How to Eliminate Sales Commissions
Three months ago, when the few paper calendars that remain on earth flipped over to 2013, ThoughtWorks, a 2,000-employee software company, reached a milestone. Sales commissions, long a staple of the organization, were no more: All salespeople were now officially on salary. This concluded a phaseout that began in early 2012.
If you're curious about why and how this happened, you're in luck. Martin Fowler, chief scientist at ThoughtWorks, has created a visual "deck"--or a series of seven virtual note cards--filled with fantastic details. The set reads something like a case study in answering a question many organizations confront: If we eliminate commissions for the sake of fostering a team culture, what will the consequences be? Fowler's deck lays out the problem marvelously, including gems like this:
"Usually salespeople get commissions based on closing the sale, but there is a risk they will sell services that are difficult to fulfill, leaving the delivery team to pick up a mess. This tension is made worse because delivery teams are a big factor in selling follow-on work, yet aren't included in the commission."
Best of all, Fowler doesn't gloss over results that are less than perfect. "It's taken a bit longer to increase the collaboration between sales staff. The competitive environment that a commission routine sets up takes a while to change, but while that change is more gradual, we can see it happening," he notes.
"One thing we neglected to consider as we made the change was in how the commission structure feeds into the self-evaluation of sales. Everyone likes feedback on how they are doing, and removing commissions takes away a habitual feedback mechanism, albeit a critically flawed one. There's no simple answer to this, while we can come up with indicators essentially it boils down to recognizing the fact that sales, like so many professions, is a multifaceted activity that resists simplistic external measures."
Of course, the problem with this last statement is obvious: If sales is too multifaceted to measure, how can anyone determine whether the elimination of commissions actually works?
Seeking answers to this question, Build reached out to Fowler. We asked: How did eliminating commissions affect your overall sales--and your cost of sales?
His reply: "Fundamentally, I don't think either of those things can be assessed quantitatively. There are too many other variables involved to be able to tie removing commissions to any change in the numbers. We have a lot of noise in our sales all the time, such is the nature of what we do. If we get a significant change in sales volume, or the cost of sales, we can't tell whether to attribute that to getting rid of commissions, our recent expansion in our data analytics capability, the growth of our Brazil office, or our increasing emphasis of social responsibility--let alone the changes in the global economy. And that would be true even if getting rid of commissions was a clear event; as the deck indicated, we've been steadily winding them down for a year or so."
Fowler's response makes sense, but it doesn't answer the key question: What is the fiscal impact of eliminating commissions? Build pressed forward, and eventually we found ourselves Skyping with London-based Gary Barnes, head of sales and marketing for ThoughtWorks UK. Barnes revealed that:
• Revenues were 57 percent higher in 2012 than they were in 2010.
• The cost of sales was 7 percent higher in 2012 than it was in 2010.
• Two people on the 12-person team that Barnes manages quit over the elimination of commissions.
From Barnes' perspective, there were several big reasons for the move: One was that ThoughtWorks' techies were increasingly involved in the sales process, explaining and doing demos. There was a sense that the sales staff was receiving undue rewards for what was a team effort--and the salespeople weren't sharing enough leads with one another. Moreover, the commission structure was too slow-moving to keep up with ThoughtWorks' rollouts. In other words, the commission structure was something that the company updated once a year. But in an era of monthly software updates, the annual setting of commissions was too inflexible--it didn't allow for the proper compensation of salespeople who had a new weapon in their arsenal every few weeks.
And yes, it's true: Although Barnes's numbers show growth in revenue and the cost of sales during the yearlong phaseout of commissions, the numbers are far too general to attribute only to the commissions move. When Build asked for specificity, ThoughtWorks demurred. "We're a private business, so we're a little bit cagey with sharing our revenues numbers and things," Barnes admits.
But we're grateful for all that ThoughtWorks did share, both in Fowler's deck and conversations with us. We bet you are, too. And we invite you to share your experiences with commissions--and any questions you might have about ThoughtWorks' efforts--in the Comments.