Should You Pay Per Performance?

05/04/2015 02:32 pm ET | Updated May 03, 2016

As an entrepreneur or founder/manager of a startup, the idea of "paying per performance" for contractors, freelancers, and consultants--instead of paying a flat fee regardless of immediate results seen or not--can be quite alluring. This type of payment strategy means your collaborators are paid based on performance or results. Nobody gets paid unless there are profits, which can be a great means of motivating your collaborators, keeping them honest and also optimizing ambition.

However, there are a few things to keep in mind if this is the tactic you'd like to take. 

The first big mistake is not having a pay per performance written agreement beforehand. Some contractors offer their own agreements, but it's likely in your best interest to draft these yourself. This way, you can ensure there aren't any loopholes and you can play with the terms to make it attractive enough to lure in the best candidates. Here are the rules for creating a pay per performance agreement so that everyone involved benefits:

 Run the Numbers First

Adopt a backwards first approach when drafting the agreement, and figure out what numbers you'd like to achieve up front. For example, maybe you're looking for a certain number of sales. This can be manipulated with conversions, traffic, subscriptions, and the like. You should be able to identify what numbers will lead to what sales figures. Tap into your sales funnel to figure out milestones and customer lifetime value. This way, you'll know exactly the value of every lead.

Ditch Unnecessary Obstacles

A lot of the time, you might be struggling with barriers for no good reason. Take key performance indicators (KPIs) as well as projections in order to "pitch" your agreement to consultants. On the other hand, you can also just ask potential consultants how much they can commit to--just make sure to get a quantifiable figure.

This is where negotiating can kick in. The consultant might give you a counter offer, and if you want to woo the best consultant you might need to give them a larger commission, a base fee on top of commission, or other perk. That base fee makes the agreement not quite pay per performance, but it can give them peace of mind that at the very least they'll be getting something out of all their hard work.

Put Yourself in Their Shoes

You know your pros, cons, and worries from an employer's standpoint. However, don't forget about empathy. Imagine yourself in the shoes of a consultant--for example, let's take a grant writer. Would you want to do all that research, writing, organizing, etc. and not get paid anything for it? Even the best grant proposals have no guarantee of getting picked up. That's a huge risk your consultant is taking, so you may need to sweeten the deal.

Striking a Deal with Piecework Fees 

There doesn't need to be a potential winner/loser scenario. A piecework fee, or base fee, can help give your consultant peace of mind while also motivating them to do their best work. Remember that pay per performance fee isn't a way to control consultants or get the most bang for your buck. It's actually just a way to keep incentives aligned and nurture great relationships. Consultants are entrepreneurs, too so you're already on the same page. It'll take a little more effort and time to come to an agreement, but with the right scenario it's well worth it.