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Why do we pay sales commissions?

blog.fogcreek.com

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Re: Why do we pay sales commissions?

#21

Post by bcrescimanno »

deltaqueue wrote: post #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 a…

I agree with your thinking that some sales folks might balk at the notion; but I'm not sure I follow your argument you should be directly (financially) rewarded for the additional effort in the larger deal. I've known several sales folks who chase many small deals simply because they're a lot easier to manage, require less time to close, and by collecting as many of them as possible, they're able to maximize their commissions.

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.

Re: Why do we pay sales commissions?

#22

Post by chc »

edw519 wrote: 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…

Although you have a point, I think you take it too far. Many of the worst decisions I have seen salespeople make were based on the drive to get someone to buy now rather than, say, next week. They even knew that rushing things was going to be bad for the customer, but the salespeople's interests didn't align with the customer's.

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.

Re: Why do we pay sales commissions?

#23

Post by JumpCrisscross »

The article mis-interprets Ariely's study.

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.

Re: Why do we pay sales commissions?

#24

Post by masklinn »

parfe wrote: post #6
binarymax wrote: post #2

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.

I can think of something worse: being the customer. 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.

> 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.

Re: Why do we pay sales commissions?

#25

Post by bcrescimanno »

edw519 wrote: 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…

I disagree with your edit; with the quick adage that it's far easier and cheaper to retain a customer than create a new one. It sounds to me like Fog Creek has a mix between sales and account management (but so do a lot of companies that I've come across). If your sales team is also working in that account management role, retaining their clients should always be high priority even if those customers wont' be up for renewal / another contract for some time.

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."

Re: Why do we pay sales commissions?

#26

Post by sunchild »

deltaqueue wrote: post #12
binarymax wrote: post #2

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…

Unfortunately, some of the most successful software vendors in the world have turned over-promising and risk-shifting into a way of life. For a million reasons, the market tolerates this injustice, and more often than not rewards it. It's hard not to be bitter about it.

Re: Why do we pay sales commissions?

#27

Post by buzzcut »

JumpCrisscross wrote: post #23

The article mis-interprets Ariely's study. 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 predic…

I linked to the video where Ariely talks about the U-shaped effect (that is small rewards increase, but large ones decrease, performance). I mentioned him to demonstrate that there was some evidence for the notion, not to say that he entirely makes the case I'm arguing for. Given the thousands of ways commissions can go wrong, I'm asking whether any small increase in benefit is ever outweighed by the problems.

Re: Why do we pay sales commissions?

#28

Post by notahacker »

jriley wrote: post #20

The most effective sales quota scheme in my corporate experience: 10% higher sales than your last quarter. There are many more complicated systems, but this one was very difficult to game.

It's a good way to ensure a dip in sales at the end of a good quarter.

Re: Why do we pay sales commissions?

#29

Post by jxcole »

edw519 wrote: 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…

I disagree strongly, even after your edit. Revenue right now does not ipso facto translate to a better or more sustainable business. Google is a great example. They could plaster their front page with advertisements which could, quite possibly, generate more revenue right now. But they know that users having a good experience right now will bring them back tomorrow. So they put off some possible ad revenue in the hopes that their users are more likely to continue using their service.

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.

Re: Why do we pay sales commissions?

#30

Post by paulhauggis »

binarymax wrote: post #2

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.

A couple of years ago, I worked at a place like this. The salespeople would promise features to new clients and guess at when they would be implemented.

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..

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