Why do we pay sales commissions?(blog.fogcreek.com) |
Why do we pay sales commissions?(blog.fogcreek.com) |
There are many more complicated systems, but this one was very difficult to game.
I had to laugh at this. How is this that difficult? An excel spreadsheet with a few columns might only take a 20-30 minutes per day (if that). If it's based on a percentage, excel can automatically calculate that based on a column. I am a re-seller for a few products online and this is exactly how I calculate it. I have another sheet that tallies all of my monthly revenue. I can't imagine it being much different when selling services or products for a company like Fog Creek. You could also keep track of all names/companies, etc. here.
I'm going to offer another perspective: Fog creek basically just gave themselves a pay raise. Rather than giving salespeople a cut of the sales, they now are paying them a flat-fee.
Some people may like this because now they have consistent income. However, it's much less than what they could potentially earn. If I was a salesperson there, I would quit. I would like to see the results of this in 1 year (or 5 years). I suspect they will switch back to a commission-based system within that time-frame.
It reminds me of my brother's job. He used to work as a bike builder at a local shop here in PA. He used to get paid $10/bike and he would build many bikes per night. They switched it over one day to $11/hour and he then had no incentive to build as many bikes (and he admits didn't doesn't work as hard..because he was going to get paid the same regardless). Most people are like this.
In a way, it's like converting from free-market capitalism (you have no limit to your success) to communism (everyone is now equal).
They do this to developers all the time. Every job I've ever had has been based on salary. This sounds great, until you realize that the employer now has no incentive to keep you within 40 hours/week.
At one company, the new COO came in and announced that new working hours were an hour earlier and half-an-hour later. Everyone working there was on salary, so we essentially all got a pay-cut.
Fog Creek have taken on the sales risk entirely from the sales staff. It's not a one-way trade.
The guy who's content with the base salary is almost the definition of a sales account manager who isn't working out.
I suppose. But without sales, they would be out of business. They take this risk on regardless of what they are paying their sales staff (Business is all about taking risk).
I wonder what percentage they were actually giving their sales staff..10%..20%? I doubt it was over 50%, so they aren't really increasing their risk by that much.
Well, that was dumb.
Ditching commission doesn't mean performance can't be rewarded, via bonuses for good performers, generous raises when merited, etc.
This is an idiotic argument, if I ever saw one.
Lines of code don't measure the programmers contribution to your companies bottom line.
Sales do.
That said, paying sales commissions to sales people is not that different than giving shares and stocks options to programmers as an incentive.
A mediocre post, at most.
The rate of commission is not where the risk lies. Commissions are, from a short-term perspective, risk-free for the business. If the sales staff don't sell, you pay them less; the risk of divergence between revenue and expenses is lessened. The incidence of risk is pushed onto the sales staff.
If expenses are fixed but revenue is variable, then you face higher risk as a business.
In this case Fog Creek are taking the incidence of downside risk on themselves; in exchange for the loss of upside risk they will pay higher fixed wages.
My point is that you will get bad salespeople by selecting for the ones willing to take smooth, low returns over commissions.
I was addressing the parent comment to mine, which did seem to be making a value judgement.
> My point is that you will get bad salespeople by selecting for the ones willing to take smooth, low returns over commissions.
Can you back this up with figures, or is it your expert opinion?
It's weird to call that "expert opinion". I'm not an "expert" at managing sales teams, though I've hired salespeople in 2 companies (I've never done sales or managed a sales organization). But we're right now not so much discussing my opinions about direct sales as we are talking about basic facts.
That said we don't really know. Everyone uses commissions because everyone agrees that they work. But I'm not sure we've tested the alternative. That's why the Fog Creek trial will be interesting.
I had extremely high numbers, but I hated the work environment. Suddenly every other salesperson wants a piece of you. Trying to stick their names in for a percentage of the sale. Screwing my long term clients for a very small short term sale. Even breaking into my desk to copy my book of business. Adding commissions = scorched earth among co-workers. Not even talking about how this affects training/new hires.
Without incentive my performance would have been equal or better. Commission sales specifically attracts sociopaths.
edit: Despite the above; I think hackers should try a real sales job at some point. It's empowering once you learn how easy it is.
I raised an eyebrow when Joe referred to system-gaming by "making fake phone calls to hit call numbers". If you're incentivising staff with ensuring they adhere to largely meaningless metrics like that you're doing it wrong (it's more or less exactly analogous to judging programmers by their lines of code). Beating them with a stick for not meeting those sort of targets is "coercion", not to mention requiring data-collection time sink; offering a carrot for things sold, which presumably requires tracking anyway, isn't.
Commission sales specifically attracts people who consider themselves to be better than average salespeople. Yes, sometimes they have sociopathic tendencies (although they tend to be the ones who only think they're good). Yes, without going to the ridiculous lengths of some recruiters, good salespeople do tend to have a more mercenary attitude towards work than programmers (they don't have weekend cold calling projects either!), just as programmers on average have somewhat different motivating factors at work from investment bankers, academics and actual rock stars. Even if greed isn't always good, sales roles with an absence of commission and commensurately higher salary incentivises those who suck at selling (or who despite impressive credentials suck at selling your product specifically) to stick around longer. If you're a startup, you're probably not able to offer your staff as attractive a package as Fog Creek or select your salespeople so successfully in the first place.
I agree with the original poster that sales jobs are a good idea for hackers considering starting a startup
edit: I worked at a place where the salary was enough to cover me and the commission was a bonus of 50-150% on top of the salary. I always knew I was at least starting at a living wage. If I was starting at 0, it might be different. Also, we would do 1-2 sales per day, so the volume was high enough that a lead here or there didn't matter. But in businesses where a sales guy makes 3 or 5 sales a month, I can see why each individual sale can be fought over.
Create a system where you maximize the number of people weighted by their need of what you sell. Presented at a timely moment. The client should see you as a domain expert, and someone who makes the process frictionless. Pricing is a surprisingly small part of it. If you can build a good process, you'll sell 10x what the car salesman types will.
Unconventional approaches to sales are the most successful, so a hacker mindset pays off. Once I got over my initial fears, it was quite easy to get the high score :)
The same is not true of sales comp. Salespeople earn commissions on money they are bringing into the company. It's much easier to measure and while it's not easy to perfectly align incentives (which is why sales teams have spiffs and regions), it's at least possible.
Remember also that the alternative to "no sales commissions" probably isn't "lower paid account managers"; it's "account managers paid nearly as high, but on a salary basis". The best sales account managers can virtually print money; the median sales account manager can't sell bottled water in the Sahara Desert. Most companies that do direct sales need to attract talented sales teams.
But even with a perfect sales team, most products have sales cycles stretching weeks-to-many-months. Which means it can take a quarter or two to see how a sales account manager is going to work out. If you're paying them fixed comp, that's an awfully expensive experiment to run.
I have no idea how well this works with "inside" sales teams ("dialing for dollars" operations); maybe fixed comp makes more sense there.
Fog Creek asserts that the study shows a negative relationship between commission and performance. This relationship was found - for very large rewards. Small rewards increase performance when compared to no reward.
Here is the original paper: http://m.pss.sagepub.com/content/15/11/787.short.
In a follow-up study, he showed that effort increases with reward almost as predicted, but error rate increases exponentially: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-937X.2009..... The effect is also variable depending on whether it is a primarily intellectual or mechanical task.
I'm not making a ruling on commissions here, just saying the Ariely quote corroborates Fog Creek's null hypothesis.
I suppose, in a purely theoretical discussion corner-stoned by Ariely's research, the question becomes whether sales is a more mechanical or creative task. I would argue that in a split sales/customer service environment it could very well become the former. Whether that is desirable is dependent upon one's business model.
Absolutes are probably not the answer - there will be models, e.g. Groupon or real estate, where sales commissions may be well worth it. Businesses that depend on relationships, however, may want to re-think a system that encourages maximising the rewarded variable at the expense of all others. Bringing light to the assumption that salespeople require commission, though, is a nice place to start - thanks for that.
So you implemented a system that makes people less worried about the most important thing to worry about?
OP makes many fine arguments about the pros and cons of commissions, but this one little nit trumps them all.
There are many reasons for businesses to suffer and eventually die: capitalization, profitability, positioning, etc. but insufficient revenue is the biggest poison of them all.
I always thought of revenue as the water level in a creek. Enough covers all the ugly rocks below. Insufficient exposes all other weaknesses.
It sounds like Fogcreek must be doing rather well for this to work and I'm happy for them. But it makes me wonder: if revenue ever starts failing to meet projections, how soon will commissions be re-instituted to stop the bleeding?
[EDIT: Some of the replies below imply that I overlooked the words "right now", but that was exactly my point: like oxygen, "who is going to buy right now" is the most important thing to worry about. Enlightened organizations may be able to ascend Maslov's Hierarchy of Needs, but as soon as sales people worry less about Level 1: Revenue Right Now, I begin to worry.]
My experience in sales is tilted almost exclusively to real estate transactions, but I'll say PG's How To Make Wealth Essay offers an explanation (http://www.paulgraham.com/wealth.html).
There is large variance in skill when it comes to many jobs, but in sales it is huge. Fortunately we can measure and properly attribute the more skillful salespeople, and those people have a pretty clear impact on the firm's revenues. All the negatives mentioned in the post are certainly true, although in real estate the mitigating factor is that the biggest source of leads for good brokers are referrals from past happy clients (enterprise SAAS is probably less viral).
Sadly there is also large variance in programming skill, but it's far harder to quantify or justify or transport to the next employer. In real estate, if you suck and sold no houses in 2 years as a broker, or if you were awesome and sold 30 houses, that's easy for a future employer to notice and verify. When I interview for hacking gigs, no one really knows whether I did a good job, I can only say what I generally worked on and have them take my word for it as a 1/N contributor. Self-employed programmers seem to be able to sidestep some of these problems.
In short: they pay market rates based on a transparent internal system of scale, they have a generous profit sharing plan (thus motivating everyone to increase profits regardless of role) and excellent benefits (health and non-health related).
It's hard to argue against a system like that.
I asked - how much are you paying that guy - he is great? the answer was - "an OK salary" - but they did find out what motivated him - for this guy it was vacation time.
Everyone wants a salary that reflects their worth in a business - then (for peak performance) everyone might have different motivators. It might be recognition, a great car, a better office - it does not matter - find out what it is and supply it...
For one thing, I wouldn't say this is known good until the organization has demonstrated to itself that it can recruit / train / inculcate new people into this system. I'd suggest they'll also want to keep an eye on how the sales team evolves over time -- habits die hard, but they do die, and it may be that the commission system served to ensure that some positive habits were maintained.
For another, this may be suited to their competitive niche, or even this particular moment in their market penetration. If the product is selling itself, if the market is growing for everyone, then commissions may not help and may be counterproductive to the image and relationships they want to build. The situation may change if the market position matures and stabilizes.
I'm not saying any of these _will_ be issues. I'm just saying that corporate cultures develop over periods of years, and that comp systems are important signals into that development. It sounds like this is going great, and good management will always be looking at how corporate culture is moving -- but I would think management would want to keep a careful eye out for unintended consequences of this for quite some time.
(And they may well be doing just that. But the post seems a little more definitive.)
As a sales engineer, I'm not sure I agree that employee views can be divided into a black-and-white categorization of X vs Y. I'm not lazy, want to avoid work, etc., and yet I still think a $200,000 deal requires more work and yields more profit for the company than a $5,000 deal, and thus I should be rewarded for that additional effort.
Comparing this reward system to coding or some other profit-generating segment of the company only works part of the time. With sales, the increased profits available for reward are immediately clear. With coding, the value-add of a coder's efforts are less clear, so it's up to his or her manager to see the financial impact of that employee and reward accordingly via bonus. Simple example: a friend of mine optimized some javascript, reduced the file size, and this ultimately saved his company over $200,000 a year in bandwidth. This is quite clear, whereas a simple bug fix or new feature is not.
http://www.joelonsoftware.com/articles/fog0000000070.html
Most of the arguments in the article could just as easily apply to a fixed salary (jumping ship for better pay, fighting over who gets the big deals etc). And I would argue that the theory y vs theory x argument, that good employees are by nature more intrinsically motivated than just in it for the money, probably holds true a lot more for programmers than for salespeople. By definition, sales is about getting customers to pay money, so for a salesperson it's probably a good thing to be motivated by money.
The real question about commission-based compensation is: Is what I measure, and pay people for (this quarter's revenues) really what I want to achieve (maximum long-term profitablity)?
If you pay by commission, you will probably get higher revenues right now, but also more of the problems mentioned (mostly overselling to customers that arent really a good fit for the product).
I'd say it depends on the situation the company is in. If you're an established, profitable software company like FogCreek that wants to build long-term relationships with happy customers, a fixed salary is probably better. But if you're a startup with 2 months of runway left, desperately needing some revenue right now, you're probably better off paying commissions to your salespeople.
That is only true if you focus entirely on sale dollars as the measuring stick.
It is much harder to measure the impact of things like customer satisfaction, office dysfunction, job churn and so forth.
I've been in sales my entire professional career, but always commissioned based. I've worked in SMB with small teams and enterprise with massive teams. I feel like these are related points (to paying commission), but you may have a different opinion.
First, commission is like crack. Once you get a taste, it's hard to kick. Earning potential is outrageous. I was the highest paid employee for two years. I made more than the founders, anyone on our leadership/executive team, and anyone that built what I sold. That last point kept me up at night, so I eventually found a way to redistribute the wealth. I stayed in sales because I couldn't imagine "how anyone could live on that little" (< $100k). It's hard to quit.
Second, crack either transforms people or attracts a certain personality type. I've never been surrounded by so many disloyal, self centered, unethical, and maniacal people. Ever. I've also caught myself crossing boundaries I would have never previously considered -- until I thought about how it would push me over the accelerator and significantly increase my commission. I have met some people with strong character and ethics in sales, who are great salespeople, but they're a tiny minority.
Third, those ethical breaches typically result in misrepresentation of the company/product/service you're selling. Commissions are typically paid on a contract, not on the lifetime value of the customer. I firmly believe the commission-based sales people are potentially the most damaging thing to your company. Set an inaccurate expectation to close the deal? As a sales person, you're on to the next one. Results in high churn and damaged credibility, neither of which affects the salesperson's commission check.
Last, sales people are typically the least knowledgeable in the organization about the company/product/service they're trying to sell. I've always been in, uhm, technology as a service(?), but neither of the companies I've worked at have any desire to hire people who understand the technology. They hire salespeople that have "consistently exceeded quota" and "increased customer spend by x" or some other sales achievement. That's great, dude, but you sold fucking vacuum cleaners. What do you know about the product those guys in the dark rooms are slaving away over? Why are you the best person to go out and represent all of us in the market? Speaking of, I've yet to interview a salesperson that's come in with "here's a list of my previous clients who will vouch for my integrity."
For those talking about large sales team, I can personally assure you all of the negative aspects mentioned in the post become even more apparent with scale. Poaching leads, generating fake orders, tarnishing the company to exceed quota ("total lack of ethics")-- it's all there, and it's easier to hide in a bigger pond.
I know you need to move units and generate revenue, but I agree, why do we pay sales commission?
So why is the author wrong?
While there certainly ARE cases where commission is being used in the wrong way, there is nothing inherently wrong with it.
1) The author misinterprets the research and states that people perform worse when under an incentive. This is only true for INTELLECTUAL tasks. If you tell one group of people that they get $50 if they solve a math problem in five minutes then that group will perform worse than another group without an incentive.
But if you tell one group of people they'll get $20 for every brick they move from A to B in five minutes you can be sure they'll move the bricks much faster than a group with no incentive.
2) "The problems include infighting over who gets credit for accounts and sales." Again, a problem with how you set up the system. This fighting can easily be avoided. Just make sure it is clear who is responsible for each customer.
3) The author also forgets one of the great features of a commission based system. If you are a small startup you may not be able to hire a large sales force. In that case, you can hire great sales people at a low base salary and make sure they only get paid when you get paid.
TL;DR: commissions are a tool among others. Use it well and it will help you. Use it in the wrong way and it won't. Use common sense.
If it were, there would be a small difference between the best salespeople and the worst. Everything I've seen suggest the variance is bigger in sales than it is in programming.
[1] http://www.joelonsoftware.com/articles/fog0000000038.html
In my experience, commissions exist so that places can hire a ton of salespeople with relatively little risk to themselves.
Demonstrated model of success, no need to blog about it in 2012.
"Atlassian was founded in Sydney in 2002"
"Based in New York City, Fog Creek was founded in 2000"
In smaller teams (when managed well, and with the right talent), the focus is always on the sales number vs. the sales commission, which is properly considered as a byproduct of the sales number. If you dig deeper, many of the negative attitudes are associated to reps working to hit their sales number.
My assumption is that sales numbers still need to stand at individual levels (to avoid social loafing) unless the team as already proven themselves. I'd be interested to see what different problems this tactic floats later down the road.
That's my thought. I really like the idea of commissions to reward hard work, but either way you have to manage things right.
At one small company I worked at, the main sales guy received very little (if any) commissions. He didn't get many sales at all, but that wasn't a big issue since he had his salary.
At another, there were three sales people on commissions. One of them didn't sell much or provide much value, but he had in the past. As long as his old clients didn't leave, he kept getting paid (due to the way things were structured). This did not endear him to the other employees.
The other two sales people were very motivated by the commissions. They could sell a ton, which would be great if it wasn't for the way it was done. They were in constant cut-throat competition, trying to adjust things so their numbers would be 1% better at the other one's expense. This just devolved into a ton of fighting, eventually causing controls to be put into place to prevent either one from tweaking things. It was also easier to get a new customer to pay us for a few months than increase old business or keep them happy, so customer turnover was very high.
The best system I saw had one person working to get new business (on commissions), and once the sales was in it was managed by someone else (on commissions for keeping/improving their business). This removed the incentive to replace good old customers with fly-by-night new ones, but it was a very small team so I'm not sure it would have scaled very big.
Whether there are commissions or not, management needs to keep an eye on things to intervene when something is happening that's not in the organization's best interest. There are plenty of sales people (just like every other profession) that are happy to take advantage of companies if given the chance. Some people can do an amazing job for you, but need a ton of oversight.
You can see this in an extreme form with car dealerships, where the salesmen are usually 100% commission. It's common for dealerships to have a half-dozen salesmen loitering on an empty lot, because they don't cost the dealership anything.
Many people hired for a sales job never actually sell enough to justify their cost to the company. Hence the need for commissions as a way to weed out the many non-performers.
If all or a majority of compensation is commission, you also deter the non-performers from trying to get the job in the first place.
However, the OP seemed to miss why we pay sales people with commissions but programmers with salaries: it is easy to objectively measure the output of sales people and it is not easy to objectively measure the value of code.
If you asked the question, "Why do we pay most people in salaries?" the answer is because there is no easy way to pay-by-performance for most creative, subjective, or service oriented tasks.
My snarky answer to this is if a software guy wants to get rid of commissions, he shouldn't complain when I client gives him a mock up in Word.
My serious answer is the problems his sales department had were symptoms of a broken system. Many easy, smaller fixes could have alleviated the boiler-room atmosphere he describes.
A direct sales rep has a one-on-one relationship with individual named customers and works with a marketing team to target prospects directly, and spends perhaps weeks of time (over the course of a sales cycle) with each customer.
This is probably completely different for lower ticket items that have shorter sales cycles (like bug tracking software). But it also speaks to the risk they took, given that they weren't wasting money experimenting on the sales staff. (their effectiveness was quickly apparent).
An account manager hired into a 2-year-old sales team that has been making its quarterly numbers isn't going to be eased into commission comp.
Moreover, most sales account managers are intrinsically motivated to set things up for the 20x sale, because they're likely to own the account when the 20x home run comes in.
Most sales teams have spiffs set up to account for the "real estate agent" problem where short-term deal flow trumps revenue maximization.
I agree that managing a direct sales team is a hard problem, but in terms of designing an incentive comp plan, it's hard to argue that it isn't easier than doing incentive comp for developers.
A salesman and a programmer go on a bear hunting vacation together. As they arrive at the log cabin in the wood, the salesman tells the programmer: "Ok, why don't you unpack and get everything set up, and in the meantime I'll go find us a nice fat bear."
The sales guy leaves and the programmer start unpacking. An hour later, as he's about half done and taking something out of the car, he hears a loud roar coming from some bushes near the cabin. He looks and sees the salesman shoot out from the bushes, with a huge, snarling, growling, drooling bear charging behind him. The bear is enormous, all jaws and claws and muscle.
The salesman runs straight for the door of the cabin, the bear right behind him. At the last moment, he steps to the side. The bear, carried by its momentum, crashes into the cabin. The salesman quickly closes the door and locks it behind the bear. Loud noises come from inside as the bear trashes the place and tries to find its way out.
The salesman turns to the programmer and says:
"Ok, phew, that's one done. I'll go find another one while you skin this one."
I had to integrate an existing system with a product sporting a 7 figure price tag. Most painful part involved dealing with disinterested engineers who brushed off our unmet requirements as "Blame the salesman."
The entire company deserves blame and the engineers should be fighting for better sales standards if they don't want to put the work in.
That assumes they have any way to do so. Unlikely in the situation you describe, where engineers are probably considered an expense and sales "bring in the revenue", I'd expect sales to be completely siloed from engineering and that they don't give a shit.
Hence the depressing (and likely depressed) and disillusioned answer you got from engineering: they have no way to fight this internally.
If this happens often at your company, Client Services or Development needs to have a heart-to-heart with the sales manager.
As a developer there, it was my job to get them implemented by that time. I think I only stayed there 6 months before quitting for a better job..
In the long run, this is a much better situation for us. The customers are, on average, happier, which means they keep coming back, they recommend us, and they need less support.
The same thing could be said of any company. It is possible to drive too hard to make a sale and alienate your customer. Right now you may benefit. But later down the road you will probably develop a bad reputation.
More importantly, we're talking about salespeople hired to scale up a proven business model, not entrepreneurs exploring different ways to make money.
Focusing on the "right now" as an entrepreneur can cause all sorts of issues, but if you hire a salesperson to sell your known product to a known target market based on a known process, they better fucking well be focused on closing the sales right now. It obviously depends on the industry, but I'd say that in most cases in B2B, without the drive of a salesperson trying to close the deal right now, every deal will take twice as long and half the deals will probably never close at all.
If you pressure someone into a sale now and they decide to leave soon afterward — perhaps even demanding a refund or issuing a chargeback — you've probably lost them for at least a year, and then the company is worse off than if you hadn't made the sale at all. But if you take a little while to make sure you get it right, the lost week or month will get canceled out by how happy they are with what you've given them.
So you're absolutely right that, all other things being equal, a sale right now is better than a sale tomorrow. But all other things are not always equal, and if you try to force every peg you find into that round hole, you're just going to end up with a lot of broken pieces.
Moreover (and I'm reading between the lines a bit here) I think part of that statement is referring to sales people ignoring the "hard" sales and focusing only on the "easy" sales. "Are you ready to buy? No? Ok, I'll call again in 6 months" becomes, "Let's talk about your concerns so that maybe you'll buy in a month instead of 6."
However, there is a point where you've reached a certain critical mass, where your happy customers market for you, where your own marketing and presence sells the company. Like Fog Creek, which is now an established and known company. At this point you will do better at growing your customer base through marketing instead of commission driven sales, where customer service to the existing customers will do the selling for you, and changing the pay structure of your sales people will align them better to this approach. It also allows you to convert your customer base slowly to those you know will remain with you for longer. I think you still need to keep statistics on sales performance, and deal with bad performers and promote good performers, but these should be closer to a bonus structure and work over longer timescales, like the rest of the staff.
If taking away commissions didn't hurt sales, why would reinstating them fix some hypothetical sales problem? This makes no sense.
Because the reason why sales didn't drop might be because of wider factors that outweighed the removal of commissions. Once/if the "water level drops" and management start panicking, they might consider reversing their position on sales commissions, at least to see if it makes a difference for the better.
Seems like a pretty obvious line of thinking to me.
Interesting. I wrote a particularly tricky piece of code today. It required much more effort on my part than some simple code I wrote last week, so I need to be rewarded for that additional effort. Oh wait, I am rewarded with a salary for doing what I was hired to do - solve problems writing code.
What FogCreek is saying is that it should be the same thing in sales. You're hired to do sales. It doesn't matter if it's $10 or a million dollar deal, that's your job. Why should it be any different than any other salary person?
Another interesting thing to me is when sales people talk about all their great sales, but seem to forget that someone created the product they are selling. If thought about in that manner each sale should cause the entire company to get paid. In fact, that's exactly what pays the salaries of everyone who works there.
Think of this from the perspective of an owner. If you are going to choose between two sales guys, one who pulls in $10 deals and another who pulls in million-dollar deals, who are you going to choose? OK, now that you've chosen the latter, how much are you going to pay him? Since there's no simple way to come up with an arbitrary worth, say you settle on a nice big offer for him. What if he stops producing stellar numbers (due to personal deficiencies or market forces)? Do you fire him or reduce his pay? Doing either is sure to infuriate him if external forces are at play, so the only alternative is a merit-based commission system.
I'm not saying it's right for companies who only pay sales commissions and don't reward coders--there absolutely should be profit sharing and bonuses for programmers with measurable contributions to the company--but this process is in place simply because sales' efforts are infinitely easier to quantify and reward (from a profitability standpoint) than are programming efforts.
My thought is that, just like in every other aspect of the business, your top players will be your highest paid as part of the normal compensation process--and those top people should be the ones closing the bigger deals. Just because you don't get cut a check for that specific deal doesn't mean there wouldn't be rewards for doing so.
What's the difference? In either scenario, you are rewarded proportionately to how much effort you put into landing one large deal or multiple small deals.
"My thought is that, just like in every other aspect of the business, your top players will be your highest paid as part of the normal compensation process--and those top people should be the ones closing the bigger deals. Just because you don't get cut a check for that specific deal doesn't mean there wouldn't be rewards for doing so."
I suspect commissions simply originated from sales reps demanding recognition for their efforts. Bonus structures and salary positioning through systems like FogCreek assume you have fair and competent managers who recognize and reward effort. Sales teams may not always present this luxury, so reps may simply demand these commissions to cover their bases.
Is this a real-life example or a hypothetical situation? Hard to imagine this to be realistic unless this is one of the top 100 sites in the world.
If I give my sales people a cut of the lifetime value of a customer instead of the immediate contract, would that be better or worse?
In my mind, the problem is that commission is an incentive to do whatever it takes to close the deal -- especially if you're in an uncapped commission with accelerators. For example, if I'm paid 10% on my first $300k in new business, 15% on $300-499, 25% on 500+, I'm doing everything I can to hit $500k, right?
I (the commissioned salesperson) would lie to my mom if I'm at $490 with a $12k deal on the table. I'll lie to you, and I'll tell you things about our product/service that aren't true. You'll do this one project with us, I'll get my gigantic commission check, and then you'll a) never come back b) tell everyone you talk to about us and c) not affect my commission check. I'll also put on my resume that I "exceeded monthly quotas" and smile. Remember, I'm here to get paid. That's why we're in a commission-based role. [edit: Please keep in mind that I'm giving accounts of what I've seen, not necessarily what I've done. I wouldn't lie to my mom. Others would.]
I believe you can mitigate that problem by paying out over a term, or upon certain achievements (deployed, customer gave us a positive rating, etc.). However, what additional problems does that create in your organization? Is it good or bad to have the salespeople managing (micro or otherwise) the delivery ("selling is not delivering")? Does that compensation model get too complicated?
Call me an optimist, but I wish companies would hire people that want to truly evangelize their widgets, put them on a base salary, and then measure performance. Sales isn't rocket science, it just takes someone who is comfortable talking to people...and when you're selling something you believe in, that's really easy to do.
I would say that sales is definitely a creative task (but you're right that's the important question w/r/t Ariely). There is a rote aspect to working the phones, or keeping records, but sales is a performance skill that requires a lot of thought about strategy, rhetoric, timing, etc. etc. By no means is it rocket science (I wrote a bit about that here: http://www.fogcreek.com/guide/The-most-basic-things-your-com...), but there is a lot to consider and get good at.
I completely agree with your assessment of sales commissions elsewhere--and I think we've all seen enough of a share of unfair, incompetent management to understand the rationale. That said, I also agree that there is some serious baggage that comes with commission-based compensation and it's worth a look to dump it.
I don't think it was intended, but that's a condescending statement. That's like saying "I'm looking for developers to just write some code, not find ways to do it better." A good salesperson should be looking for different ways to make money for their client, their company, and effectively (profit sharing) themselves.
Additionally, most sales managers are promoted sales people, not necessarily cunning business people. A "known process" rarely exists.
ps, I'm a big fan of your blog and contribution here, so please go easy on me.
Making a sale still takes a lot of skill and effort - and, even more, it takes tenacity, and drive, and a very strong desire to actually close rather than spend months and months waiting for the client to make up their mind. Sure, you might lose some clients by pushing for the close (though with experience, you know which ones will respond to it), but at least it then frees up your time to pursue other prospects who can be sold more easily.
I don't think that makes salespeople inferior to programmers. These are two different kinds of jobs with two different sets of parameters. Programming is project-based work, where you aim somewhere and you go there and then you're done. Sales is process-based work, where you have an infinite pile of leads to go through (and if the leads run out, you go and generate more), and selling more today doesn't mean you sell have less to do tomorrow. I find the latter much more difficult to do.
To put a final nail in the idea that I look down on sales - both my girlfriend and my ex-girlfriend are salespeople. Not that that's why I dated them, or anything, but it'd be hard to be with them if I looked down on their profession ;-)
That actually sounds like a very uncommon case. Even fully client-side software has variable costs in the form of support costs.
Support costs aren't relevant to your parent's example, but they do imply another misalignment of incentives. If a salesperson's commission is based on revenue alone, she'll just as soon sell to a costly, high-maintenance customer as to a profitable, low-maintenance one.
Again, just two issues I have here:
(1) Dev incentive comp and sales incentive comp aren't particularly comparable.
(2) Huge compensation for the best sales managers is an economic reality, not a philosophical issue, and if you're not going to compensate variably, you're shifting a lot of risk from the sales manager back onto the company.
That's the worst part. The sales guys get a bonus and the developers get an 80 hour work-week.
Examples: Real estate Brokerage &
Investment banking
Etc.
I am intrigued by the idea of no commissions in some if not all sales jobs. If the person isn't selling you can fire them. If they do well in the managers judgment you can bonus them. While it is subjective, almost all business decisions are. A good manager is good at making good subjective decisions.
Perhaps I've been soured by the particular salespeople I've worked with, but I don't think it's a job that ethical or sane people thrive in long-term because there are eventually going to be situations where management expects results that can't be achieved without deceptive behaviour. Most of the successful salespeople I've known have been greedy, delusional, unethical, or borderline sociopaths. The really good salespeople are the ones that can hide it until a critical moment.
What I'm really getting at: is the problem with commissions themselves or the way in which commissions were structured at the places you worked? Putting aside cash flow and accounting issues, could you design a commission structure that incentivises correct behavior?
Also consider equity or profit sharing in the company too.
I'm not sure I agree with sales being in product development. You run the risk of having a sales person champion an idea as the greatest thing on earth, only to find out the market size is exactly 1. The salesperson should, however, be concerned with the customer's satisfaction long after the deal is signed.
Why would you do that if the 25% is only on the 500+ stuff? It's not like those $2k at 25% ($500) are going to be very significant compared to the 300k@10 ($30000) and the 200k@15 ($30000 as well).
25% of 500 = $125 vs 15% of 499 = $75
But in other instances, you're right, and typically the salesperson knows exactly which deal matters the most.
That definitely sounds like a recipe for disaster.