Strategy

Companies Should Stop Paying Sales Commissions

Commissions aren't necessary to motivate salespeople, and in fact they'll be more productive with a straight salary, author says.
Justin Roff-MarshFebruary 12, 2016
Companies Should Stop Paying Sales Commissions

It’s not hard to validate the oft-expressed observation that sales is typically the sole responsibility of autonomous agents. Companies advise their salespeople that they will be held accountable for outcomes, not activities. They are paid commissions — and sometimes only commissions, with no fixed salary. And they are encouraged, in most cases, to manage their territories, their accounts, and their sales opportunities as if they were, well, their own.

Justin Roff-Marsh

Justin Roff-Marsh

Answer these three simple questions:

  1. If an important sales opportunity is lost, who is ultimately responsible?
  2. If an important customer is dissatisfied, who is ultimately responsible?
  3. If an account falls into arrears on its payments, who is ultimately responsible?

Salespeople spend so little time selling because they have so many responsibilities competing for their limited time, because each salesperson is a self-contained sales function.

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Consider this: What has caused both the productivity and the quality of manufacturing to increase by many orders of magnitude over the last 100 years?

The answer is centralized scheduling and division of labor. And division of labor has had the same catalytic effect on project environments (think construction, aerospace, finance, and even marketing). Yet the modern sales environment is, in key ways, analogous to manufacturing as it looked more than a century ago.

That’s about to change. Silent revolutionaries have fruitlessly scrutinized sales for evidence that the function is somehow unsuitable for centralized scheduling and division of labor. Their new assumption, around which their sales environments have been engineered, is simple but powerful: Sales is the responsibility of a centrally coordinated team.

The Dedicated Sales Coordinator

Sales must be viewed as a machine, where tasks like prospecting and setting up sales meetings are shared and delegated within an in-house team.Opinion_Bug7

We should not begin this discussion by asking whether sales commissions make sense. Rather, we should ask whether we should sell via autonomous agents, or via a centrally coordinated team where sales professionals are paid as salaried employees and team members rather than independent outsiders. With this reengineered model, salespeople get dedicated executive assistants, or sales coordinators, who will free them to do nothing but sell.

Do Salespeople Need Special Motivation?

If salespeople don’t have the opportunity to earn commission, why would they sell?

I wish I had a dollar for every time an incredulous executive has asked me that question.

You would think the onus should be on the defender of performance pay to present an argument. After all, receptionists answer the phone when it rings, without getting incremental pay. Your controller does a good job of paying bills on time, without getting a per-check rebate. Even senior executives perform important tasks absent special incentives. (I’m assuming that no one is paying you to read this!)

Should salespeople differ from almost every other worker on the planet? The reason behind the obvious answer to that question (“No”) is simple: Absent the opportunity to earn a commission, salespeople will still sell because they are salespeople. (Just as receptionists answer the phone because they are receptionists.)

The “new” plan being proposed here, then, is not even new: It’s exactly the same plan used to compensate everyone else in the organization.

In the excellent best-seller “Drive: The Surprising Truth About What Motivates Us” (Riverhead Books, 2009), Daniel Pink presents a powerful case against performance pay. His conclusion — backed up by many social sciences experiments — is that external rewards retard the performance of knowledge workers. Such rewards have a positive effect only in situations where workers are performing mindless, repetitive tasks.

With these points in mind, commissions may be defensible in traditional sales environments — not because they motivate salespeople to sell, but because they motivate them to prospect. But that argument is moot with an internal, team-based sales approach that frees sales folks from the requirement to generate their own sales meetings.

When a significant component of salespeople’s pay is performance-based, management has formally abdicated its responsibility for sales. In so doing, management has telegraphed to salespeople that selling is optional! It is up to each individual salesperson to generate sales in the quantity of his or her choosing.

Calculating Salespeople’s Salaries

There are no surprises here either. As with all employees, there are two considerations:

  • Replacement cost (how much would you have to pay for another person with a comparable set of capabilities?)
  • Asking price (how much do you have to pay someone to ensure that the compensation plan is not a regular topic of conversation?)

It should go without saying that it would be foolish to propose that salespeople (or any team members) take a cut in pay when you transition to this new model. Most of our fellow, silent revolutionaries shift their salespeople to a salary that’s equal to, or slightly greater than, their average total earnings over some prior period, often three years.

Both parties are getting a terrific deal here.

Salespeople are receiving a not-insignificant pay gain. Obviously, the potential to earn a certain amount of money is not worth nearly as much as the same figure, guaranteed.

Meanwhile, management is increasing the volume of effective work performed by each salesperson. In our experience, companies that have reengineered the sales function to a team approach, using coordinated scheduling and division of labor, have realized sales-productivity improvements that are worth far more than an incremental increase in salespeople’s compensation and the cost of a sales coordinator.

The transition to this reengineered environment can be difficult for sales managers. However, if the ones who have transitioned were to refer to a previously compiled list everything they thought they knew for sure about sales, almost every statement on that list would now be false.

Justin Roff-Marsh is the founder and president of Ballistix, a sales management and marketing consultant, and author of the new book “The Machine: A Radical Approach to the Design of the Sales Function” (Greenleaf Book Group Press, October 20, 2015).