The Case for Ending Sales Commissions
The New York Times recently ran an interesting piece about companies moving their sales teams from commission to straight salary. As the article noted, “To many in the highly competitive world of sales, such a move is tantamount to blasphemy.” I’m sure they also heard some stronger language that they couldn’t print.
Most people view commissions as integral to sales. Who hasn’t heard the cliché that salespeople are coin-operated? Besides, commissions must work--why else would they be part of every comp plan from selling chewing gum to jumbo jets?
The last 20 years, though, have seen tremendous changes in how consumers buy products, how people work, how sales and marketing operations are managed, and how people sell. With all that change, perhaps commissions have become obsolete.
The Evolving Sales Landscape
One big change is that customers are showing up much later in the sales process. The Corporate Executive Board, a firm that provides advisory services to businesses and government clients, describes this phenomenon in its best-selling book, The Challenger Sale. The firm notes that buyers are 57 percent of the way done with their purchase decision before they ever call a salesperson. They’re getting more than just product information online. Prospects are talking to other customers, reading reviews, checking price and availability, and, in the case of software products, usually getting free trials and test versions. The role of the salesperson in this model is fundamentally different.
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A related change in sales is the impact of social media on your company’s reputation. Your salespeople are the face of the company. Prospects who have a bad sales experience can tell hundreds of people in seconds, or post a review that will last for years and be seen by thousands. Commissions that incent people to close the deal may lead them to overpromise on what can be delivered, and then they move on to other prospects once the deal is closed. The damage to a company when this happens can be tremendous.
The Problems With Commissions
Something that hasn’t changed is the issue of fairness in commissions. The economy has cycles. In 2001 and 2008, the economy suffered tremendous contractions. Salespeople everywhere saw their incomes drop sharply, even as they were being asked to work harder than ever. From a good year to a bad year, salespeople may see their income drop by more than 50 percent. Salespeople also make less when they take new jobs or get assigned new territories. It's hard to argue that commissions are fair when so much of what people earn is so dependent on factors they cannot control.
Commissions have other problems as well. They encourage people to maximize their income, even at the expense of the greater good of the company. Many comp plans have evolved complex formulas about margins, discount rates, deal sizes, and timing in an attempt to prevent people from doing the wrong deal. There’s an industry of compensation-management and commission-calculation tools, and an army of sales-ops people to run them. It can be an expensive and messy process.
Changes are happening that make a commission-free world more likely. One is that field sales are being replaced by salespeople who stay at their desks all day. Research from cloud-based sales technology provider InsideSales.com shows that field-sales positions have been stagnant for years, while the number of people selling from their desk has been growing rapidly.
This is being driven by better Web conferencing tools, increased comfort with buying over the Web, and an increasing demand for immediacy. Buyers would rather have a conference call now than an in-person visit next week. Even remote sales workers are spending less time in face-to-face meetings and more time working from home offices. The days of the field salesperson who would check in twice a week are gone. Now salespeople are viewed more and more as part of a process that can modeled and reproduced.
The other change is that, more than ever before, managers can actually see how salespeople are working--and if they are working. Reports generated by the CRM system, activity reports, sales performance management tools, and the increased availability of meaningful performance metrics have replaced spreadsheets and notebooks. Now managers are expected to know what their people are doing, and be looking for ways to help them perform better. Tweaking the commission plan and running spiffs are being replaced by better training and support, and more active management oversight.
The ultimate question is if salespeople will actually sell if they don’t get commissions. The truth is that most people want to succeed at work, and most jobs don’t need highly leveraged variable compensation plans to get people to perform. But whether commissions should be eliminated entirely ultimately depends a lot on the company. Either way, it's something that conscientious managers should be thinking about.