I was scrolling through articles on Inc., and a piece titled "Why Sales Commissions Don't Work (in the Long Run)" definitely made me do a double take. The article's author argues against using sales incentives, highlighting his own company, which has been quota-less for less than a year, as an example. While this approach may work in this particular company, I have spent more than two decades watching the power of well-aligned incentives in action--both as a sales rep myself, and as the CEO of an incentive compensation company.
Here are six reasons sales compensation is essential in most businesses:
1. Motivating people differently drives results
To expect your employees to put their work before their self- interests on a regular basis is not acknowledging reality. People need to be motivated, and different people need to be motivated in different ways. At the very least, it's offensive to assume that giving sales people commissions is "suggesting the worst of them."
For a moment, think of your organization as if it were a seafood restaurant, and your sales people the fisherman. No matter the ambiance, the service or the style--if there are no fish being brought into the restaurant, you're going to be out of business pretty fast. The same is true when in comes to most businesses and sales.
As long as more deals keep coming in, the company is sustained and everyone else can do their job. If they can't catch the fish, the system breaks down. But here's the tricky thing: catching fish is a tough business. Fifty times a day the fish reject the bait, and sometimes there are no bites for days. In the real world, this consistent rejection and need to make call after call even when you're not feeling particularly confident can take a toll.
That's where commissions come in. According to Ventana Research, "Every organization needs a well developed compensation strategy that utilizes incentives and rewards to motivate sales talent as fully as possible." Well-aligned compensation plans keep hungry salespeople focused on the prize at hand. There is a clear end goal and they will keep fishing day after day to get there.
2. Misaligned goals--not commissions--create silos
The fact that sales people have quotas certainly doesn't correlate directly to working in a silo, especially if their goals are in line with the overall success of the company. In fact, in more and more companies we work with, commissions are often team based, increasing collaboration across individuals and departments.
In fact, according to a study by the Aberdeen Group, "Best-in-Class firms are 37% more likely than all others to link the sales team's overall performance to the company's overall health, using defined metrics such as profit margin, forecasting accuracy, customer retention, net client value, etc.," "Rather than isolating the perception of the sales team's performance around the simple number of dollars in closed deals." For example, if sales production is low, smart companies don't just look at the two lowest performing reps; they search for the larger problem. If we follow the fishermen analogy, they might consider that they are not in a fish-dense area, or that they could be using the wrong bait. Or they look inward, and ask themselves if they are offering the right training programs and opportunities. We have often seen companies where a new sales person's KPIs include bringing in more experienced reps to help close a deal or visa versa where the experienced reps bring in lower performing reps for training purposes.
Sure, there are often individual stars in sales. But just like on professional sports teams, those individuals need to work collectively with the larger team to ensure success. Sales is no different. And if it is, companies should re-look at how their plans may be creating silos, before looking at reps.
3. Measuring and recognizing performance pays off
Skonnard's suggestion that instead of measuring people, you should measure systems by looking at things like "out-put, the deals they're bringing in, how long the customer stays, and the overall team's contribution to the goal." I couldn't agree more. But the thing is, these points are already a part of most sales compensation plans. But the missing element when you eliminate those plans is the ability to tweak the compensation levers to inspire different behavior and performance. A Globoforce Employee Recognition survey found that when companies spend just 1% or more of payroll on recognition, 85 percent of them see a positive impact on engagement. It's difficult to reward individuals if you have no means of measuring top performers and contributors to the company.
4. Incentives can yield long and short-term gains
One of the major issues the article noted with commissions is the belief that they are synonymous with short-term thinking, which is simply not the case. We have customers that use our incentive compensation software to pay on metrics like the quality of the long-term relationships, breaking into new markets, and contract renewal--that's not short-term thinking, and it doesn't yield short-term results.
Having worked in the sales industry for more than two decades, I've personally seen the power of long-term incentives like President's Club to shape rep behavior and inspire performance. A rep that misses Club by two percent this year is going to be frustrated, but he's also going to be motivated to step it up so there is no question that he will reach that carrot next year. As another life-long sales person who commented on Skonnard's article said, "We need the carrot, we thrive on running after that carrot and when we get the carrot, the satisfaction is immense."
5. Competition inspires performance (it doesn't kill culture)
There is a definite benefit to healthy internal competition in sales; it's a vital necessity. Healthy competition creates healthy results. But it only works when the foundation of your company is built around achieving common goals, winning and losing, together. We've had various sales contests where winners get to attend a World Series game, receive a special bottle of wine from their manager's collection, or enjoy a ski trip with their team. I can guarantee that the contests don't cause ill will. Jealousy? Maybe. But that's life, and that's sales. Contests that create competition while maintaining the existing company culture you've worked hard to build are extremely effective. "Commissions reward the top dogs for being territorial" is an undue stereotype that should be put to bed once and for all.
6. Embrace the Conflict (and don't insult the integrity of your sales team)
Making decisions that are good for the customer, and making decisions that are good for the sales rep are not mutually exclusive. It's all about properly designed compensation plans. The problem is, you could argue that it's in the best interest of your customer to give away your product for free, but that's not what business is about. It's about building long-lasting, mutually beneficial relationships between your company and your customer. That necessitates that your reps care about what they charge the customer. My advice would be to embrace the conflict and build it into your strategy; both sides are trying to get the better deal. This requires a fair amount of tension, which is natural. Sales people deserve the benefit of the doubt that they can think about what's best for their customers--and their commission--in tandem.
To assume that sales reps are incapable of caring for their customers or company culture because they are paid a commission shows a fundamental lack of understanding of your workforce. And if the problem is inherent in the workforce, who is to say that they will perform any better without a commission system. What you need to do is construct a sales team of reps you trust, and then empower them to perform their best, without assuming they are primed to destroy your culture and customer relations. To do this, you need to give them tools that encourage friendly competition, motivate behavior that is aligned with your overarching company goals, and inspire performance.
While the piece advocated for treating all employees equally by eliminating commissions from the sales department, Xactly advocates for treating all employees equally by giving everyone incentives for reaching their goals. And while we aren't saying this approach isn't working great for Skonnard's company--I would wager to say they are an exception to a well established rule and strongly advocate thinking twice about whether this approach could really work for you.