Why Sales Commissions Don't Work (in the Long Run)
Think about salespeople and you think of stereotypes: people who are motivated only by money; risk takers who thrive on the adrenaline of a potential massive payoff; territorial lone wolves who aren't team players; nine-to-fivers who are inherently lazy and will only work hard if incentivized with a big carrot.
Are some salespeople like this? Sure. But most are just like every other professional, whether in your marketing, HR, or finance department. Most wake up in the morning wanting to come to work and excel at what they do best: selling. They want to do a good job and get paid fairly for it.
We've definitely found this to be true at Pluralsight, where we've made the unconventional decision to do away with sales commissions. Why? Because commissions lead to a number of unnecessary evils when it comes to long-term business outcomes. Here are six reasons we've found commissions to be a short-term strategy that won't serve your business goals over time.
1. They don't motivate from within.
Any time a company tries to motivate people, I see a red flag. Motivation is a word we try to strike from our vocabulary at Pluralsight. When you assume people have the company's best interests in mind, it instantly removes the need to motivate people. Instead, you can focus on educating them on business goals, as you move toward gaining a shared vision of where you're all trying to go as a company. That approach empowers autonomy and eliminates short-term thinking.
Rather than using commission-based compensation, we pay our sales team members above-average market rates for their level in the industry. We don't believe our salespeople need the extrinsic motivation of a sales commission any more than our PR team does. We don't assume the worst of our sales group by expecting that without the extra incentive for doing their job, no one will get out there and sell. Instead, we assume the best of everyone in the company, and we build our culture around that belief in our people.
2. They sub-optimize rather than optimize.
Sub-optimization occurs when an organization is not as successful as it could be because one part of the business works in a silo, focused only on its own success. This is what happens in many companies when they look at a specific sales result based on one individual at a specific point in time. For example, if you notice in a given month that your company's total sales numbers are down, it's tempting to just look at the list, see which of your sales reps sold the least, and decide those people are the problem.
But it's probably not that simple. Someone's low numbers might be due to the fact that you changed that rep's territories midway through the month, or assigned her to spend time training new hires or going on customer visits for part of the time frame being measured. Any of these factors--which might serve the larger goal of driving more business for the entire group--could impact a salesperson's results. The lesson is that a commission-based mentality leads to sub-optimization. For your business to excel, you must optimize, focusing on what you can learn from the whole group in a particular month that would allow you to make additional long-term improvements to the entire system.
3. They point fingers at people, not systems.
I don't believe in measuring people--period. As I discussed in a recent post, my philosophy on this did not emerge in a vacuum but was originally proposed decades ago by W. Edwards Deming, who identified 14 points on Total Quality Management. One of those points was to eliminate quotas for all employees. Deming's principles highlight the idea that it makes more sense to measure systems than people.
I often get pushback on this concept when extending it to salespeople, with naysayers asking, "How do you know that your sales reps are performing well without measuring their performance?" The answer is, we don't try to measure people in that way. Instead, we try to measure the systems that they're a part of--as well as the output of those systems, the quality of what's being produced, and the overall team's contribution toward the goal.
4. They're not future-focused.
If sales commissions are problematic, why do so many companies use them? The answer is simple: They work, but only in generating short-term results. If you only care about next month's numbers, then commission-based sales will temporarily do the trick. But your leadership team should be thinking far beyond tomorrow when choosing the most effective sales compensation structure. Leaders should be aware that commissions, rather than foster collaboration within the organization, instead foster an unhealthy culture of competitiveness that ultimately is not in the company's--or the customer's--best long-term interests. Commissions reward the top dogs on the sales team for being territorial and not joining forces with other reps, which holds back the entire system.
Alternatively, removing commissions encourages salespeople to share best practices, with the goal of improving the whole team. Ideally, everyone in sales should be thinking long range about the greater good for the sales group and the company. These metrics come through measuring the overall output of the sales channels on an ongoing basis, as opposed to measuring the results of specific individuals in a given month. When your teams understand this, it helps build a culture of continual improvement. It takes the punitive spotlight off people and focuses on what's more important: measuring and continuing to perfect the true capabilities of the overall system you built.
5. They're not based on learning.
Once you start thinking about how commissions negatively affect your culture, you realize that imparting this knowledge to your teams and supporters is one of the most powerful things you can do to move the company in the direction you want it to go. When we first came up with the idea of nixing sales commissions in our company, even our investors thought we were crazy. That was six months ago. Now they've joined our ranks of believers in gaining a deeper understanding of how these concepts can lead to powerful change across the whole company. Without a deep understanding of these principles--which is derived from education, training, and teaching--it's easy to fall back on the popular belief that you must treat your sales team differently from everyone else in your company by offering them commission-based pay incentives.
But when you take the time to help your teams really understand how these counterintuitive concepts work, people start to get it. That's one of the reasons why last week, we brought everyone together--flying our employees from all locations to our headquarters in Utah--to do a massive cultural rendezvous around why we think this way about things. This three-day workshop, called PS CultureCon 2014, helped us explore, companywide, how Deming's concepts relate to Pluralsight's culture, and why we follow them. The investment in CultureCon worked. Coming out of that week, our sales team developed a clear understanding of why we do the things we do. That education is much more valuable than any extrinsic motivator.
6. They're not best for the customer.
If you're not doing what's in your customers' best interests, your business will ultimately fail. That's why it's important to look at the conflicts of interest that arise when you pay people by commission. Our sales team, for example, has grown from 5 to 50 people in the past 12 to 18 months. Their assignments, territories, and account lists are constantly shifting. With all of this change, think about how commission-based pay would impact how our reps think about what's best for the customer. You can't really prioritize customer needs if you're focused on commissions, because you're thinking about your own bottom line.
As a result of eliminating commissions, we now see sales team members taking pride in their work and finding more joy in it. People no longer feel like they're part of a cat-and-mouse game, in which they're on the opposite side of the table from management. When we're all on the same team, doing what's in everyone's best interest, the focus becomes about how we serve each customer. This cultural shift makes it possible to prioritize what every company should care most about: learning how to work together to build each part of the business and take it forward--over the long haul.