Channel Partners

December 1, 2005

4 Min Read
Its Time for a Change in Subagent Compensation

In an industry beset by continual change, it is surprising to see certain business processes remain static. For example, the business process of commission splits and 1099 taxation has not changed in decades. Isnt it time our industry consider some alternative compensation models for indirect sales partners?

Approximately 35,000 businesses and individuals earn some or all of their income from agency-type telecom sales. Most gain a significant percentage of this revenue by placing orders through master agents. These master agents are largely me too organizations as it concerns compensation. Almost all follow the same method of splitting commissions in varying percentages. Traditionally the subagent is an independent representative that receives payment of commissions on a split with the master agent. The subagent receives a 1099 for tax purposes.

What does this mean to him or her?

First, he or she has no legal standing with a carrier. A carrier may or may not choose to work directly with the subagent. Often carriers will insulate themselves from subagents by forcing the master agent to be the go-between.

Second, under a 1099 tax structure, the subagent has to pay self-employment taxes as well as supply his or her own health insurance both of which can be extremely expensive. Its been this way for decades. My question is, Why?

Lets look at some alternative methods of compensation that enable subagents to gain the benefits they seek freedom and independence, high earning potential, verifiable and bankable earnings, access to health care, insurance and other creative differentiators.

The first issue to consider is independence.

People often choose to become subagents to gain the freedom and independence of being selfemployed. Having no one to answer to but oneself is consistently pointed out as being a primary driver for people coming into this business model. To be rewarded with that independence, master agents typically pay only for sales brought to them. Fair enough.

So what about the subagent who has, over time, brought a consistent stream of revenue to the master agent? They are relegated to an ongoing struggle to get paid a higher and higher percentage of the master agent revenue while still getting paid on a 1099 tax basis. They often receive nothing more than a check.

One alternative for subagents is to work for a master agent as a straight commission employee. This method, which allows the master agent to pay on a W-2 with taxes withheld, can benefit the subagent in ways the payment of 1099 commissions alone cannot.

Master agents who offer a straight commission employee model pay commissions with all appropriate taxes withheld roughly equal to the net of a 1099 minus self-employment tax while offloading the tax reporting burden for subagent. Additionally, depending upon the business rules for insurance in their states, straight commission employees may gain access to health, dental and other medical insurance programs the employer may offer.

As employees, wont subagents lose their freedom? Not necessarily. Some master agent employers allow straight commission employees to retain the freedom to do as much or as little as they desire, without the imposition of quotas, reporting or any other onerous sales requirements.

In addition, straight commission employees also have the advantages of bankable earnings to more easily secure loans while experiencing no change in net pay because it is derived from commissions. They also can carry the master agencys brand for marketing purposes.

The second issue to consider is how much you actually get paid.

While most master agents are completely reputable, some have hidden or understated the actual payments they receive from carriers. They then pay the split, based on the understated commission rates. This process shortchanges the subagent.

While we advocate full disclosure of carrier commissions on revenue splits, another approach is to disclose the full and complete commissions paid and pass on 100 percent of these amounts without a split. In this scenario, subagents pay a fixed licensing fee. One advantage of being licensees is that subagents gain legal standing with the carriers. Licensees also can be given straight commission employee status, as previously described.

It is incumbent on master agents and subagents to revisit the onesize- fits-all commission model and look at a total compensation and benefits package for the long-term health of the indirect channel.

Peter J. Keane is president and CEO of KeaneTel, a master agency based in Hammonton, N.J., that offers a range of compensation plans and options to its sales agents. He can be reached at [email protected].


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