometimes they will say or do anything so that a customer says yes," warns Reagan. Watch out for ISRs who take liberties either with price cutting or in making other commitments (delivery time, certain product specifications) that can't be met.

How will they represent your competitors? Beware of ISRs who work for both you and your competitors. That's usually prohibited by their contract, but it does happen. "Often, if they can't do it with company A's product, they'll switch to company B's product," says Reagan.

Who will own the customer relationship? If customers are sold on the ISR (as opposed to your product or service), they might leave once that ISR heads for greener pastures.

How thoroughly have you screened the sales reps? Checking credentials requires a lot of work, but it can be done. "You want to see the results they've created for similar companies. If the ISR is a real professional, they'll give you a résumé which contains that information," says Reagan. --I.M.

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Hot Tips

Saga Software has a performance bonus system with some added oomph. The enterprise-software developer, based in Reston, Va., is a big user of on-the-spot performance bonuses -- to the tune of nearly $300,000 a year, distributed among 40% to 50% of its 800 employees. Elite performers receive cash bonuses worth $500 to $5,000. The company also offers those go-getters an enticing option: defer all or part of the bonus for one year, and Saga will mark up the deferred reward by 50%; sit tight for two years, and the company will double the pot. If you leave Saga, however, you don't get a dime of the money. Only about a third of all bonus recipients have selected the deferral option since the program was inaugurated, in January 1998. But the company believes that more will soon follow suit. --Mike Hofman

A new law allows your senior employees to work more hours. Until recently the government withheld benefits for people 65 and older who made more than $17,000 a year. The idea behind the depression-era rule was to encourage retirement and make room for the next generation. But in today's tight labor market, "the last thing we ought to do is discourage seniors from working," says Congressman Sam Johnson (R-Texas), who sponsored legislation to repeal the earnings limits. In April, President Clinton signed the bill into law, and now 800,000 seniors 65 and over are free to earn as much as they can without reducing their Social Security checks. --Jill Hecht Maxwell

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More Stifled Growth

Last month, in the story " Stifled Growth," we met Frayda Levin, vice-president of Regent Book Co., an $8-million family business based in Lodi, N.J. Levin is a member of the National Federation of Independent Business, an organization that generally opposes certain federal employment regulations, like those that prohibit age discrimination.

Levin was once accused of discriminating against an employee because of that worker's weight. The charge against Levin never resulted in any action against her, but she found the experience sobering.

Although a majority of federal regs cover small businesses, many CEOs don't know when they're breaking -- or nearly breaking -- the law. Part of the confusion stems from the ways in which different rules silently kick in as a company's employee head count reaches certain thresholds. In last month's article we noted which federal regulations go into effect when a company adds its 10th, 15th, and 20th employees. Here are some of the rules that pop up for larger businesses: