Of all the complex business strategy decisions to deliberate, "commission-only versus salary with commissions or bonuses," is certainly the most tricky and the most important.

Over twenty-plus years in business, I've heard all the debates and the pros and cons of each approach, and I have seen each approach work and fail in varying degrees.  There didn't seem much point for me to re-tread all of the same old issues on this topic, but I did think it would be helpful to uncover perspectives and insights that are already out on the web, and to bring them together in one place for review.  Albeit, these are the insights that I've identified with which I agree and my experience validates so that bias does apply.  So here are a few citations that bring together the most salient points...

There are three situations or combination of situations where commission-only sales seems to work well...

1. When the product is easy to sell, commission only provides a way for the salesman to maximise his earnings. I have a friend that sells advertising on a commission-only basis, when his peers have a base combined with a much lower commission.  He chooses commission-only as he spends his day working lists of old customers which have a very high percentage of people that are ready to make a buying decision.
2. When the salesperson is already selling to the target audience and your product would simply be layering-on additional revenue with perceived minimal effort.  This option also covers selling though an ad hoc opportunity, e.g., "I sat next to this guy at lunch and..."
3. Commission-only also seems to work best when their are short sales cycles measured in hours or days.  Long sales cycles cause two issues: First, the time investment increases requiring a much greater ROI for the salesperson.  The second issue is the risk the sale will be “undermined” by competition during a long sales cycle.

When does it not work...

1. Obviously it's not going to work when you get the reverse of the above:  When your product is difficult to sell, when your salespeople have to find brand new customers, and when there are long sales cycles.
2. However it also doesn’t work when it's an excuse to not invest in your sales activity.  I don’t mean just pay retainers, I mean not even providing adequate training, management and follow-up.  All too often commission-only is perceived as an “I’ve got nothing to lose” solution because it supposedly costs the vendor nearly nothing.  The reality is that it can lull you into a false sense of activity or worse you can have your brand completely trashed.
3. It doesn’t work when the agreement is informal or the audit-trail is poor quality.  Both which normally translate into perceived breaches of the agreement, a lack of trust, and sales coming to a stall-out.  All too often I see merchant-banker types fighting over who was owed the commission on a deal that mutated and had mutltiple parties involved along the route to a transaction.
4. Finally, it doesn’t work when what each party brings to the table isn’t valued properly by the other party.  For instance, I am endlessly approached by people who wish to access my network for free (the one I have slaved long and hard to build) and only wish to pay me if they can conclude a transaction – an activity I have no control over.  Another regular theme is that I can have a website built for them at no cost and then make margins from their brilliant product.

A couple of other points to consider...

1. A commission-only sales force has little interest in providing customer service beyond the sale.
2. The hiring and management of commission-only staff can can be a huge drain on the management team as these people are all independent operators.

Source: Does Commission-only Sales Actually Work? (above)
By brendan at 3 March, 2010, 9:37 pm

The first condition required for this model [commission-only sales roles] to work is a short sales cycle. Most people either do not have the patience or simply cannot afford to wait three to six months to complete a sale and earn a commission. In addition to the requirement that these staffers have the financial means to support themselves for several months, a long sales cycle dramatically increases the difficulty of maintaining their interest and motivation...

The second prerequisite for success with this compensation model is a relatively simple product. Consider the items sold by successful home-based and network marketing firms such as Amway: vitamins, long-distance service, household cleaners, the list of products trends very heavily toward simple to understand and consumable goods...

Contrary to the idea that commission-only sales representatives are free, since they are only paid on what they sell, there are two huge costs of using such a sales force:  1. The hiring, training, and supervision of these workers can overwhelm the management team.  2. Independent sales representatives are given little incentive to provide customer service beyond the sale.

Source: The Commission Conundrum (above)
Column by Francisco Dao

How do you find the good reps?  It’s very difficult! The good productive rainmakers usually work with big brands that we all know. The others are very picky about who they will represent. They will ask much of you – do you have current accounts that produce revenue that they can now manage so they can earn business is ready to do business. You must have a great website, enticing brochures, great spec sheets, alluring packaging, and other basics your need to succeed. If you are not ready to play with the big boys, the good reps will take a pass on your and move on to greener pastures.

Should you hire a sales person in house?  I know, money is tight. You barely make enough to pay your mortgage never mind a high priced sales pro. But here lies the dilemma – do you invest in a dedicated proven sales pro who will devote himself to you? How do you know they will perform and at least cover their cost of having them on staff? Perhaps you tried this in the past and have gotten burned – big pay with little or no sales from them. This is always a tough call, but, if you are truly in it for the long haul, you need to invest in good sales people. They are the heart of your organization. Without sales, nothing else happens. We believe one of the best investments you can make is to bring aboard the highest quality sales help you can afford.

Source: Should you hire commission only reps or hire in house sales people? The inside story... (above) by Jim DeBetta, February 22, 2010

There are many reasons why salaries and bonuses are better for both real estate principal and salesperson alike... How you reward your sales team impacts significantly on both the profit of the [business] and on the earnings of the salespeople themselves. When you pay salespeople - or anybody - a percentage of your gross income, you sacrifice profit. When comparing the three most common systems used in real estate agency sales and using the same expenses, the same gross average selling fee, and showing the break-even Points for all three systems, the office that breaks even first is the independent office paying "salaries and bonuses" to its salespeople. Does this mean that the salespeople are worse off? NO!

So why does our industry persist with reward systems that are both unprofitable for the office and are detrimental to the financial health of all but a few of the salespeople working under those systems? [Business] leaders are afraid of losing money paid in salaries to people who do not perform, so they opt for the commission-only system which they believe will minimize losses.  Yet, without adequate hiring programs to properly train and test new recruits, then the chance of failure is high. Just as the recruit reaches the point where he or she is about to make money, the person leaves. This leads to the industry leaders complaining, "You can't find good people!" ...To build a winning team you need a few things working for you: Your office must be ATTRACTIVE. You must have HIRING PROGAMS that minimize the risk of lost salaries paid to the wrong people. You must have TRAINING PROGRAMS designed to get your new people to a satisfactory knowledge level... Your TRAINING PROGRAMS must continue developing your new people for as long as they remain with your company. These four ingredients explain why our Top 100 salespeople perform as well as they do, and thanks to salaries and bonuses there is sufficient profit for the agency to thrive as well.

Source: Commission-Only Versus Salary-and-Bonus (above)
Pittard Training Group Leadership and Sales Bulletins

The number one mistake businesses make is in assuming that commission only sales people are just like employed ones, just paid differently. If going down the freelance route is going to work for you and your business, you need to radically rethink, and the best way to start that process is to put yourself in a freelancers shoes...  He is taking a leap of faith (after due diligence) that you will pay him on time and not go bust in the meantime, that you will provide the service promised to the clients/customers he finds for you, not leaving him to answer the angry after sales calls, and most of all, that there actually is a market for your products at the prices you are asking him to sell at.

[Rules for commission-only sales to work...]
Rule 1: Be realistic and honest. If you have found selling your product yourself difficult, or it has a long lead time, tell him so.
Rule 2: Learn from businesses who have successfully used self employed sales people for years. They know you have to keep your people busy, by providing leads, appointments or data to work with (depending on the type of business). Expecting a freelancer to provide all his own leads, with no data provided to get him off and earning quickly will mean you loose them very quickly.
Rule 3: The quicker you pay his commission the more loyal and hard working he will be.
Rule 4: Motivation rules!  Sales people are a complicated breed, and freelancers the most complicated of all! They spend their lives motivating themselves, and get a group of them in one room and usually there’s a party! They are as a group the most “up”, optimistic, enthusiastic people on the planet. Yet, when the bubble bursts, many can bomb with a speed known only to Newton!  To keep a freelancer motivated and on task, you need to be aware of your role in managing him. Anything you do, any process you have, any communication (or lack of it) could affect whether you are the parachute, the soft place to land, or the trampoline which will get him bouncing back up again, this time even better than he was before and doubling his sales. Become a Sales Manager par excellence, and if you can't, then hire one!
Rule 5: Do not expect him to work under the same terms and conditions, or to have the same relationship with him as an employed sales rep.
Rule 6: Train, train, train! Give him the best product and product related sales training possible. Even if he is experienced in selling a similar product, he still needs to know yours inside out.
Rule 7: Do NOT confuse marketing with sales.  What you have on your hands is a hungry sales machine, not a marketeer. Sales mops up where marketing leaves off. He needs you to provide him with the marketing tools, presenters (and pitch), leaflets, business cards and back office support.
Rule 8: Think of recruitment as ongoing.  Freelancers rarely stick around long. They can be the “ladies of the night” of the sales world.
Rule 9: Always recruit more freelancers than you think you need.  The drop off within the first month of contracting with a freelancer is very high. The reason is simple. Just as you aren’t needing to commit to them long term, so they aren’t needing to commit to you.
Rule 10: Budget for success. Remember the “free” in free-lance means:  Not “tied," not “no cost!" There are three main areas to budget for: recruitment, training and management costs.

Source: Commission-only sales, the right choice? (above)
By Liz Sparkes, 17th Mar 2010

There are quite a few valuable insights from the sources above.  I'll add at least one more...

Consider all of the human-relations understanding, communications, behavior-styles adaptation, leadership, and management required to manage traditional salaried employees...  Now, consider applying all of that know-how and then some to managing employees who admittedly choose as their primary motivator whether or not you and your company is doing everything it can to support their success at earning even $1 let alone $100, $1,000, or $10,000. Recruiting and managing a commission-only sales team is a game that can be played and occasionally won, but I do not believe that it is for the faint of heart or the inexperienced.

One last note: Whether you are seeking to hire a salaried employee or a commission-only sales freelancer, here's a fairly good article about "How to recruit top notch sales people."  I especially like the eight interview questions.