A Smarter Way To Think About Sales Commissions

Commissions

One of the business world’s oldest traditions, the practice of paying commissions to sales teams, is under scrutiny.

These days, conventional wisdom is under attack, and explaining key business decisions with ‘it’s just the way it’s always been done’ doesn’t cut it anymore. One of the business world’s oldest traditions, the practice of paying commissions to sales teams, is under scrutiny. And it’s probably crossed your mind at least once — is motivating my sales team with commissions the best thing to do?

Those who argue against commissions believe that treating salespeople differently from the rest of the team results in a lack of unity and employee loyalty. Paying commissions is viewed by this camp as a divisive practice that discourages teamwork and encourages short-sighted goal setting and thinking, de-incentivizing employees from pursuing long-term relationships with customers in favor of inflating sales metrics for the month.

One author claims the idea of paying commissions relies on an outdated theory of employees needing to be controlled, coerced, punished, and lavishly rewarded in order to perform; comparing the idea of paying commissions to sales teams to an S&M dungeon.

We disagree.

Salespeople are human beings (for the purposes of this article, this point is not up for debate). Human beings are motivated by a lot of things, but generally speaking, these motivations can be reduced to values and needs.

There’s a pretty famous hierarchy for thinking about needs that you might be familiar with, but money can be tricky to place in this hierarchy just because it affects so many points in the pyramid. (This might not be the only reason money is difficult to place — if you start to think seriously about Maslow’s hierarchy it begins to fall apart a little. For example, in Maslow’s world apparently there are no starving artists.)

The secret to making commissions work is understanding the value hiding behind the money for each employee.

Sometimes, this can be an entire world of values. People are motivated for a whole host of reasons, like achieving fulfillment in work, feeding their family, or getting a shiny gold iPhone.

If you’re looking to predict an employee’s response to a compensation/commission package, look to the value of their incentives. The guy with a new baby on the way is going to work way harder for commission than the guy who has everything he needs and maybe might use the money for another monitor at home so he can watch Orange Is The New Black and surf Reddit at the same time.

If commissions work so well, then why are salespeople typically the only employees who are compensated by commission?

Our Chief Customer Officer, Tal Tsfany, thinks that this is a mistake — that all employees should be compensated like salespeople. Inventory software company Fishbowl agrees. The Utah-based company put all their employees on commission, and saw their revenues soar by more than 60 percent year over year since 2007.

“All employees should be compensated like salespeople, and it’s a mistake that they aren’t.”

Fishbowl leadership describes the advantage of their plan as closing the gaps between departments by ensuring everyone is focused on revenue, profit, and savings, instead of individual department agendas. After a short while on the program, the majority of their employees too have become highly resistant to going away from the plan.

“If you look at the best people in the tech world today,” says Tal. “They are always compensated by incentives — typically stock options.”

Everyone on your team is contributing to sales in their own way. The best salespeople are the ones who get that their role is to understand what people need and help fill that need in a valuable way.

“Non-salespeople usually underestimate the joy of making a sale,” says Tal. “Not because of the commission, but because of seeing somebody actually use a product because you introduced it, you positioned it and you understood their need and were able to fulfill it. It’s a joy because you as a salesperson are the touching point of a company’s path to the customer. Everyone in the company behind you did something to get to that point, but sometimes you’re the only one who gets to see that value chain come to fruition.”

Commissions can play a part in fulfilling not just material values, but intangible ones like self esteem and job satisfaction. Malcolm Gladwell wrote in Outliers that the greatest job satisfaction comes from work that contains complexity, autonomy, and a clear correlation between effort and reward. It’s difficult to think of a more straightforward, unambiguous way to link effort to reward than commissions.

A caveat — implementing commissions in the wrong way can be disastrous for sure.

Behavior is driven by incentives, and the wrong incentives will have your salespeople climbing all over each other. Some of it comes down to the psychology of individuals — whether an employee feels motivated or frustrated at the thought of people doing better than them.

However, this can be mitigated by putting the right incentives in place. For example, incentives that exponentially reward group achievement can go a long way toward fostering a collaborative atmosphere. Done constructively, competitive elements like commissions and leaderboards can be inspiring. The transparency shows us what’s possible, and pushes everyone to do more and learn from each other.

What do you think about commissions? Drop us a comment and let us know your thoughts.

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  • http://www.bigimprint.com/ Ethan

    In the process of building a sales team at the moment, and wondering about this very thing. I personally like commissions when selling, but it’s a tradition worth examining for it’s usefulness.

    In your experience, what is the biggest downside with doing away with commissions?

    Thanks for the write up!

  • Pingback: Part 4 – Rethinking Sales: Commission for Everybody | Elephant Tech()

  • David Chism

    Well said, Ian. Great article. I think commissions are good in most situations and should be pushed more by companies. I think the company a salesperson is working for is the key. If it is a good place to work with, that is half the battle for a saleperson. He (or she) should enjoy working there! He should know that he is a valuable part of the team as well. I am not always a huge fan of 100% commissions. I have seen some shady companies that pay 100% commission and don’t care about their sales staff…and it shows. The turnover is very high.

    Find a great person. Treat him well, share the vision and goals of the company…get him on board…and then reward him for helping the company grow!

    • Ian Chan

      Agreed, David. Company culture and context are a lot more important for identifying how a salesperson (or any employee) will respond to commission or compensation plans. It’s essential to productivity for a person to feel like she is valued in her workplace, and unfortunate that many companies miss the basic steps you mentioned in getting the most out of their team members.