Street Smarts: The Sales Commission Dilemma
There's a better way to reward salespeople.
By Norm Brodsky
Street Smarts
Want to stir up controversy among a group of business owners? Ask them what's the best way to compensate salespeople. It's like throwing raw meat into a den of lions. You can just sit back and watch them go at it. Over the course of 25 years in business, I've developed my own system for handling sales compensation. I've also become convinced that the way most companies do it is a recipe for trouble.
I'm referring, of course, to the practice of paying sales commissions. Unless you're very careful about how you use them, they almost always have the effect of undermining any sense of unity and common purpose in a business. How? By putting the salespeople in a separate category, by making them stand apart. Granted, sales commissions aren't the only culprit. It doesn't help that most companies put the salespeople in separate offices, hold separate meetings for them off-site, and treat them far more gingerly than other employees at performance review time.
But commissions play the largest role in distancing salespeople from other employees. The result is a lot of animosity and resentment, leading to inevitable conflicts. The accounting people complain that the salespeople make special deals with customers and then don't inform the people who do the billing. The operations people complain that the salespeople make unreasonable demands. As the owner, you're constantly having to mediate between departments while resolving disputes among the salespeople themselves over who has which territory, who handles which customers, and who gets the leads coming into the office.
You also have to cope with the great fear all owners have that their salespeople will leave and take customers with them. That's actually more likely to happen with a commissioned sales force than with a salaried one. For salespeople on commission, the customer represents security. As long as they have that connection, they think they have a means of earning a living. Consequently, they have a strong interest in making sure the customer belongs to them rather than to the company. They resist letting anyone else have a relationship with the customer.
To protect themselves, owners come up with all kinds of mechanisms aimed at preventing salespeople from getting too cozy with customers. One approach is to transfer every new account from a salesperson to a customer-service rep, who handles the relationship from then on. Another technique is to reduce the commission over time.
Such systems may or may not weaken a salesperson's hold on a customer, but they don't address the underlying problem. The salespeople are still not members of the team. Their focus isn't on making the company successful -- it's on looking out for No. 1.
I want everybody in my company to be on the same team, including my salespeople. That won't happen unless everybody is paid the same way. Notice that I didn't say everybody should be paid the same amount. Because of the role they play and the difficulty of the work they do, salespeople will always earn more than most other people. That's natural. But I want all of my employees to be part of the same compensation system. That is, I want them to receive a salary that is reviewed and adjusted annually, based on the performance of the company and the contributions of the individual.
Now a lot of owners, I realize, will stop reading at this point because they're convinced they could never implement such a system. They believe they have no choice but to pay sales commissions. They say it's how the industry works, or it's what salespeople want, or it's the only way to motivate them. And, in fact, commissions are the norm in most industries, and commissions are the only way to motivate some salespeople. But those aren't the people I want in my company, and you should think twice about having them in yours.
I've found salespeople fall into three categories. First, there are the hotshots -- the super salespeople who have all the answers, who claim to know more about your industry than you do, and who are impossible to teach or control. They thrive on commissions and don't want to be part of anyone's team.
The second group consists of entrepreneurs, that is, salespeople who really want to be in business for themselves. They are also motivated by sales commissions, because they like to be independent and they aren't planning to stick around anyway. You may be able to convert some of them, but the majority will leave eventually and start their own companies. That is their destiny, and there's nothing you can do about it.
Then there's the third group, which is the largest -- people who do sales for a living simply because they like the work and they're good at it. They have no hidden agenda. They are motivated by the same things that motivate other employees. They just happen to sell. These people don't need to be on commission. Yes, they want to be compensated fairly, but they also want what most other people want -- to be part of a team. They want to belong.
And yet, by definition, you're not a member of a team if you're selling on commission. The way you get paid forces you to be in business for yourself. Unfortunately, most salespeople don't recognize the problem. They're accustomed to being on commission. They've bought into the conventional way of doing things. When they interview for a sales position, the first questions they ask are, "What's the commission and what's the draw?" If you offer them a salary up-front, they give you a funny look.
You can't fight that, and I don't. I won't risk losing good sales candidates by trying to force them into my system before they're ready. It's my job to sell them on the program, and that takes time. We want salespeople to focus on doing what's best for the company -- and not what's best for them.
So we start new salespeople with what they're used to: salary and commission. After two years, we know whom we want to keep. I'll then go to the person and say, "Listen, you've been here two years. We want you to be here forever. We'll buy out your commission and raise your salary, so you won't lose any income. In return, you'll get stability. Do you think you're going to have a good year? I'm willing to guarantee that you'll have a good year.
And if you really do have a good year, I'll guarantee that next year will be even better. Then again, if the economy goes bad and you have some down years, you don't have to worry about a big drop in your income. You'll continue to earn your salary. We want to give you that security because we want you to be here for the long haul."
I also explain our salary-review process. It begins with an assessment of how well the company did in the past year and how well we expect it to do in the coming year. We then set a range for salary increases based on the assessment. Everybody's raise falls within that range, but whether people are on the high end or the low end depends on their individual performance.
As a result, salespeople, like other employees, are rewarded both for the company's success and for their own contributions to it. The logic is simple: We want them to focus on doing what's best for the company whether that means selling or working with other employees to solve a customer's problem or helping with collections or spending time on important projects that don't necessarily result in immediate sales.
By doing that, by becoming full-fledged members of the team, salespeople will earn more money over the long run than they would if they stayed on commission. I also point out that they'll be able to take longer vacations, because they won't have to worry about leaving their customers unattended; someone else on the team will handle any problems. Above all, there's the satisfaction of being part of a thriving company and the security of knowing they won't be left to fend for themselves when the going gets tough.
After 12 years with a largely salaried sales force, I can assure you that this system works. What's more, it's good for everybody, though I have no doubt who gets the most out of it: I do. I get a cohesive company. I get people working together. And while I've always tried not to waste time worrying about salespeople leaving and taking customers, the thought doesn't even occur to me these days. It's almost impossible to imagine. And that may be the greatest benefit of all: peace of mind.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc. 100 company and a three-time Inc. 500 company. This column was co-authored by Bo Burlingham. Previous columns are available online at www.inc.com/keyword/streetsmarts.
Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.
