Commission: Baby Steps!
If there’s one common challenge in motivating a sales force charged with long and complex sales cycles, it’s commission. From a sales management perspective, commission is one of the most powerful motivational tools at a company’s disposal; after all, what gets rewarded gets done. From a financial perspective, commission is a method of transferring the risks attached to generating new revenue away from the company towards the sales person; after all, the company doesn’t pay out until after the salesperson delivers.
From my experience, companies predominately adopt the financial perspective, as I rarely come across a commission plan that pays out on anything but the final sale. This can be effective in a transactional business in which sales cycles are short, but proves very ineffective at motivating sales people in longer sales cycles.
I love analogies, especially ones that refer to professional sports because it is the most transparent industry out there. Imagine you are the owner of a professional sports team and you only pay your players if they score; In football that means touchdowns and in soccer that means goals scored. What do you think your players are going to do if you only reward them for scoring??
Put simply, they will ignore all the steps that lead to a score, like getting first downs in football or passing the ball in soccer, if they even understand the steps at all. Your wide receivers will always “go deep” while the defensive backs will always attempt an interception; your soccer players will be shooting from all over the field and will never play defense! Now I’m not a professional coach, but my guess is my team wouldn’t win too many games acting this way.
That’s why it blows my mind that companies only pay salespeople after they have “scored”, especially in sales cycles that last nine to twelve months! What you should be incentivizing are the activities and behaviors that lead to a sale, like getting a first down or passing. Task the Sales Operations department (or bring in a consulting firm) to define the steps that the best salespeople in your company or peer companies/industries take to bring a sale to fruition. Sales managers should integrate those steps with their CRM tools and their salesperson’s goals (often times called activity based commission, or management by objectives) so that they can drive insight into what their salespeople do well and where their development opportunities are, as well as insights and development opportunities for the sales force as a whole. Eventually, you will have goals that each salesperson can consciously perceive as possible in the short term, as opposed to a “closed-sale” commission that only becomes consciously plausable once a sale is in its final stages and whose fate is already sealed. This allows salespeople to see a clear path to the sale rather than just the end zone/goal posts off in the distance.
For all you finance folks out there, I know what you’re thinking. “What happens if we pay our salespeople on all the activities that lead up to the sale, but the sales don’t close?” As a finance person who is charged with investing in scalable initiates with a high ROI, this kind of result would be catastrophic. I can empathize with your fear, and my response is that success of this kind of incentive program is predicated on your company’s ability to accurately define the behaviors and activities that lead to a sale. Once you are sure those activities have led your best employees (or employees at peer companies/insutries) to close sales, then you know incentivizing the rest of your salespeople to perform those activities will win business. On an individual level there might be some salespeople who are paid to “sell nothing”, but at a portfolio level the numbers will work out. As any good leader would say, “the best invest is in your people”.
Very intriguing…
I have had success in designing Sales Incentive Plans that rewarded the Sales Engineer / Account Managers for significant “Wins” early in the selling process. In our case, the design wins necessary to capture sales once programs started ramping in production, generally 6 – 12 months later at a manufacturing site often in another part of the world. It should be noted that we paid for verified design wins even if we did not capture the sales.
To use your football analogy – we felt paying for first downs would lead to more scoring opportunities and ultimately more touchdowns. In fact, we were right; our ability to capture, track and close sales globally went up dramatically.
To summarize we paid an upfront bonus for the design wins, which while a small portion of the overall compensation package allowed the Sales Engineer to get some immediate gratification. The major commission opportunity still came from split adjusted closed sales.
Feel free to contact me if you’d like to hear more details.
My commission structure just changed and it is AMAZING!!! We are not limited in width or depth and at the highest level in the company, we can collect to infinity. The company just put a bonus incentive program together so we can now make weekly bonuses. For every new person who comes onto your front line, you collect $100 and for every new person who comes under them, 7 levels deep, you collect $20 per person. This is great motivation to build and get more people on board!!
Although your proposal is better than paying commission on sales only , I am not so sure about the effectiveness of financial incentives in general . See Chapter 5 of
“Hard Facts, Dangerous Half-Truths & Total Nonsense”
by Jeffrey Pfeffer and Robert I. Sutton.
Christian, thanks for the insightful comments. Yes, you are right that often times incentives point employees in the wrong direction.
There was a great study called The Folly of rewarding A while hoping for B that seems to be the basis of a lot of the chapter you referred to, and is a classic challenge faced by anyone who designs commission schemes. At the end of the day, commission is one tool in a large tool belt of intrinsic/extrinsic motivators. The disadvantage of commission is that is sometimes rewards the wrong behavior (which is why I said companies should put in the effort to clearly define the sales process), and is less powerful than intrinsic motivation. It’s advantage is its scalability: one message/commission plan can be broadcast to a large number of people with a similar sales process, thus affecting thousands of salespeople. Commissions will never go away, and we should work hard at having them tell our salespeople what’s important to accomplish, and reward them for doing so.
All that said, you make a great point about intrinsic motivation….it is an extremely powerful motivator and if administered properly, a game changer. Maybe a topic for discussion soon. If anyone has any thoughts on the powers of intrinsic motivation, the floor is open.
Good article and nice sports example. I think this is a good idea, but what do you think about this simple twist to help the financial aspect?
Still pay based on the final sale……. but pay a higher multiplier if the sales person followed all the key steps you’ve identified that help the company win deals? This would drive the behaviors that you want and higher sales, and not put a financial burden on the company.
Jeff Koning
Great!
Bravo!
I couldn’t agree with you more. Why shouldn’t the company share more of the risk – especially with at will employment and in these times of deep recession. During my entire career in inside software and internet sales, I have always found the all or nothing, sink or swim, closed sale commission and commission only sales plan/philosophy patently absurd, unfair to the salesperson and a demotivating factor. Why shouldn’t we get paid for all the work we do – like everyone else? After all, when we leave, the company owns, utilizes, benefits and receives revenue from the leads we developed, the pipeline we built, and subsequent sales and cross-sales from the customers we closed.
Great discussion from all! Thank you Mr. Gilroy for your
insight. As a medical professional transitioning from straight, hourly salary to commission only sales positions, this is interesting food for thought… One must love and respect the professional sales process to succeed, in any industry, I believe…
Our sales team is only eligible for commission with demonstratable achievement of the monthly metrics.
Eric,
I like your website! This article made me think of one of my favorite books about behavior modfifcation, “Don’t Shoot the Dog”, by Karen Pryor. It backs up your strategy and beliefs. This book has helped me tremendously with my sales and keeping my customers happy. I also train dogs and the same principles apply to dog training!
Here is some information on that book:
http://www.wayneandtamara.com/dontshootthedog.htm
Best,
Robert Milner
I agree, i like this article, good points, and also helps to focus the sales exec as well. I do reserve the right to ensure sales professionals are also ultimately revenue driven and that commission schemes should be in relation to company performance.
I have worked in environments where the SD has complicated the procedure with accelerators etc the individual is just encourged to sand bag, hold back sales, and spend their time just trying to cheat the system.
The key here is that the exec is paid or rewarded for anything that adds value to the organisation, an approach that i believe should apply to every part of the business, not just sales.
Is there not a case that says milestone based incentives for challenging sales environments (i.e. economic down turns, early adoptor product, new market, new region etc) as described above; and Deal-Close Rev focused comission plans in upturn, mature markets, to turbo charge growth thro close rates.
The intrinsic consideration is key I believe. While sales certainly does reward economically motivated people it is not the ONLY motivator. The issue is attempting to provide systemic solutions to an intrinsic issue. In fact, numerous studies, “First Break all the Rules“, by Buckingham and Coffman citing the Gallup studies,and “People don’t leave their job, they leave their Bosses” by Kevin Kelloway point out that top performers are more energized by the “chase” and winning. It’s a matter of knowing the intrinsic motivators of the sale people and building both the team and the compensation around both. Excellent article.
Eric, as you know commission plans are very complex. But they are developed with one goal in mind; To manipulate the sales organization to achieve the corporation’s revenue objectives.
I most certainly like your approach because many corporation’s objectives have changed from “get the order, no matter what” to “get the order by following this process”. Most sales training is based on process based selling, most CRMs are based on process based methodologies but most (if not all) comp plans are based on “get the order, period”. Process goes out the window in the final stages of the month / quarter / year (from the field to exec management).
The best sales people actually know how to manage (manipulate) the comp plan. If you want process and structure verses “Cowperson (by or girl) selling, adopt this strategy as you’ve suggested. If you explain it to the CFO that way, it’s an easier internal sale because they understand process and are the first to complain when it’s not followed.
That being said, the lions share of the comp still must be on the order or the sales comp manipulator will quickly get bogged down in process and learn how to blame it for poor productivity.
Having worked with sales people for more than a decade, one thing I have learn’t is that sales people know how to maximize an incentive plan. If the plan pays for activity, then there will be lots of activity! I also agree that the plans can drive the wrong behavior. But I would attribute this to bad plans than just a general statement that incentive plans do not drive the right behavior. If a rep can easily figure out how much she will make for every deal without having to use an algorithm, it will drive the right behavior. Many companies fall into the trap of using incentive plans to ‘manage’ reps Vs rewarding them for a job well done.
Fabulous discussion! Long sales cycles present some of the biggest challenges to sales compensation plan design (and the most interesting problems!).
Regarding whether or not incentives actually help at all, the best piece I’ve read on the subject is “Rewards and Intrinsic Motivation” by Cameron and Pierce. It’s dense and academic in tone, but I’ve read the whole thing and found that the key points relevant to sales compensation design from the book are the characteristics of effective rewards. According to Cameron’s and Pierce’s research, incentives and rewards are most effective when…
1) Used for the benefit of the employee(not just to create benefits for the employer)
2) Focused on challenging activities (not on activities that employee sales people already like to do)
3) Tied to specific reasonable, objective, and attainable standards of performance
4) Accompanied by celebration of significant successes by the organization.
In addition they note that, “Reward systems that are discretionary, subjective, or based on pleasing the people in charge are often seen as unfair and coercive. What is ‘good’ today may not be good enough to earn a reward tomorrow.”
There is substantial written work questioning the effectiveness of incentives in creating sustainable healthy motivation. This book takes this question on, focusing mostly on the education and compensation application of the principles.
Super post, Need to mark it on Digg
I agree with the premise. Point-of-sale incentive opportunity becomes less motivating as the sales cycle increase. But the sports analogy doesn’t fit an absolute position here. Generally, sales professionals engaged in strategic selling environments get paid a base salary that exceeds the target incentive opportunity. So like the football player, the sales person gets paid for activities that contribute to the end goal. Athletes with direct accountability for scoring points actually do earn proportionate to their scoring frequency (think the Bill’s Rian Lindell earns 3x more than the average place kicker for the stuff he does prior to scoring?). For positions with indirect accountability, like linemen, it’s all about activities — they needn’t get paid for scoring because it’s not their job.
Certainly, scoring or sales frequency contributes to motivation. It’s tough to get excited about something that won’t happen anytime soon. But disciplined professionals stay focused on the goal, and instinctively do all the things that will help achieve that goal.
Paying salespeople for activities or pre-sale “milestones” is practical for those covering undeveloped markets with infrequent sales opportunities. But as the market matures and the opportunities become more frequent, the milestone approach becomes a poor substitute for paying on what matters. The activity deviation between individual salespeople is slight relative to sales performance, and thus the value between par performance and excellent performance isn’t enough meaningful for scalable performance increases.
There is a practical application for tying incentive pay to pre-sales activities, but the principle is counter to what drives salespeople, and hard to swallow given the current financial health of many enterprises.