Why do we pay sales commissions?

Why salespeople are on commission? Because it's one of the rare jobs where performance can be easily and objectively measured.

Most of the arguments in the article could just as easily apply to a fixed salary (jumping ship for better pay, fighting over who gets the big deals etc). And I would argue that the theory y vs theory x argument, that good employees are by nature more intrinsically motivated than just in it for the money, probably holds true a lot more for programmers than for salespeople. By definition, sales is about getting customers to pay money, so for a salesperson it's probably a good thing to be motivated by money.

The real question about commission-based compensation is: Is what I measure, and pay people for (this quarter's revenues) really what I want to achieve (maximum long-term profitablity)?

If you pay by commission, you will probably get higher revenues right now, but also more of the problems mentioned (mostly overselling to customers that arent really a good fit for the product).

I'd say it depends on the situation the company is in. If you're an established, profitable software company like FogCreek that wants to build long-term relationships with happy customers, a fixed salary is probably better. But if you're a startup with 2 months of runway left, desperately needing some revenue right now, you're probably better off paying commissions to your salespeople.

Long time HN contributor, first time I've felt the need to go anonymous.

I've been in sales my entire professional career, but always commissioned based. I've worked in SMB with small teams and enterprise with massive teams. I feel like these are related points (to paying commission), but you may have a different opinion.

First, commission is like crack. Once you get a taste, it's hard to kick. Earning potential is outrageous. I was the highest paid employee for two years. I made more than the founders, anyone on our leadership/executive team, and anyone that built what I sold. That last point kept me up at night, so I eventually found a way to redistribute the wealth. I stayed in sales because I couldn't imagine "how anyone could live on that little" (Second, crack either transforms people or attracts a certain personality type. I've never been surrounded by so many disloyal, self centered, unethical, and maniacal people. Ever. I've also caught myself crossing boundaries I would have never previously considered -- until I thought about how it would push me over the accelerator and significantly increase my commission. I have met some people with strong character and ethics in sales, who are great salespeople, but they're a tiny minority.

Third, those ethical breaches typically result in misrepresentation of the company/product/service you're selling. Commissions are typically paid on a contract, not on the lifetime value of the customer. I firmly believe the commission-based sales people are potentially the most damaging thing to your company. Set an inaccurate expectation to close the deal? As a sales person, you're on to the next one. Results in high churn and damaged credibility, neither of which affects the salesperson's commission check.

Last, sales people are typically the least knowledgeable in the organization about the company/product/service they're trying to sell. I've always been in, uhm, technology as a service(?), but neither of the companies I've worked at have any desire to hire people who understand the technology. They hire salespeople that have "consistently exceeded quota" and "increased customer spend by x" or some other sales achievement. That's great, dude, but you sold fucking vacuum cleaners. What do you know about the product those guys in the dark rooms are slaving away over? Why are you the best person to go out and represent all of us in the market? Speaking of, I've yet to interview a salesperson that's come in with "here's a list of my previous clients who will vouch for my integrity."

For those talking about large sales team, I can personally assure you all of the negative aspects mentioned in the post become even more apparent with scale. Poaching leads, generating fake orders, tarnishing the company to exceed quota ("total lack of ethics")-- it's all there, and it's easier to hide in a bigger pond.

I know you need to move units and generate revenue, but I agree, why do we pay sales commission?

"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."

What's the difference? In either scenario, you are rewarded proportionately to how much effort you put into landing one large deal or multiple small deals.

"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."

I suspect commissions simply originated from sales reps demanding recognition for their efforts. Bonus structures and salary positioning through systems like FogCreek assume you have fair and competent managers who recognize and reward effort. Sales teams may not always present this luxury, so reps may simply demand these commissions to cover their bases.

Honestly, I think places use commissions for the reason of underpaying some salespeople- not for the reason of rewarding top salespeople.

In my experience, commissions exist so that places can hire a ton of salespeople with relatively little risk to themselves.