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Why do we pay sales commissions?

blog.fogcreek.com

11–20 of 119 posts

Re: Why do we pay sales commissions?

#11
I suspect FogCreek had success because their sales team is relatively small, but I'm curious to see how this works long-term. Is a lack of commission structure going to deter future recruits? They said nobody left, but have they tried hiring any additional sales reps? Big time sales reps will assuredly balk at the prospect of cutting their income to some average amount, but perhaps that type of employee only exists at larger organizations.

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.

Re: Why do we pay sales commissions?

#12

I will tell you, for anyone who actually helps to build the selling product, there is nothing worse than watching a salesperson completely oversell a project, walk away with a fat check, and you are left holding the bag and working overtime.

Over-promising is usually a result of a poor salesman who does not focus on maintaining long-term relationships with his or her prospects/clients (and will probably jump from industry to industry). Unfortunately this is rampant at businesses with high sales volume and lower software / contract prices because there is minimal incentive to focus on anything besides quotas.

If this happens often at your company, Client Services or Development needs to have a heart-to-heart with the sales manager.

Re: Why do we pay sales commissions?

#13
IMHO, a key reason this works well for them is that their compensation package is really nice and well rounded: http://www.joelonsoftware.com/articles/fog0000000038.html

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.

Re: Why do we pay sales commissions?

#14
post #8

...and are less worried about who is going to buy right now... 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…

You've really gotta be looking for something to disagree with if that's what you've decided to hang your hat upon. The words "right now" were emphasized in the original sentence for a reason.

If taking away commissions didn't hurt sales, why would reinstating them fix some hypothetical sales problem? This makes no sense.

Re: Why do we pay sales commissions?

#15
I agree that commissions can generally be corrosive (and are a hallmark of lazy management, generally speaking), but I have to wonder how this would work in larger teams.

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.

Re: Why do we pay sales commissions?

#16
Measurement & Leverage?

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.

Re: Why do we pay sales commissions?

#18
I was very pro-comissions until I worked commissioned sales. Completely agree with the author.

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.

Re: Why do we pay sales commissions?

#19
I'm surprised Fog Creek kept commissions around for so long, considering that Joel has been writing articles about how incentive pay causes dysfunction since 2002 (Edit: 2000, even!)

http://www.joelonsoftware.com/articles/fog0000000070.html

http://www.joelonsoftware.com/news/20020715.html

http://www.joelonsoftware.com/items/2006/11/10b.html

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