Increase Sales: Time to Kill Your Commissions?
BY Tom Searcy
Your compensation structure may not be motivating your sales team the way it should be. Here's how to tell whether you need a change.
The idea that commissions drive more sales is a foundational belief about selling. It is as elemental as supply and demand is to economics.
But it's often wrong. (I know, I hear you already: Sacrilege! Blasphemy! Hear me out.)
The idea of commissions is based upon the pain/pleasure principles of behavior change. By giving rewards, we get people to change their behavior. The same goes for taking away things: Penalties also lead to behavior change.
But in complex sales–indeed, in some very common sales situations–the research shows that these principles don't hold up. Because of this research, you may want to consider changing the way you compensate your sales team in order to improve your sales performance.
The truth is, commissions work sometimes–but only sometimes. Here's how to understand the difference.
When to Skip the Commission
1. When it takes many parties to close a sale: In complex sales that require subject matter experts, studies and design, as well as many meetings with the buying company’s experts, commission has less of an impact on sales performance. Commissions work better when one individual’s single efforts have a direct impact on the closing of a sale.
2. When the sales cycle is very long: The longer the sales cycle, the less the commission structure drives actual behavioral change or lift in performance. What sustains the focus of the sales people is the actual achievement of the sale.
3. When the sale pays out over a long time: Many commission structures “pay when paid.” This means that a sales rep is paid along the way for each incremental purchase by the customer over a long relationship. This commission structure is less compelling for most salespeople, and does not change their behaviors substantially–because the period of time between the sale and the reward is so long.
So when should you use a commission-heavy compensation plan for changing sales performance?
When to Stick With Commissions
1. Transactional sales: Retail sales are an example. When a sales person is selling a cellular phone plan, a water softener or real estate for example, the customer is making a transactional purchase. The purchase is a stand-alone event; the more transactions a sales person can close, the better the sales performance. In this case, commission motivates hard work, focus and short-term goal attainment.
2. When burst activity can directly affect sales: Some businesses benefit from the direct relationship between more customer visits and more sales. Raw materials, components and manufactured parts are examples. By working harder and more intently, a sales rep can take a larger piece of the buy through sheer frequency and effort.
3. When introducing new products: It can sometimes be challenging to get salespeople to introduce new products or services to current customers. Partly it's fear of the unknown; there's also the risk that a potentially bad experience could compromise current sales. A sales contest or bonus program for selling new products can change behaviors.
We cannot expect that there is a one-to-one direct correlation between commissions and sales performance. People are more complex than that–the research backs it up.