Hire picture-perfect employees

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(Money Magazine) -- Question: How do I go about bringing on my first employee? - Parijat Sahai, Blue Bell, Pa.

Answer: "This is a big step in the life of your business," says Martin Lehman, a former retailer who counsels entrepreneurs via the Service Corps of Retired Executives (SCORE). "Be careful." Those first employees can have a major impact on the performance of your company.

Your first task: to determine whether you're looking for someone who can take on some of your current responsibilities or whether you want someone to fill gaps. If you're looking to delegate, carry a note pad as you perform your daily duties and record everything you do. This will help you draft job descriptions.

But also consider whether you could use someone with skills you don't have. "Think about what you're lacking and what you need to make your business grow - that's the position you should fill," says Lehman.

Next gather the necessary paperwork and figure out pay and benefits. To determine an appropriate salary, call local employment associations or industry groups. Or use aggregating sites like Glassdoor.com and PayScale.com.

If you'll offer benefits - doing so can make you competitive with big firms - start with area business groups, like the chamber of commerce, to see if they offer insurance or retirement plans.

Write a job ad, making sure to give a clear outline of duties and pay. Play up the opportunity to influence the direction of the business, says Grant Robinson, president of People Values, a personnel management consulting firm in Renton, Wash.; this is a key advantage over bigger businesses.

If the job requires special skills, post the listing on an industry site or in a trade publication. Otherwise, use CareerBuilder.com or Monster.com for maximum views. Interview several applicants and check references. Also consider doing a background check through a site like Backgroundchecks.com. You'll pay $50 to $100 per employee, but it's a worthy investment. - Reporting by Shara Rutberg, Julie Freese and Winna Ironkwe

What documents do I need to prepare before hiring my first employees? - Denise Haney, Orem, Utah

Answer: After you've decided on a candidate, you'll want to create a formal offer letter. This should state the job title and expectations, salary, benefits, vacation and sick days, plus any other terms agreed upon.

"This letter is meant to make sure that there's no miscommunication about what you're offering," says John Bower, president of the Detroit office of staffing firm Express Employment Professionals, and a small business adviser through SCORE.

You'll also have to prepare tax forms: The specific type depends on whether you'll be hiring regular employees, who'll work for you exclusively for a set salary, or independent contractors, who may be paid by the project or hourly and may have multiple employers.

If you're hiring the former, you must withhold taxes from their checks. So have the workers complete W-4 forms (find these at irs.gov), which record deductions and exemptions. You'll use this info to determine how much to withhold. (At the end of the year you'll send employees and the IRS a W-2 form that reports any annual wages and taxes withheld.)

You may also need to send a copy of the W-4 to your state; check in with your local "small business development center" to find out if you do or, if not, what documents you must complete for state tax withholding.

If you're hiring independent contractors you won't withhold taxes, but you'll want to have them fill out a W-9 form so that you have their taxpayer ID numbers on file. (At the end of the year you'll provide information about how much you've paid them on a 1099 form that you'll send to both the subcontractors themselves and the IRS.)

All your new employees must fill out the U.S. Citizenship and Immigration Services I-9 form (downloadable at uscis.gov/i-9) verifying that they are eligible to work in the United States.

Other key documents to prepare for your new hires: An employee handbook and a sexual-harassment policy. Do get the employees to sign a form stating that they have read and understand the latter. Don't forget to have your staffers complete an authorization form for any funds you'll withhold for insurance.

Also, you may want to have them fill out a personal data sheet with emergency contact information. You can craft all of these documents yourself - your trade association or the U.S. Small Business Administration can provide samples to guide you. - Share Rutberg and Alexis Jeffries

I need salespeople. I'm thinking of offering to pay on a strictly commission basis instead of a salary. Is that a smart approach? - Henry L. Rolfe, Rowlett, Texas

Answer: Hiring employees on a commission-only basis may sound like a cost-saver. But investing in your staff usually pays off in the long run, experts say.

Good salespeople communicate to prospects what makes your business special. "They're preaching your company's gospel," says Aaron Ross, CEO of Blackbox Revenue, a San Francisco sales productivity company and a small business counselor with SCORE.

"So you want someone who buys into the mission, someone you've spent time and resources getting excited. If you hire someone and you're not willing to invest time and resources in them - and that's what a commission-only sales offer suggests - you're missing an opportunity."

Besides, you may face faster turnover with a commission-only sales force than you would with part-salaried salespeople, says Kimberly McCall, president of McCall Media and Marketing in Freeport, Maine. After all, the straight-commission sales-person has no incentive to stay when hard times hit.

Also, you could end up with someone who's too aggressive, considering that he or she will need to make sales to make the mortgage payment. That kind of attitude could turn off potential customers.

Yet another strike: It's tough to find quality among this pool, says Jo Prabhu, a member of the staffing management panel of the Society for Human Resource Management. "Commission-only sales-people are becoming a dying breed. Today it seems that everyone wants a more secure position."

Given all that, McCall says, "Providing a position where there's an equitable base and a reasonable expectation to succeed is probably less expensive in the long run."

The ideal base salary figures and commission percentages vary from industry to industry. A trade group in your field should be able to help you figure out what's appropriate for the job you're trying to fill. - Shara Rutberg

The in-person meeting is critical for evaluation. John Bower, who counsels small business owners in Crystal River, Fla. through the Service Corps of Retired Executives and runs a staffing firm of his own, offers these tips for conducting the interview:

DO provide candidates with a company profile in advance so that they can come prepared to relate their experiences to your firm.

DON'T set up interviews less than one hour apart. They'll go better if the environment seems relaxed. Bower suggests spending at least 30 minutes but no longer than 45 minutes with each candidate.

DO prepare questions in advance. For the most telling responses, stick with open-ended questions. Try this one: "Tell us about a challenge you overcame in your work life. What was the result and what did you learn?" It shows the candidate's problem-solving skills.

DO ask each person the same questions so you can compare responses.

DON'T dominate the discussion. Use the 80/20 rule - you talk 20% of the time and then let the candidate have the floor for the rest.

DO be wary of someone who has jumped around a lot, and whose explanation is money. This type of candidate probably won't be as loyal an employee as you would like.

DO write down your thoughts of the person right after the interview. Otherwise, it may become a blur. -Alexis Jeffries

Need help with your business? Your Shop is written by the editors of Money's sister Web publication, CNNMoney Small Business. Submit your questions to their experts and to other small business owners at cnnmoney.com/smallbusiness/getanswers.