Are Sales Commissions Bad for Business?
Welcome to frosty February. The super bowl upset is on everyone’s minds … I love it when the underdog wins, don’t you?
Business is a game of win or lose too, and sales commissions have always been a critical part of that world.
Process thinkers, like Deming, have challenged commissions (and other types of variable compensation) for many years. I believe the reason these process thinkers are so opposed to variable compensation is that they can see that the organization doesn’t understand how their business processes work. When compensation programs are based on faulty assumptions, they are bound to distort the system.
But process thinkers haven’t taken over the world. Not yet any way.
Human beings are goal directed. Some want steady and secure incomes, while others are willing to take chances that might earn them big rewards.
Which kind do you want in your sales force? This week’s article is based on the recent musings of one of today’s best thinkers, David Maister.
I think you’ll enjoy it.
Until next week.
February 5, 2008
Are Sales Commissions Bad for Business?
Sales commissions are routinely criticized in process circles. Deming famously opposed variable compensation, and especially sales commissions. Yet few of these people have ever really worked successfully in a sales environment, and thus their criticisms often reflect only a shallow understanding of the situation.
Clearly, commissions are a complex and highly charged issue that deserves a lot of thought. In a recent blog posting, http://tinyurl.com/2tcuyy, David Maister brings up some criticisms of compensation systems based on commissions. Analyzing David’s comments is worthwhile if you want to understand this problem:
“I’m generally not a fan [of paying commissions], because paying a commission:
1. “Fails to distinguish between revenue and profit. It can reward bringing in work that the organization loses money on (or at least makes less money than other alternative uses of its scarce resources.)”
I totally agree. The misalignment between revenue and profit caused by commission plans that reward revenue only is obvious and well documented.
2. “Fails to distinguish between on-strategy and off-strategy work. The organization ends up with an ‘if it moves, shoot it’ mentality.”
Again, I totally agree. Although this point is intended for a professional services business, targeting the right kind of prospect is crucial for every business.
3. “Over-rewards the person who makes the final sale (the transaction), and under-rewards activities (for example, seminars, articles, speeches) that ‘court’ the audience and lead them into conversations that result in sales. Consequently, it encourages an impatience that may backfire in building business.”
True. Unfortunately in many businesses, there has been no thought about how to effectively “nurture” customer relationships until they are ready to buy, and so the “courting” activity is left up to the salespeople alone. The result is that it either doesn’t get done, or there is a wide variation in how it gets done. In every case, however, compensation connected to the final sale alone drives a myopic perspective in the sales organization.
4. “Encourages salespeople to think of their own rewards (the commission) rather than truly helping the client, and hence creates an uncaring market image that may backfire.”
Again, true, in many cases.
5. “By overstressing individual commissions, can prevent the cooperative teamwork necessary to execute a full coordinated marketing program. Instead, the sales efforts are no more than the (weakened) sum of a lot of individual efforts, none of which has the impact to make a big difference.”
This point may or may not be true. In a case in which team effort is really required and only one person gets substantial payment, the criticism is sensible. However, sometimes people who work in organizations where salespeople make commissions become jealous of those commissions. Many of those people, in my experience, are not actually willing (or able) to do what it takes to get business, so their criticisms are not justified.
How to Turn Your Sales and Marketing Into a Lean Six Sigma Production Machine That Runs Like Clockwork (And Do It in a Way Your Salespeople Will Love!)
So When Are Commissions Justified?
The four points David mentions are sound; however, the issue is highly contextual, and I believe there is a risk of “throwing the baby out with the bathwater.”
Not everyone is good at or motivated to do the things the sales role requires. If you are like most people, it requires self-awareness and may require the will to do things you are not comfortable with or motivated to do, especially at first. For example,
- Preparing yourself for meetings with prospects (Is 15 minutes enough? Is an hour too much?)
- Focusing on the prospect’s interests and perspective rather than your own and be serious about it rather than fake
- Seeking out clever and creative ways to engage them (can be difficult in some cases)
- Taking the trouble to remember things about them and use that information in the next interaction
All these require discipline and effort. You can make yourself more effective with practice. Further, since there may be little or no payoff in the short term, it can be difficult for an outsider to know if the salesperson is really working at it or slacking off (although prospects might be able to detect a lack of sincerity).
Although I don’t dispute the criticisms David makes for commissions (in fact there are even more problems with them, which I’ll mention momentarily), having been a commissioned salesperson for many years in my career, I believe that one benefit of commissions is that they help motivate certain people, in the right context, to work harder and more creatively. If my pay won’t vary from the next person, why go the extra mile to land the extra client? Why step away from Sunday night television to practice my lines for Monday morning’s appointment?
The Answer is in the Process
One problem businesses have, which they try to cover up by using commissions, is that they really don’t know what it takes to convert prospects to customers. They fear paying for nothing, and believe commissions are a way of paying for results instead. Yet as markets, cultures, and technologies change, this eliminates their control of their own destiny.
My point is that a business needs to be very clear about the way it engages its potential customers, how it develops a relationship by helping them realize their problems, and how it earns their trust. The series of actions people in the company take, when combined with their prospect’s responses to those actions, are what comprise “the sales process.”
Within that framework of clarity, there will be selling tasks that produce obvious variation, depending on the skill and will of the person doing the helping (or “selling”). Examples might be:
- How many interested people did you cultivate at a conference?
- How many qualified attendees did you secure for a seminar?
- How many companies agreed to initial on-site workshops or evaluations?
Being more or less effective at these specific kinds of tasks ties obviously to the company’s fortunes and obviously requires personal discipline and energy to accomplish well.
I’m no compensation expert, but I believe these situations argue for variability in one’s compensation, at the least (to reward efficacious behavior), and since the ultimate proof of efficacy is in the revenue, commissions can be a sensible approach.
February 5, 2008
Commissions are an effective compensation model for sales teams. It is the only way to directly reward measurable results. The issues identified in the article are very real and correct. However, each of them can be addressed in the compensation model, provided the company understands the sales process and can specifically identify the desired results. Unfortunately, many companies “don’t know what it takes to convert prospects to customers”. It is hard to reward a result if a company doesn’t understand the process.
Most compensation plans fail because organizations do not understand their sales organization or process. Armed with that insight, it is rather easy to build an effective compensation plan that utilizes commissions to reward performance.